December 14, 2010

Investment Managers Upbeat for 2011

Both managers and financial advisors are optimistic, Russell surveys find, but clients aren’t

Managers are generally confident in the global economy, and they share an optimistic view of U.S. equity markets, according to a survey of more than 200 investment managers released Tuesday by Russell Investments.

Close to 90% of managers surveyed believe market performance in 2011 will be positive, and 40% expect the markets to increase by 10% or more during 2011, the December 2010 Investment Manager Outlook study found. Nearly 50% believe the markets will increase, but by less than 10% for the year, while 7% expect the market to remain flat.

Just 6% of managers expect a down market in 2011.

Valuation

Slightly more than 50% of managers believe the market is fairly valued, representing a significant shift from sentiment last quarter, when 57% believed the market was undervalued.

Despite this shift, 38% still see the market as undervalued. Only 10% believe the market is overvalued.

As for the Republican Party’s recent gains in the U.S. House of Representatives, close to 80% of managers generally view the outcome as positive for equities, and about 40% see it as negative for bonds.

Advisor Survey

In a separate survey of advisors released by Russell Investments on Dec. 8, the vast majority of advisors — 86% — say they are using dividend-paying stocks and mutual funds to provide retirement income, and 70% say they use annuities. About 43% use bond laddering, while just 15% of advisors responded that they use managed payout accounts, also referred to as target distribution funds.

Russell’s Financial Professional Outlook, published in December, is written by Phill Rogerson of the company’s consulting and client services unit. This latest FPO survey of 200 advisors at 100 firms finds that providing income in retirement is a very different problem for FAs than that of providing income during the accumulation phase. As such, it requires different solutions, mainly the need to avoid running out of money, provide stable income and maintain flexibility.

“The fact that advisors are optimistic while their clients are pessimistic about the direction of the capital markets is not surprising to Russell, given the amount of cash that remains on the sidelines, out of the investable markets,” writes Rogerson in the study.

According to an Investment Company Institute report, he notes, investors withdrew more than $33 billion from U.S. stock market mutual funds in the first seven months of 2010.

In addition, “Advisors have told us that their clients continue to distrust the markets and Wall Street, and that they do not feel confident that regulatory reform will protect the ‘average investor,’ ” the author explains.

Investors also distrust the ability of the world’s leading economies to create reasonable fiscal and monetary policies, and they fear that currency manipulations will be used to achieve unfair trade advantages. Furthermore, on top of all these worries, investors fear a possible double-dip recession.

The conundrum, according to Rogerson, is that the market tends to come back in advance of an overall economic turnaround by anticipating economic change, so for many investors, “waiting to get back in” may turn out to be “waiting too long.”

Thus, he suggests that when it comes to economic recovery, “an important message for advisors to convey to their clients is: the global economic recovery may not be as big and bold as we might like, but it is underway nevertheless.”

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