Managers Foresee Volatility and Solid U.S. Performance

Institutional asset managers are still bullish on U.S. stocks for 2015, though global volatility concerns continue.

Geopolitical risk and European economic stagnation are seen as the top risks for equity investments in 2015, according to a quarterly survey of institutional money managers published by Northern Trust.

The survey results for the fourth quarter of 2014 show investment managers overwhelmingly expect market volatility to increase in the first half of 2015. Most managers also remain at least somewhat concerned about geopolitical risk and a slowdown in Europe, but these issues have not been wide-reaching enough to endanger a generally positive view of U.S. economic and corporate profit growth opportunities, Northern Trust says.

Eight in 10 institutional asset managers expect volatility—as measured by the Chicago Board of Options Exchange Volatility Index (VIX)—to rise over the next six months. As Northern Trust observes, this is a new high for increased volatility expectations since the survey’s launch in October 2008. The previous high for the number of advisers forecasting increased future volatility was set in the third-quarter 2014 survey, when 70% of advisers said they expected volatility to go up.

A European economic slowdown is high on most managers’ rankings of risks to equity markets, Northern Trust says, and a little more than half of respondents expect the Eurozone’s gross domestic product (GDP) will remain flat or negative over the next six months. Nearly all managers expect the European Central Bank to implement a quantitative easing (QE) program, and 54% expect it to go into effect in the first quarter of 2015. 

Investment managers’ expectations regarding the U.S. economy remain strongly positive. For example, Northern Trust notes that 95% expect corporate profits to either remain the same or increase in the first quarter of 2015. Another 86% expect job growth to either remain stable or accelerate over the next six months, and a relatively strong majority (61%) expects housing prices to rise over the next six months, up from 52% the previous quarter.

Other survey results show most (86%) institutional money managers expect the recent drop in global oil prices to have a positive effect on global GDP, while 11% expect a negative net impact from lower oil prices. Similarly, more than three-quarters (76%) of the managers polled by Northern Trust believe the strengthening U.S. dollar will have “just a modest negative impact on U.S. corporate earnings,” while 19% believe it will have little to no impact, or a net positive impact on U.S. corporate earnings.

“Given the relative strength in the U.S. economy, most managers do not expect the dramatic decline in the price of oil or the strength in the U.S. dollar to derail the U.S. equity market,” notes Mark Meisel, senior investment product manager of the firm’s multi-manager solutions group, who oversees the survey. “Most of the managers in the survey make investment decisions on fundamental analysis and they seem to remain cautiously optimistic on U.S. equities.”

Somewhat offsetting the positive views, Northern Trust says 36% of managers see U.S. equities as overvalued. This represents the largest share with that view in the survey’s history, researchers note. Emerging markets, on the other hand, are seen as undervalued by 53% of managers, while 49% view European equities as undervalued.

On the bullish/bearish spectrum for asset classes and broad economic sectors, managers are most bullish on U.S. large cap equities, non-U.S. developed equities and information technology, consumer discretionary and industrials, Northern Trust finds. By asset class, a majority of managers are bearish on U.S. fixed income (65%) and commodities (61%). By sector, significant numbers of managers are bearish on utilities (69%), materials (45%) and telecom services (43%).

Northern Trust says the fourth-quarter 2014 survey also asked for views on “a business issue facing active managers: the increasing asset flows and market share of passive (and smart beta) strategies.” A strong majority of managers (68%) believe that the increase in the market share of passive/smart beta strategies will have no effect on their ability to generate excess return (alpha) over their benchmark. However, Northern Trust finds 22% believe the growth of these strategies will have a short-term effect on their ability to produce excess returns, and 10% expect a more serious long-term, systematic impact.

And while just over half (51%) of managers experienced no negative impact from the growth of passive/smart beta strategies, 46% report that flows into passive/smart beta products have had a modest negative impact on their active businesses, according to Northern Trust. Over the next five years, a slight majority (51%) expects passive strategies to gain modestly higher market share of institutional investment assets, while 9% believe those strategies will have significantly higher market share. Forty-one percent expect the same or lower market share for passive/smart beta strategies over the next five years, Northern Trust finds.

A full-survey summary report is available at