Investment Manager Outlook

Transcription

1 RUSSELL RESEARCH Investment Manager Outlook RUSSELL S QUARTERLY SURVEY OF MANAGERS AND THEIR VIEWS OF THE MARKET COMMENTARY BY RANDY LERT, CHIEF PORTFOLIO STRATEGIST March

2 Survey Goals and Summary of Key Findings Key Trends March Investment Manager Survey* Small Cap Growth MORE BULLISH MORE BEARISH * Compared to survey results from / Investment Manager Outlook Poll. Summary of Key Findings Large Cap Growth Cash Fixed Income MORE BULLISH MORE BEARISH Are investment managers steadfast in their investment strategies or merely stubborn? Perhaps it s a very fine line of distinction. The March Investment Manager Outlook survey shows that a strong majority of money managers remain confident in both U.S. and non-u.s. stocks but continue to be bearish toward bonds and real estate. At the same time, we see some sign that the staunch optimism of late is being slightly tempered as the strongest performing segments of the equity market were not the market segments most favored by managers. Highlights: The vast majority of managers (more than 9%) view the U.S. stock market as either fairly valued or undervalued. Some % of surveyed managers are bullish on U.S. large-cap growth stocks, despite the fact that large-cap value stocks outperformed large growth stocks by. percentage points YTD through February as measured by the difference between the Russell Top Growth Index and the Russell Top Value Index. Health care, technology and energy remain the favored sectors; autos and transportation and utilities remain out of favor. Managers are predictably bearish on bonds, and they believe the real estate rush has passed. Cash is gaining interest among managers as % of respondents are now bullish on cash, compared to only % of respondents who were bullish on this asset class last quarter. Managers are staying committed to their strategies because they see the imbalance between actual returns and stock valuations as something of a continued if somewhat prolonged opportunity. Until the price and performance trends change significantly among market segments, our survey shows they are largely staying their course. About Russell s Investment Manager Outlook As the creators of the Russell Indexes, consultants to more than $. trillion (as of 9//) in assets worldwide, and the only firm that monitors more than, investment manager products, Russell Investment Group has extraordinary access to seniorlevel investment decision-makers. Prior to the end of each quarter, Russell surveys a sample of those decision-makers to collect their top-line opinions about the direction of the markets, sectors/styles to watch, and trends on the horizon that could impact investment strategy. The result of this survey is Russell s Investment Manager Outlook. Investment Manager Outlook is intended to generate a meaningful snapshot of investment manager sentiment. Three of the four questions posed to investment managers are repeated each quarter, so that results can be measured over time. The poll also includes one topical question that changes each quarter. In addition to providing quantitative results, Russell reviews the data collected each quarter, and provides a qualitative analysis from a senior investment strategist (see page ). Investment Manager Outlook is completed and distributed at the end of each quarter. This report includes responses from U.S. large- and small-cap equity managers as well as U.S. fixed income investment managers. The manager research that Russell conducts for investment purposes is independent of Investment Manager Outlook, and responses to the survey are voluntary. MEDIA RELATIONS CONTACTS TACOMA Jennifer Tice -9-9 NEW YORK Matt Burkhard -- INVESTMENT MANAGER OUTLOOK MARCH

3 Commentary & Analysis Most investment managers think that the continued outperformance of U.S. value stocks over the past decade is not sustainable based on their responses to Russell Investment Group s March Investment Manager Outlook. While the vast majority of managers surveyed think that U.S. stocks are fairly or undervalued, they are most bullish on large-cap growth at a time when many value stocks have continued their -year trend of outperforming growth stocks. The surveyed managers continue their positive outlook on the performance prospects for non-u.s. stocks, both from developed and emerging countries, which have performed well this year. The U.S. bond market has generated lackluster results consistent with the bearish sentiment that has been expressed by managers for some time. Overall, the U.S. stock market has generated reasonable performance to start the year with a.% return for the broad-market Russell Index through the end of February. This is consistent with the bullish attitude of the managers last quarter and continuing into this quarter. However, many U.S. equity asset class and sector returns remain stubbornly counter to the overall viewpoint of the surveyed managers. This quarter, % of surveyed investment managers are bullish on the large-cap growth component of the U.S. market. Yet, as of February, the blue-chip growth portion of the market, represented by the Russell Top Growth Index, had gained only.% for the year, lowest of all segments in Russell s U.S. index family. Compare this performance to the Russell Top Value Index which was up.% for the year or the robust 9.% return of the Russell Growth Index which reflects continued small-cap strength. The NAREIT (Real Estate Investment Trust) Index continues to defy the managers very bearish outlook (% bearish last quarter and % bearish this quarter) with a return in January and February of 9.%. What is going on? What are the managers seeing that has failed to be recognized in market results so far this year? First, let s take a quick look at what the managers are saying again this quarter. Overall, they remain positive on the U.S. stock market with only % By Randy Lert Chief Portfolio Strategist Manager Expectations by Asset Class (As of March ) % % % % U.S. Large Cap Growth 9% U.S. Mid Cap Growth % Non U.S. (developed market) Equities % % U.S. Small Cap Growth % Emerging Market Equities % % % U.S. Large Cap Value % Cash U.S. Mid Cap Value U.S. Small Cap Value % Real Estate % U.S. Treasuries % High Yield Bonds % Corporate Bonds % % % % = % Bearish = % Bullish % % % % % Note: Bearish = percent of managers responding with on a scale of. Bullish = percent of managers responding with on a scale of. Scores for neutral () are not included. See detailed charts on the following pages. Please refer to pages for asset class definitions. RUSSELL INVESTMENT GROUP

4 declaring it overvalued, % declaring it fairly valued and % seeing it as undervalued. Within that generally favorable perspective on U.S. equities, % were bullish on U.S. large-cap growth, % were positive on the midcap growth sector and % were bullish on non-u.s. equities (developed markets). With respect to economic sectors, the highest bullish sentiment remains reserved for health care which has been at the top of our charts since the survey was initiated in June. It is followed closely by the technology and the other energy sectors. Autos and transportation still gathers the most bearish outlook, with the interest-rate sensitive utilities sector following closely behind. Real estate and bonds remain the least favored asset classes for the survey respondents. Negative sentiment about the U.S. small-cap value asset class was not far behind with % of managers bearish on this asset class. The asset class with the biggest up-tick in manager sentiment for the quarter was cash where % of the managers were bullish a % increase in bullishness over last quarter. This is understandable since cash yields are now up to over % and longer-term treasury bond yields remain below %. The risk reward ratio for longer maturity fixed income is just not attractive with the current flat yield curve. This quarter s rotating question asked managers their view on the current Russell consensus earnings forecast as provided by IBES (Institutional Brokers Estimate System), which targeted a one-year earnings growth at.%. In general, the managers surveyed think this forecast* is optimistic suggesting that they may think realized earnings will come in a bit lower than current Wall Street consensus. Note, however, that even against this backdrop the managers express a belief that the market is either fairly valued or undervalued, and they continue to express a strong preference for growth stocks in all cap segments, but particularly with respect to large capitalization stocks. So, even in a declining growth environment, they like stocks and large-cap growth stocks in particular. How does this square with recent market outcomes? To understand the managers continuing allegiance to what have been these out-of-favor market segments, consider some historical perspective. *Forecasting represents predictions of market prices and/or volume patterns utilizing varying analytical data. It is not representative of a projection of the stock market, or of any specific investment. -Year Annualized Returns for Selected Russell Indexes (Through February, ) -Year Annualized Total Returns (%) 9. Russell. Russell Growth. Russell Value 9. Russell. Russell Growth. Russell Value 9.9 Russell. Russell Growth. Russell Value For additional performance information please refer to page. INVESTMENT MANAGER OUTLOOK MARCH

5 As you can see in the asset class performance chart below, as of Feb., the -year annualized total return on the Russell, was 9.%. Over the same period, the Russell Index also had an annualized total return of 9.% and the small-cap Russell Index returned 9.9% per year. In a low inflation and low interest rate environment those returns are quite close to what most investment experts would call an average outcome. Stocks, in general, are thought to provide about a % premium over cash in the long run. Now, let s take a look at how those returns differed in the growth and value style segments of the market. Over that same -year period ending Feb., the Russell Growth Index returned.% on an annualized basis while the Russell Value Index returned.%. That five percentage point differential in annualized total return is substantial and way outside of historical norms given that over the long run the two style indexes should have had total returns that are very similar. The same pattern is true when comparing the average total return over the same years of the large-cap Russell Growth Index at.% with the Russell Value Index at.%. For U.S. small-cap stocks the difference in returns between value and growth is even more pronounced. Over the past decade the annualized total return of the Russell Growth Index was.% while the Russell Value Index annualized return was.%. So, while the -year return on U.S. stocks is completely within historic boundaries, the imbalance of where that return occurred in the market is quite substantial. And, this level of disparity between various segments of the market may not be sustainable. Performance Expectations by Sector (As of March ) % % % % % % Health Care % Technology % 9% Other Energy Integrated Oils Financial Services Producer Durables Consumer Staples Consumer Discretionary and Services 9% % Utilities Autos and Transportation Other % % % % % Material and Processing % % % = % Bearish = % Bullish % % % % % Note: Bearish = percent of managers responding with on a scale of. Bullish = percent of managers responding with on a scale of. Scores for neutral () are not included. See detailed charts on the following pages. Please refer to page for sector definitions. In short, most managers think that, given an appropriate historical context, the market trends of the past ten years will have to change. The imbalance within a variety of market segments has not yet been rectified. And until we see the gap shift or narrow, watch for the managers sentiment to remain largely unchanged for the near term. RUSSELL INVESTMENT GROUP

6 Results Valuation of the U.S. Equity Market QUESTION: Which of these general valuation conditions best describes the current U.S. equity market?* Key Findings: % believe the market to be undervalued, a decrease of seven percentage points from the fourth quarter of. One-third as many managers (%) believe that the market is overvalued. Most managers believe that the market is fairly valued (%), an increase of four percentage points over last quarter. Which Condition Best Describes the Current (Q) U.S. Equity Market? Undervalued Fairly Valued Overvalued Which Condition Best Describes the Current U.S. Equity Market? Q Q Q Q Q Undervalued Fairly Valued Overvalued * U.S. equity market refers to the broad investable market as defined by the Russell Index. Indexes are unmanaged and cannot be invested into directly. INVESTMENT MANAGER OUTLOOK MARCH

7 Results Short-term Interest Rates QUESTION: The current one-year IBES (Institutional Brokers Estimate System) forecast of growth in earnings per share for the broad-market Russell Index is.%*. In your view, at the end of one year will that estimate of earnings prove to be: significantly pessimistic, moderately pessimistic, accurate, moderately optimistic, significantly optimistic? Key Findings: Most managers (%) feel that the one-year forecast for earnings growth of.% for the Russell is too high. Almost one in five managers (9%) think this forecast is accurate. Only % of managers think that actual corporate earnings growth will be higher than the current IBES forecast. 9 Significantly Pessimistic (earnings growth will be more than %) Moderately Pessimistic (earnings growth will be. %) Accurate (earnings growth will be. %) Moderately Optimistic (earnings growth will be.%) Significantly Optimistic (earnings growth will be less than %) *As of January, RUSSELL INVESTMENT GROUP

8 Results Asset Class Expectations QUESTION: What are your expectations for the performance of the following asset classes over the next months? Key Findings: About twice as many managers surveyed are more bullish in their outlook for U.S. growth stocks than in their outlook for U.S. value stocks. This relationship is repeated across all asset class size ranges. Non-U.S. stocks in both developed and emerging market countries were the second most favored asset classes behind U.S. growth stocks. The number of managers bullish on cash increased more than % during the quarter. Scale is to : = strongly bearish = neutral = strongly bullish U.S. Large Cap Growth U.S. Large Cap Value 9 9 Q Q Q Q U.S. Mid Cap Growth U.S. Mid Cap Value 9 Q Q Q Q 9 U.S. Small Cap Growth Q Q U.S. Small Cap Value 9 9 Q Q Note: Numbers may not add to percent due to rounding. INVESTMENT MANAGER OUTLOOK MARCH

9 Results Asset Class Expectations (continued) U.S. Treasuries 9 Corporate Bonds 9 Q Q Q Q High Yield Bonds 9 Q Q Real Estate Q Q Cash 9 9 Non-U.S. Equities 9 Q Q Q Q Emerging Market Equities Q Q Note: Numbers may not add to percent due to rounding. Scale is to : = strongly bearish = neutral = strongly bullish RUSSELL INVESTMENT GROUP

10 Results Sector Expectations QUESTION: What are your expectations for the performance of the following sectors over the next months? Key Findings: Support for health care (%) and technology (%) moderated slightly over the quarter. The outlook for the financial services sector continued to improve during the quarter and has increased by % over the last year. Bullishness for both oil related sectors integrated oils and other energy was slightly lower during the quarter. Scale is to : = strongly bearish = neutral = strongly bullish Technology Health Care Q Q Q Q Consumer Discretionary & Services Consumer Staples Q Q Q Q Integrated Oils Other Energy Q Q Q Q Note: Numbers may not add to percent due to rounding. INVESTMENT MANAGER OUTLOOK MARCH 9

11 Results Sector Expectations (continued) Materials & Processing Q Q Producer Durables Q Q Autos & Transportation Financial Services 9 Q Q 9 Q Q Utilities Other Q Q 9 Q Q Scale is to : = strongly bearish = neutral = strongly bullish Note: Numbers may not add to percent due to rounding. RUSSELL INVESTMENT GROUP

12 Methodology and Background About Russell Methodology Russell Investment Group conducted the Investment Manager Outlook survey between March, and March,. The survey was sent to a group of U.S. large- and small-cap equity and U.S. fixed income investment managers, researched by Russell. Having a financial relationship with Russell was not part of the criteria for being included in the survey. In total, representatives of investment management firms from the United States participated in the survey. On average, the companies that responded individually manage an estimated $. billion* in assets. The large majority of individual respondents to Investment Manager Outlook have senior-level investment decision responsibilities, and are often portfolio managers or CIOs. Other participants included investment strategists, research analysts, and others. The manager research that Russell conducts for investment purposes is independent of Investment Manager Outlook, and responses to the survey are voluntary. * Estimated assets under management is based on a majority of survey respondents March. About Russell Investment Group Russell Investment Group is a global market leader among manager-of-manager investment firms, based on assets under management, as measured by The Cerulli Report. Russell has also been named the Multi-manager of the Year for two consecutive years by Global Investor magazine. Russell, which launched its first multi-manager funds in 9, manages more than $ billion in assets as of December, and advises clients worldwide representing more than $. trillion as of September,. With its multi-manager investment strategy taking hold in markets around the world, Russell has expanded in recent years by developing alliances with leading financial services organizations in major global markets. Russell also has broadened its original focus on corporate pension plans to include services to endowments and foundations, investment advisers, banks, brokers, and other service organizations. Russell employs a multi-manager investment approach and a business proposition that allows its clients to focus on their core competencies while delegating the highly specialized task of researching and selecting managers to Russell experts. Founded in 9, Russell is a subsidiary of Northwestern Mutual and is headquartered in Tacoma, Wash., with offices around the world, including principal offices in New York, Toronto, London, Tokyo, Singapore, Auckland and Sydney, and additional service locations in Chicago, San Diego, Winston- Salem, Melbourne, Paris, Johannesburg, Amsterdam and Geneva. For more information, go to INVESTMENT MANAGER OUTLOOK MARCH

13 Asset Class and Sector Performance Index Performance for the Period Ending February, Annualized Total Returns LATEST THREE ONE THREE FIVE TEN INDEX ASSET CLASS MONTHS YTD YEAR YEAR YEAR YEAR Russell Top Index Mega Cap Russell Top Growth Index Mega Cap Growth Russell Top Value Index Mega Cap Value Russell Index Large Cap Russell Growth Index Large Cap Growth Russell Value Index Large Cap Value Russell Midcap Index Mid Cap Russell Midcap Growth Index Mid Cap Growth Russell Midcap Value Index Mid Cap Value Russell Index Small Cap Russell Growth Index Small Cap Growth Russell Value Index Small Cap Value Russell Index All Cap Russell Growth Index All Cap Growth Russell Value Index All Cap Value MSCI World Ex-U.S. Non-U.S. Equities MSCI Emerging Markets Emerging Markets Lehman Brothers Treasury U.S. Treasuries Lehman Brothers Aggregate Bond Corporate & Gov t Bonds Lehman Brothers High Yield Bond High-Yield Bonds NAREIT Equity Index Real Estate Citigroup -Month T-Bill Cash LATEST THREE ONE THREE FIVE TEN INDEX SECTOR MONTHS YTD YEAR YEAR YEAR YEAR Russell Index Autos & Transportation Consumer Discretionary Consumer Staples Financial Services Health Care Integrated Oils Material Processing Other Other Energy Producer Durables Technology Utilities Frank Russell Company is the owner of the trademarks, service marks, and copyrights related to its indexes. Indexes and/or benchmarks 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. Sector returns are calculated by categorizing the securities that make up the Russell Index into discrete industry groupings and then computing the net return for each grouping. RUSSELL INVESTMENT GROUP

14 Asset Class Definitions Large Cap Growth These securities are growth stocks which fall into the Russell Top Index. This index consists of the top securities in the Russell Index, as ranked by total market capitalization. This Blue Chip large capitalization index represents approximately % of the Russell total market capitalization. As of the latest reconstitution, the average market capitalization was approximately $.9 billion; the median market capitalization was approximately $. billion. The index had a total market capitalization range of approximately $.9 billion to $. billion. Growth stocks tend to exhibit higher price-to-book and price-earnings ratios, lower dividend yields and higher forecasted growth levels. Large Cap Value These securities are value stocks which fall into the Russell Top Index. This index consists of the top securities in the Russell Index, as ranked by total market capitalization. This Blue Chip large capitalization index represents approximately % of the Russell total market capitalization. As of the latest reconstitution, the average market capitalization was approximately $.9 billion; the median market capitalization was approximately $. billion. The index had a total market capitalization range of approximately $.9 billion to $. billion. Value stocks tend to exhibit low price-to-book and price-earnings ratios, higher dividend yields and lower forecasted growth levels. Mid Cap Growth These securities are growth stocks which fall into the Russell Midcap Index. This index measures the performance of the smallest securities in the Russell Index, as ranked by total market capitalization. This index accurately captures the medium-sized universe of securities and represents approximately % of the Russell total market capitalization. As of the latest reconstitution, the average market capitalization was approximately $. billion; the median market capitalization was approximately $. billion. The index had a total market capitalization range of approximately $. billion to $. billion. Growth stocks tend to exhibit higher price-to-book and price-earnings ratios, lower dividend yields and higher forecasted growth levels. Mid Cap Value These securities are value stocks which fall into the Russell Midcap Index. This index measures the performance of the smallest securities in the Russell Index, as ranked by total market capitalization. This index accurately captures the medium-sized universe of securities and represents approximately % of the Russell total market capitalization. As of the latest reconstitution, the average market capitalization was approximately $. billion; the median market capitalization was approximately $. billion. The index had a total market capitalization range of approximately $. billion to $. billion. Value stocks tend to exhibit low price-to-book and price-earnings ratios, higher dividend yields and lower forecasted growth levels. Small Cap Growth These securities are growth stocks which fall into the Russell Index. This index measures the performance of the smallest, securities in the Russell Index, representing approximately % of the Russell total market capitalization. As of the latest reconstitution, the average market capitalization was approximately $.9 million; the median market capitalization was approximately $9. million. The index had a total market capitalization range of approximately $. billion to $. million. Growth stocks tend to exhibit higher price-to-book and price-earnings ratios, lower dividend yields and higher forecasted growth levels. Small Cap Value These securities are value stocks which fall into the Russell Index. This index measures the performance of the smallest, securities in the Russell Index, representing approximately % of the Russell total market capitalization. As of the latest reconstitution, the average market capitalization was approximately $.9 million; the median market capitalization was approximately $9. million. The index had a total market capitalization range of approximately $. billion to $. million. Value stocks tend to exhibit low price-to-book and price-earnings ratios, higher dividend yields and lower forecasted growth levels. INVESTMENT MANAGER OUTLOOK MARCH

15 Asset Class Definitions Treasuries Treasuries are debt obligations of the U.S. Treasury. Principal and interest payments are guaranteed by the U.S. Government. Because default by the government is unlikely, the return on Treasury bonds is relatively low, and a high inflation rate can erase most of the gains by reducing the value of the principal and interest payments. There are three types of securities issued by the U.S. Treasury (bonds, bills, and notes), which are distinguished by the amount of time from the initial sale of the bond to maturity. Please note, there is no guarantee the government will not default on a particular issue. The Lehman Brothers Treasury Index covers public obligations of the U.S. Treasury with a remaining maturity of one year or more. Corporate Bonds Corporate bonds are debt obligation issued by a corporation. Issues included in this classification are generally rated at least Baa by Moody s Investors Service or BBB by Standard & Poor s. In general, when interest rates rise, the value of bonds held in the fund will decline. Bond investors should carefully consider risks such as interest rate risk, credit risk, inflation, securities lending, repurchase and reverse repurchase transaction risk. Bond funds have the same risks that are associated with the underlying bonds owned by the fund. In contrast to owning individual bonds, there are ongoing fees and expenses associated with owning shares of bond funds. Portfolios that invest primarily in high yield bonds are subject to additional risks such as limited liquidity and increased volatility. The Lehman Brothers U.S. Aggregate Bond Index represents securities covering the U.S. investment grade fixed rate bond market, with index components for government and corporate securities, mortgage passthrough securities, and asset-backed securities. Cash Short-term investments typically involve instruments such as 9-day government Treasury Bills, high quality shortterm notes and commercial paper issued by major financial institutions and blue chip companies. While highly liquid, cash generally has not kept pace with inflation. Citigroup -Month T-Bill Index is an average of the last -month U.S. Treasury Bill issues (excluding the current month-end bill). Non-U.S. Developed Market Equities Equities in non-u.s., developed markets. Non-U.S. markets entail different risks than those typically associated with U.S. markets, including currency fluctuations, political and economic instability, accounting changes, and foreign taxation. Securities may be less liquid and more volatile. The MSCI World Ex-U.S. Index SM is a free float-adjusted market capitalization index that is designed to measure global developed market equity performance excluding the United States. As of May the MSCI World Ex- U.S. Index consisted of the following developed market country indices: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, and the United Kingdom. High Yield Bonds High Yield bonds are non-investment grade debt obligations. Issues included in this classification are generally rated Ba or lower by Moody s Investors Service or BB+ or lower by Standard & Poor s. In general, when interest rates rise, the value of bonds held in the fund will decline. Bond investors should carefully consider risks such as interest rate risk, credit risk, inflation, securities lending, repurchase and reverse repurchase transaction risk. Bond funds have the same risks that are associated with the underlying bonds owned by the fund. In contrast to owing individual bonds, there are ongoing fees and expenses associated with owning shares of bond funds. Portfolios that invest primarily in high yield bonds are subject to additional risks such as limited liquidity and increased volatility. The Lehman Brothers High Yield Bond Index covers the universe of fixed rate, non-investment grade debt. Payin-kind (PIK) bonds, Eurobonds, and debt issues from countries designated as emerging markets (e.g., Argentina, Brazil, Venezuela, etc.) are excluded, but Canadian and global bonds (SEC registered) of issuers in non-emg countries are included. Original issue zeroes, step-up coupon structures, and -As are also included. The index includes both corporate and noncorporate sectors. RUSSELL INVESTMENT GROUP

16 Asset Class Definitions Real Estate Investment in real estate, usually through Real Estate Investment Trusts (REIT) or Real Estate Operating Companies (REOC), as well as open-end, pooled real estate funds. Specific sector investing such as real estate can be subject to different and greater risks than more diversified investments. Declines in the value of real estate, economic conditions, property taxes and tax laws and interest rates all present potential risks to real estate investments. NAREIT Equity REIT Index: An index, with dividends reinvested, representative of tax-qualified REITs listed on the New York Stock Exchange, American Stock Exchange, and the NASDAQ National Market System. Emerging Markets Equities Equities in non-u.s. emerging markets. Investments in emerging or developing markets involve exposure to economic structures that are generally less diverse and mature, and to political systems which can be expected to have less stability than those of more developed countries. Securities may be less liquid and more volatile than U.S. and longer-established non-u.s. markets. The MSCI Emerging Markets Index SM is a free floatadjusted market capitalization index that is designed to measure equity market performance in the global emerging markets. As of May the MSCI Emerging Markets Index consisted of the following emerging market country indices: Argentina, Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Israel, Jordan, Korea, Malaysia, Mexico, Morocco, Pakistan, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, Turkey and Venezuela. Money Market An investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although a money market fund seeks to preserve the value of your investment at $. per share, it is possible to lose money by investing in a money market fund. INVESTMENT MANAGER OUTLOOK MARCH

17 Sector Definitions Technology Primarily companies that serve the electronics and computer industries or that manufacture products based on the latest applied science. Health Care Companies involved in medical services or health care including biotechnology research and production, drugs and pharmaceuticals, and health care facilities and services. Consumer Discretionary and Services Companies that manufacture products and provide discretionary services directly to the consumer. Some industries included in this sector are jewelry, watches and gemstones, advertising agencies, cosmetics and household furnishings. Consumer Staples Primarily companies that provide products directly to the consumer that are typically considered non-discretionary items based on consumer purchasing habits. Because such companies typically offer products that are not dependent on cyclical economic conditions, their securities are frequently considered defensive or conservative. Integrated Oils Included in this sector are domestic and international integrated oil companies involved in all parts of the exploration, production and refining process. Other Energy Companies included in this sector are all energy related businesses other than those included in the integrated oils sector. Two distinct groups are: () gas distributors and gas pipelines and () other energy companies which include mining, producing, servicing, and drilling companies. Materials and Processing This sector contains companies that extract or process raw materials. Some industries included in this sector are agriculture, fishing and ranching, building materials, forest products, and steel. Producer Durables Companies that convert unfinished goods into finished durables used to manufacture other goods or provide services are contained in this sector. Some industries included are electrical equipment and components, industrial products, manufactured housing, and telecommunications equipment. Autos and Transportation This sector includes what are traditionally known as transportation companies plus automobile-related companies. Some industries included in this sector are air transportation, auto and truck parts, tires and rubber and shipping. Financial Services This sector consists of companies that provide financial services including banking, finance, life insurance, and securities brokerage, and services companies. Utilities Utility companies in industries heavily affected by government regulation. Electric companies, gas distributors and water utilities are some of the industries included in this sector. Other This category includes companies not identified as fitting into any one specific economic sector. These are sometimes referred to as multi-sector companies. RUSSELL INVESTMENT GROUP

18 General Disclosures Performance quoted represents past performance and should not be viewed as a representation of future results. We define bearish as on balance, an organization s or individual s predominant view based on a belief that general market conditions for the period in question will be negative, and relative valuations of securities in general will trend downward. This view should not be considered investment advice nor does it apply to any specific security. We define bullish as on balance, an organization s or individual s predominant view based on a belief that overall market conditions for the period in question will be positive, and relative valuations of securities in general will trend upward. This view should not be considered investment advice nor does it apply to any specific security. Russell Investment Manager Outlook is a product of Frank Russell Company, produced independently of Russell s investment and manager research services. The information contained herein has been obtained from sources that we believe to be reliable, but its accuracy and completeness cannot be guaranteed. The information, analysis, and opinions expressed herein result from surveys of persons outside Frank Russell Company and may not represent the opinion of Frank Russell Company, its affiliates, or subsidiaries. This report is provided for general information only and is not intended to provide specific advice or recommendations for any individual or entity. This is not an offer, solicitation, or recommendation to purchase any security or the services of any organization. Russell Investment Group is a registered trade name of Frank Russell Company, a Washington, USA corporation, which operates through subsidiaries worldwide. Frank Russell Company is a subsidiary of The Northwestern Mutual Life Insurance Company. Please note, managers surveyed do not necessarily manage Russell products. Global Leaders in Multi Manager Investing Frank Russell Company (Russell) holds the largest market share of the global manager of managers market which includes collective investment funds or institutional separate accounts with assets managed as segregated accounts by multiple underlying managers. The Cerulli Report, Cerulli Quantitative Update: Global Multimanager Products. Index Russell Top Index: Measures the performance of the largest securities in the Russell Index. Russell Top Growth Index: Measures the performance of those Russell Top Index companies with higher price-to-book ratios and higher forecasted growth values, representative of U.S. securities exhibiting growth characteristics. Russell Top Value Index: Measures the performance of those Russell Top Index companies with lower price-to-book ratios and lower forecasted growth values, representative of U.S. securities exhibiting value characteristics. Russell Index: Measures the performance of the, largest companies in the Russell Index, representative of the U.S. large capitalization securities market. Russell Growth Index: Measures the performance of those Russell Index securities with higher price-to-book ratios and higher forecasted growth values, representative of U.S. securities exhibiting growth characteristics. Russell Value Index: Measures the performance of those Russell Index securities with lower price-to-book ratios and lower forecasted growth values, representative of U.S. securities exhibiting value characteristics. Russell Index: Measures the performance of the, smallest companies in the Russell Index, representative of the U.S. small capitalization securities market. Russell Growth Index: Measures the performance of those Russell Index securities with higher price-to-book ratios and higher forecasted growth values, representative of U.S. securities exhibiting growth characteristics. Russell Value Index: Measures the performance of those Russell Index securities with lower price-to-book ratios and lower forecasted growth values, representative of U.S. securities exhibiting value characteristics. Russell Index: Measures the performance of the, largest U.S. securities based on total market capitalization. Russell Growth Index: Measures the performance of those Russell Index companies with higher price-to-book ratios and higher forecasted growth values, representative of U.S. securities exhibiting growth characteristics. Russell Value Index: Measures the performance of those Russell Index companies with lower price-to-book ratios and lower forecasted growth values, representative of U.S. securities exhibiting value characteristics. Institutional Brokers Estimate System (I/B/E/S). A system dedicated to the systematic collection and reporting of corporate earnings estimates and security analysts' recommendations. I/B/E/S provides information on over, companies in countries. More than, financial analysts representing over institutions contribute earnings data and recommendations to I/B/E/S. Russell Fund Distributors Inc., Member NASD. Copyright Frank Russell Company. All rights reserved. First used March RFD INVESTMENT MANAGER OUTLOOK MARCH