Managers easing off the “risk brakes” but keeping an eye on the Eurozone

As you might know, we at Russell spend a lot of time talking to professional money managers, and each quarter we survey this group for their views on the market and topical trends that could impact investment strategy – and bring those to you in the Investment Manager Outlook (IMO).

In last quarter’s IMO, it appeared that managers were “hitting the brakes” on riskier asset classes in light of the market volatility that dominated the latter half of the year. But the latest survey suggests that managers are now looking beyond the challenges of 2011 and have embraced a more positive outlook and moderate risk appetite.

Manager expectations by asset class

Manager expectation by asset class Q1, 2012

Bearish = percent of managers responding with 1-3, on a scale of 1-7.Bullish = percent of managers responding with 5-7, on a scale of 1-7.Neutral scores (4) are not included.The graph is based on 201 survey responses from money managers, collected between February 23 and March 6, 2012.

We saw this both in terms of the sectors and the asset classes that managers identified as attractive.  U.S. large cap growth stocks (69% bullish) and emerging market equities (66% bullish) both saw an increase in bullishness from last quarter and several traditionally defensive asset classes, like cash and U.S. Treasuries, saw large increases in bearish sentiment.

Despite managers’ strengthening risk appetites, it’s clear that the ramifications of the situation in Europe are still top-of-mind for many. In the latest IMO survey, we asked managers how they expect the challenges in Europe to impact their portfolio decisions over the next 12 months. Nearly half (46 percent) of the managers surveyed said that they plan to have less than typical exposure to companies that derive a significant portion of their revenues from Europe.

Managers who plan to make portfolio allocation reductions because of the challenges in Europe indicated that they would decrease exposure to the consumer staples and consumer discretionary sectors. Many of the companies in these sectors likely look less attractive to managers in the face of a European recession because they are large multi-nationals that count on the European consumer.

Global asset class diversification

But while many managers believe Europe will likely continue to drive market volatility, we believe this is no time for investors to forget the value of global asset class diversification in helping to reach desired investment outcomes. Even in the face of challenges in a specific region, there is still clearly a place for non-U.S. equities in actively managed portfolios tailored to the appropriate level of risk investors are prepared to take on.

Indeed, we saw proof of this in the IMO with the bounce-back in bullishness for non-U.S. developed market equities (49 percent) from 33 percent just three months ago. A notable portion (22 percent) of the managers surveyed also indicated that they felt the situation in Europe presented a buying opportunity after the broad sell-off in 2011 and plan to increase their exposure to Europe.

Many managers said that they would look to increase their exposure to several sectors because of the challenges in Europe – the most notable being technology (41 percent). Based on our conversations with managers, it’s likely that many are looking at technology from an active management perspective − aiming to identify attractive individual stocks rather than looking to the sector as a whole.

So, while your clients are likely still feeling the effects of the volatility and hyper-focus on macroeconomic events that we saw in 2011, it might be helpful to remind them to think like professional money managers do – look for opportunities amidst volatility and keep a strategic focus on the long-term.

RFS 7902-b

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