With the exception of financial services stocks, money managers have not let the credit concerns or a slowing U.S. economy affect their outlook, according to a quarterly survey of investment managers.
Thirty percent of money managers responding to the Russell Investments outlook survey said they expect U.S. equity markets to have returns of better than 10% next year, and 54% said they believe the markets will gain less than 10% or run flat.
On the whole, 76% said they expect the markets to rise and only 15% expect declines.
Last year 86% of investment managers thought the markets would rise, and 12% thought they would decline, according to Russell, a Tacoma unit of Northwestern Mutual Life Insurance Co.
"Attractive valuation levels and the potential of the global economy are pointing money managers toward stocks in 2008," said Randy Lert, chief portfolio strategist with Russell Investments. "The credit crunch and slowing U.S. economy do raise concerns, but manager optimism for U.S. stocks appears undimmed from that of one year ago."
Fifty percent of investment managers surveyed by Russell were bearish about the financial services sector.
Manager bullishness on financial services rose slightly, from 30% to 32%, compared with the previous quarter's survey. That was down considerably, however, from a year ago, when 46% were bullish about the field.
"Whether it's that the subprime situation will take many more months to fully unwind or whether it's that there is another, wholly unexpected shoe to drop, the managers we surveyed are not optimistic about the financial services sector over the next 12 months," Mr. Lert said.
Investment managers still prefer large-cap growth stocks over other asset classes and now see opportunity in midcap and small-cap growth companies as well.
Seventy-five percent of investment managers were bullish on large-cap growth, and 61% were bullish about non-U.S. developed market equities, which was the second-most-popular asset class.
Midcap growth and small-cap growth stock bullishness both rose from the previous quarter.
The number of those bullish on midcap growth companies rose 7 percentage points from last quarter, to 60%, and 47% were bullish on small-cap growth, up 9 percentage points.
"The managers are favoring growth over value, whether it's large-cap, mid-cap or small-cap," Mr. Lert said. "Generally speaking, value stocks are more economically sensitive to the economy, and the managers appear to be positioning themselves so they are not overexposed to value should the economy drag. Value stocks had such a long and strong run. Many managers expect the growth run of 2007 is likely to continue into 2008."
Russell polled senior-level "investment decision-makers" at U.S. large- and small-cap equity investment managers, as well as U.S. fixed-income investment managers.
More than 290 managers responded to the survey, which was conducted at the end of September.
Managers remained bullish about the technology industry (78%), health care (73%), energy (50%), consumer staples (44%), and integrated oil companies (43%) for next year.
"For 2008, managers are forecasting stocks to rise and believe that technology and health care are the best sectors to capture that growth," Mr. Lert said. "At the same time, the sectors that they favor are mostly defensive plays, consistent with those one would buy during an economic slowdown. Managers are optimistic but certainly will be keeping their eyes on economic indicators to make sure there are no big surprises."
Russell Investments had $231 billion of assets under management on Sept. 30.
