Money managers eyeing slow but steady U.S.A.
Professional money managers were feeling nervous when they filled out our latest Investment Manager Outlook survey, and it showed in the results.
As we do every quarter, we asked managers for their views on the market and topical trends that could impact investment strategy. This time, we asked managers where they see the greatest challenges in the active management environment and 66 percent pointed to headline news or event-related risks. This was certainly not unexpected in a quarter where discouraging news out of Europe and the U.S. caused a spike in the VIX index1 and a 5.78 percent market drop.2
Bullishness down across the board
Echoing managers’ focus on the European debt crisis and its global impact, survey respondents’ bullish outlook for asset classes and sectors over the next 12 months was down across the board. Non-U.S. equities and emerging market equities felt the brunt of the sentiment swing and saw a decrease in the proportion of bullish managers of 22 and 18 percentage points, respectively.
In light of the instability in the developed European economies and relatively positive outlook for U.S. economic growth, managers indicated a preference for U.S. assets in the latest survey. Managers were most bullish on U.S. large-cap growth (57 percent), U.S. large-cap value (51 percent) and U.S. mid-cap growth equities (51 percent).
(For our viewpoint on U.S equities versus non-U.S. developed equities and U.S. equities versus emerging market equities, check out Russell’s Market Expectations.)
Managers’ cautious stance also came through in their sector outlook this quarter. Several of the more pro-cyclical and pro-growth sectors saw a drop in bullishness – including the energy sector (39 percent of managers bullish, down 25 percentage points from March) and materials and processing (25 percent of managers bullish, down 20 percentage points). Meanwhile, managers were more bullish on sectors that are traditionally seen as defensive – such as consumer staples (45 percent of managers bullish, up 14 percentage points from March) and utilities (25 percent of managers bullish, up 13 percentage points).
Focus on prospects for growth
Despite the overriding concerns about headlines and economic risks, most managers are still somewhat optimistic about the prospects for growth in the U.S. Most managers (58 percent) expect to see slow, but continued real GDP growth in the U.S. at around 2.5 percent. Based on their views on the U.S. economy, the majority of managers (88 percent) indicate they are maintaining a neutral or overweight position on risky assets.
Many managers are likely torn between the overwhelming volume of bad news that has been flooding the market and the opportunities that they are uncovering amidst the market dislocations. This quarter seems to be one where managers are weighing the desire to take risk off the table – a reaction driven by fear – but many are still focused on finding opportunities in strong companies with attractive valuations.
Like many of you and your clients, there’s no doubt that managers still keenly remember the Global Financial Crisis and it is likely influencing the way they react to headline-grabbing news. While the markets will likely continue to be volatile and there may be an emotional desire to protect investments by moving to a ‘riskless asset,’ we believe it can serve managers and investors well to maintain a long-term outlook and hold a globally diversified portfolio that aims to take appropriate investment risks.
1 The CBOE VIX (Chicago Board Options Exchange Volatility Index) measures annualized implied volatility as conveyed by S&P 500 stock index option prices and is quoted in percentage points per annum. For instance, a VIX value of 15 represents an annualized implied volatility of 15% over the next 30 day period.
2 Quarter-to-date return on the Russell 1000, from April 1-June 21. The Russell 1000® Index measures the performance of the 1,000 largest companies in the Russell 3000® Index, representative of the U.S. large capitalization securities market.
Indexes are unmanaged and cannot be invested in directly. Returns represent past performance, are not a guarantee of future performance, and are not indicative of any specific investment.
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