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Northern Trust survey reveals increased risk aversion among institutional managers

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Institutional investment managers surveyed by Northern Trust solidified a trend toward risk aversion in the second quarter of 2011 amid negative economic news, but nearly three-quarters had positive views on the outlook for job growth and a majority expect corporate earnings to continue growing in the short term.

In the second quarter of 2011, 42 per cent of managers surveyed by Northern Trust said they were more risk-averse than they were one quarter ago. That is up from 36 per cent in the first quarter and sustains an increasing trend that began in the third quarter of 2010, when just 8 per cent of managers reported being more risk-averse than they were in the prior 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," says Chris Vella, Global Director of Research for Northern Trust’s multi-manager investment solutions business. "Although their general outlook remains favourable for the remainder of the year, the mixed signals coming from the economy seem to have slightly recalibrated their expectations."

Northern Trust conducts a quarterly survey of institutional managers who participate in its multi-manager programs and strategies. This quarter, approximately 100 institutional managers polled in mid-June were asked their expectations for job growth over the next six months. Seventy-two per cent responded that they expect growth to either remain stable or accelerate, a potentially positive indicator that the employment picture may be brightening.

In other US market views, 46 per cent of managers said they anticipate gross domestic product (GDP) growth to accelerate in the second half of 2011, an increase of seven per centage points from the first quarter of 2011. A majority of managers also remained bullish on corporate earnings, with 56 per cent expecting earnings growth in the third quarter. This figure was lower than first quarter results, when 69 per cent expected earnings growth.

Managers remain positive regarding US market valuations. The majority of managers (59 per cent) said the US equity market, as measured by the S&P 500 Index, is undervalued. On the international front a majority of managers find the Japanese equity market attractive, but the 60 per cent who express that view is down from 66 per cent that held the same view in the first quarter.

Some 37 per cent of managers believe emerging market equities are fairly valued, up from 27 per cent in the first quarter, while 50 per cent of managers think that home prices will decline over the next six months, an increase of eight percentage points over the prior quarter and the highest level since the second quarter of 2009.

A total of 30 per cent of managers meanwhile said their commodities exposure was lower in the second quarter compared to the first quarter. There was also a 17 percentage point decrease in the number of managers whose commodities exposure increased. These two data points may signal concerns of slowing demand for commodities and slowing global economic growth. They are also likely tied to lower expectations for inflation.

Managers identified technology, consumer discretionary and healthcare as the three most attractive market segments for investment during the second quarter, while despite having a lower tolerance for risk, the vast majority (72 per cent) of investment managers did not change their portfolio’s concentration during the quarter.

For its survey, Northern Trust polled a select group of respondents, including 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 so that Northern Trust and participating managers can examine trends in attitudes and allocations.

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