Investment Managers Stay the Course

In a survey of 100 institutional money managers conducted quarterly since the third quarter of 2008, the multi-manager investments group of Northern Trust found the institutional investment managers were making few portfolio changes.

As December 31 approached, a majority of those surveyed last month (84%) said they feared that failure to avoid the fiscal cliff would have a negative impact on financial markets. Yet fewer than a quarter of the money managers surveyed (22%) thought it likely that the federal government would not take action before January 1. Three-quarters made no change to portfolio concentration, and 81% held their normal range of cash as the deadline approached, the survey showed.

Managers taking a wait-and-see approach to the fiscal cliff negotiations were buoyed by positive expectations for key economic indicators. The survey showed a meaningful increase in positive views: 82% of managers expect U.S. housing prices to increase over the next six months, up from 69% in the third quarter and 33% in the second quarter. Investment managers were also optimistic regarding the outlook for employment. For the second consecutive quarter, a large majority expected job growth to remain stable or accelerate over the next six months.

Manager sentiment regarding the housing market and job growth continued to improve in this quarter’s survey, according to Chris Vella, chief investment officer for Northern Trust multi-manager investments. “The share of managers with expectations for improving home prices reached its highest point since we began the survey in the third quarter of 2008,” Vella said. “And although managers listed the fiscal cliff and the European debt crisis as key concerns, they remained generally bullish on equities.”

Along with these positive economic expectations, the survey found a growing divergence in managers’ views on U.S. economic growth and corporate earnings. One-third of managers surveyed expect U.S. GDP growth to accelerate over the next six months, up from 25% with that view in the third quarter.

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The share of those who expect GDP to decelerate was also up, to 21% from 14% in the prior quarter. Accordingly, the group that expects stable GDP growth shrank to 46%, from 62%. Investment managers’ expectations for corporate earnings growth are also mixed; 32% think corporate earnings will grow in the first quarter of 2013, while the same percentage believes earnings will decline.

“This is the first time since the survey’s inception that managers have been split on their outlook for earnings,” said Kelly Finegan, vice president, Northern Trust multi-manager investments, who oversees the survey. “The economic uncertainty has resulted in an equal number of managers believing corporate earnings will grow and decline in the next quarter.”

Other highlights of the survey are:

• 89% anticipate that Congress will raise the debt ceiling as needed this year, but 54% see risk for additional downgrades to the U.S. credit rating, as occurred in 2011 as Congress and the president tangled over a debt ceiling increase.
• 55% expect market volatility to increase in the next six months.
• 50% of managers believe U.S. equities are undervalued, while 57% see upside in emerging market equities.
• Managers are most bullish on information technology, health care and industrials.

Northern Trust multi-manager investments is the manager-of-managers business of Northern Trust Corp. For its survey, the firm polls investment firms that participate in its multi-manager investment programs and funds. The respondents include fixed income and equity managers across value and growth styles, with a bias toward fundamental, bottom-up stock picking strategies. The survey is conducted quarterly to examine trends in attitudes and allocations.