Investment Managers Show Risk Aversion, Positive Outlook

A recent survey by Northern Trust saw a trend toward risk aversion among institutional investment managers in 2Q 2011; however, most also reported positive expectations for job growth and corporate earnings.

In the second quarter of 2011, 42% of managers claimed they were more risk-averse now than last quarter ((up from 36%). This continues a trend that has been increasing since the third quarter of 2010, when only 8% of managers reported being more risk-averse than they were in the previous quarter.

When asked their expectations for job growth over the next six months, 72% responded that they expect growth to either remain stable or accelerate. Another 46% of managers said they anticipate gross domestic product (GDP) growth to accelerate in the second half of 2011, an increase of seven percentage points from the first quarter of 2011. A majority of managers also remained bullish on corporate earnings, with 56% expecting earnings growth in the third quarter, down from 69% in the first quarter.

Managers remain positive regarding U.S. market valuations: 59% reported the U.S. equity market, as measured by the S&P 500 Index, is undervalued. On the international front, a majority (60%) of managers find the Japanese equity market attractive; however, this number is down from 66% in the first quarter.

“It appears that our managers are becoming increasingly concerned that economic growth may be hitting a soft patch, a view that we’ve seen reflected in their more cautious approach towards risk,” said Chris Vella, Global Director of Research for Northern Trust’s multi-manager investment solutions business, in a press release. “Although their general outlook remains favorable for the remainder of the year, the mixed signals coming from the economy seem to have slightly recalibrated their expectations.”

Other findings from the survey include:

  • 37% of managers believe emerging market equities are fairly valued, up from 27% in the first quarter
  • 50% of managers think that home prices will decline over the next six months, an increase of 8 percentage points over the prior quarter and the highest level since the second quarter of 2009
  • 30% of managers said their commodities exposure was lower in the second quarter compared to the first quarter
  • There was a 17 percentage point decrease in the number of managers whose commodities exposure increased
  • Managers identified technology, consumer discretionary and healthcare as the three most attractive market segments for investment during the second quarter
  • Despite having a lower tolerance for risk, the vast majority (72%) of investment managers did not change their portfolio’s concentration during the quarter

For its quarterly survey, Northern Trust polled approximately 100 institutional managers, including fixed income and equity managers across value and growth styles, with a bias toward fundamental, bottom-up stock picking strategies.