investment manager outlook

Investment ManagerOutlookDate: June 2009

Author: Sadiq S. Adatia, CFA, Chief Investment Officer

Country: Canada

Synopsis: Russell’s quarterly survey of Canadian investment managers and their views of the market.

Russell Investments // Investment Manager Outlook / June 2009 p 1

RuSSell InveStment mAnAgeR OutlOOk

key trends / June 2009 Investment manager Survey*

*Compared to survey results from Q1 2009 Investment manager Outlook Poll.

Despite a rally that has seen double-digit gains in Canadian equities, a majority of investment managers see further upside potential, and only one-in-five think the market has become overvalued. the energy, financial services, and materials sectors continue to lead in positive manager sentiment.

the investment managers expressed these views in the latest quarterly Russell Investment Manager Outlook poll conducted by Russell in late April and may of 2009.

Sixty-three percent of investment managers are now bullish towards broad market Canadian equities, and bullish sentiment towards Canadian small cap stocks leapt from 41 percent last quarter to 57 percent this quarter.

Cash is no longer king, as only eight percent of managers say they are still bullish towards cash, and fully 61 percent are bearish. Another sign of rising confidence is the fact that 54 percent of managers now express a positive outlook for high-yield bonds, while only 21 percent remain bullish towards Canadian government bonds.

Positive sentiment was up sharply for emerging market equities, with the number of bullish managers jumping from 43 percent to 67 percent. Perhaps because of the more attractive opportunities offered in Canadian and emerging markets, the outlook for u.S. and eAFe stocks dimmed slightly this quarter.

At Russell, we share investment managers’ positive outlook on equities, and expect to see energy and commodity prices, as well as the Canadian dollar, continue to trend higher in the coming quarters. We continue to advocate full participation in the markets combined with a thoughtful approach to diversification in order to mitigate risks and maintain exposure to opportunities. n

Summary of key findings

Cash Materials & Financials

High Yield Bonds Emerging Markets

MOREBULLISH

MOREBEARISH MORE

BULLISHMORE

BULLISH


As creators of the Russell indexes and the only firm that researches more than 5,200 investment manager products, Russell Investments has extraordinary access to senior-level Canadian investment decision-makers. Prior to the end of each quarter, Russell surveys a sample of those investment managers 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 the Russell Investment manager Outlook.

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 3).

the Russell Investment manager Outlook is completed and distributed at the end of each quarter. this report includes responses from investment managers with a variety of investment focuses.

The manager research that Russell conducts for investment purposes is done entirely independent of the Russell Investment Manager Outlook, and responses to the survey are on a purely voluntary basis.

media relations contacts

tOROntO

thien Huynh manager, Communications 416-640-2529

About the Investment manager Outlook


Investment managers see more upside in equities By Sadiq S. Adatia, CFA, Russell Investments Canada limited

COmmentARy & AnAlySIS

Despite a rally that has seen double-digit gains in Canadian equities, a majority of investment managers see further upside potential. A solid 45 percent consider Canadian equities to be undervalued and only one-in-five think the market has become overvalued. the managers continue to see the most compelling return potential in the core Canadian sectors of energy, financial services, and materials.

the investment managers expressed these views in the latest quarterly Russell Investment Manager Outlook poll conducted by Russell in late April and may of 2009.

Canadian equities started 2009 as one of the world’s weakest asset classes, but have roared back with a vengeance. As the tSX has set successive new highs for the year, investment managers have remained overwhelmingly bullish towards broad market Canadian equities. the number of bullish managers increased from 60 percent to 63 percent this quarter, while the number of bears increased four points to just 26 percent.

In the small cap arena, the shift in sentiment has been much more dramatic. Sensing the emergence of new bargains, and given an increased appetite for risk in light of positive economic indicators, fully 57 percent of managers are now bullish towards Canadian small caps—up sharply from 41 percent last quarter. Bearishness has dropped from 38 percent of managers to 30 percent.

Indeed, an increased appetite for risk is a common theme this quarter. the most notable evidence is the outlook for cash. not long ago, it was the safe haven of choice for many managers, with more than one third saying they are bullish towards the asset class, despite the fact that returns were very low, and had even dipped temporarily below zero for u.S. treasuries.

today, only eight percent of managers say they are still bullish towards cash, and fully 61 percent are bearish, indicating that stocks and bonds are once again seen as offering rewards commensurate with their higher risk profile. this may be a self-fulfilling prophecy, as billions in cash currently sitting on the sidelines moves back into markets, fueling a continuation of the current rally.

At Russell, we believe investors should remain fully invested at all times, because markets are always more positive than negative over time. those who choose to hold cash are, more often than not, leaving money on the table.

Another sign of rising confidence is the preference for high-yield bonds over Canadian government bonds. Only 21 percent of managers remain bullish towards government issues, and 55 percent are now bearish. However, the number of


Manager Expectations by Asset Class (As of June 2009)

note: Bearish = percent of managers responding with 1-3 on a scale of 1-7. Bullish = percent of managers responding with 5-7 on a scale of 1-7. Scores for neutral (4) are not included.

See detailed charts on the following pages.

= % Bearish1 = % Bullish2

CANADIAN EQUITIES (BROAD MARKET)

EMERGING MARKET EQUITIES

EAFE EQUITIES

CANADIAN EQUITIES (SMALL CAP)

U.S. EQUITIES

CANADIAN BONDS

$CAD VS $U.S.

CANADIAN HIGH YIELD BONDS

REAL ESTATE

CASH

63%

45%

9%

43%

57%

21%

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54%

8%61%

26%

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35%

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55%

31%

19%

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Investment managers see more upside in equities (continued)

managers favouring high-yield bonds rocketed from 31 percent to 54 percent of managers, while bears dropped from 42 percent to 34 percent.

emerging market equities—which posted some of the worst performance at the nadir of the financial crisis—are another area where attitudes towards risk appear to have changed. the number of bullish investment managers shot up from 43 percent to 67 percent this quarter, and bears slid from 40 percent to 31 percent. It is likely that many now believe the hard-hit markets of the developing world have become oversold.

the outlook actually dimmed slightly for u.S. and eAFe stocks this quarter, possibly because other regions—such as Canada and emerging markets—are seen as offering more attractive prospects. For eAFe, the number of bullish managers is unchanged at 43 percent, but bears have climbed from 30 percent to 35 percent. For the u.S., bulls are down a few points to 45 percent, and bears are up a few points to 29 percent.

Returning to Canadian equities, the “big three” sectors of the domestic market continue to lead in positive sentiment. Investment managers remain optimistic about the energy sector, with 74 percent calling themselves bullish. this comes as little surprise, as oil prices have experienced a steady ascent in recent months, following a period of constrained supply.

Seventy percent of investment managers say they are bullish towards the financial services sector, which also follows logic, as Canadian banks have stood out as the world’s strongest in recent quarters, maintaining steady dividends and respectable earnings throughout the financial crisis.

the outlook for the materials sector also remains upbeat, with 64 percent of managers saying they are bullish. excluding gold, this sector was deeply depressed in recent quarters, and appears to be staging a comeback on the widely-anticipated resumption of global growth within the next few quarters.

Bullish sentiment towards the consumer staples sector dropped from 46 percent to 28 percent, and at the same time, bullish sentiment towards the consumer discretionary sector rose from 39 percent to 47 percent. given the more optimistic economic climate, this could be an indication that investment managers expect pleasure, rather than simple necessity, to again become a driver of consumer behaviour.


Manager Expectations by Sector (As of June 2009)

note: Bearish = percent of managers responding with 1-3 on a scale of 1-7. Bullish = percent of managers responding with 5-7 on a scale of 1-7. Scores for neutral (4) are not included.

See detailed charts on the following pages.

= % Bearish1 = % Bullish2

UTILITIES

MATERIALS

INDUSTRIALS

TELECOMMUNICATIONS SERVICES

FINANCIAL SERVICES

ENERGY

INFORMATION TECHNOLOGY

CONSUMER STAPLES

CONSUMER DISCRETIONARY

HEALTH CARE

25%

70%

47%

59%

45%

74%

64%

59%

28%

48%29%

53%

27%

28%

28%

26%

19%

33%

13%

41%


telecommunications saw an up-tick in bullish sentiment, from 39 percent of managers to 45 percent. earnings in this sector have been steady, and many market observers expect the recent change of leadership at Rogers Communications bodes well for future performance.

the information technology sector, which is largely a proxy for Research in motion, saw an increase in bullishness to 59 percent, and bearishness was cut in half to just 13 percent of managers.

Industrial companies also saw an improvement in outlook, with bears remaining virtually unchanged at 28 percent, but bulls increasing 10 points to 59 percent of managers. the industrial sector is expected to benefit from improving vacation travel, government infrastructure spending, and higher demand from emerging markets.

At Russell, we share investment managers’ positive outlook on equities, and expect to see energy and commodity prices, as well as the Canadian dollar, continue to trend higher in the coming quarters. We continue to advocate full participation in the markets combined with a thoughtful approach to diversification in order to mitigate risks and maintain exposure to opportunities. n

Investment managers see more upside in equities (continued)


ReSultS

valuation of the Canadian equity market

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Question:

Which of these general valuation conditions best describes the Canadian equity market?

Key Findings:

45% of managers consider the market undervalued•

34% of managers consider the market fairly valued •

21% of the managers consider the market overvalued•


ReSultS

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1 = Strongly bearish 4 = neutral 7 = Strongly bullish

Chart data is based on percentage of respondents.

note: numbers may not add to 100 percent due to rounding.

Question:

What are your expectations for the performance of the following asset classes over the next 12 months?

Key Findings:

Bullishness towards emerging markets up sharply to 67 percent of managers •

High-yield bonds stage comeback, with majority of managers now bullish•

Cash no longer king: eight percent of managers bullish, 61 percent bearish•


ReSultS

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Asset class expectations (continued)

Scale is 1 to 7




ReSultS

1Q09 2Q09

Scale is 1 to 7




Sector expectations

Question:

What are your expectations for the performance of the following sectors over the next 12 months?

Key Findings:

energy sector still seen as most promising with 74 percent of managers bullish•

Financial services bulls rise again to 70 percent of managers•

Bullish sentiment shifts from Consumer Staples to Consumer Discretionary•

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Sector expectations (continued)

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How long for u.S. housing recovery?

Question:

last quarter, ImO survey respondents indicated that an improvement in the u.S. housing market is the key economic indicator of a market recovery. How long will it take for the u.S. housing market to cease hindering a market recovery in Canada and the u.S.?

a. 3 months b. 6 months c. 1 year d. 1.5 years e. 2 years f. longer

Key Findings:

Investment managers divided on outlook for u.S. housing•

majority expect stability within six months•

nearly one third see stability taking 18 months or longer•

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Supplementary information

-50.00

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0.00

10.00

Canadian equity (Broad Market)

Canadian equity (Small Cap)

US equity EAFE equity Emerging markets equity

Canadian bonds Canadian high yield bonds

Cash

1 Yr (%) 3 Yrs (%) 5 Yrs (%) 10 Yrs (%)

the Asset Classes are based on an appropriate, broad-based index applicable to that sector. For example, returns for the broad Canadian equity market are based on the S&P/tSX Composite Index.

Annualized Asset Class Returns to may 2009

Index Sources: 3 mSCI , 4 PC Bond, 5 tSX group Inc., 6 Russell Investments Canada limited

Asset Classes 1 Year (%) 3 Years (%) 5 Years (%) 10 Years (%)

Canadian equity (Broad market)S&P/TSX Composite Index5 -26.99 -1.27 6.87 6.39

Canadian equity (Small Cap)S&P/TSX Small Cap Index5 -35.68 -12.41 -3.29 n/A

u.S. equityRussell 3000® Index6 -25.95 -8.54 -5.75 -3.91

eAFe equityMSCI EAFE Index3 -29.70 -7.48 -1.08 -0.96

emerging markets equityMSCI Emerging Markets Index3 -27.37 3.49 10.54 7.10

Canadian bondsDEX Universe Bond Index4 5.52 5.55 5.60 6.15

Canadian high yield bondsDEX High Yield Index4 -4.92 2.32 3.96 6.63

CashDEX 30 Day T-Bill Index4 1.57 3.17 2.97 3.32

Annualized Asset Class Returns to may 2009


Canadian equity (Broad Market)Index Source: S&P/TSX Composite Index5

Canadian equity is a growth asset involving the purchase of ownership interests—and the rights to profits and voting that this implies—in a company listed on the S&P/tSX Composite Index. equities may be purchased from the global Industry Classification Standard sectors, including financials, energy, materials, industrials, consumer discretionary, consumer staples, health care, information technology, telecommunications, and utilities.

the risks faced by Canadian equities include liquidity risk, market risk and company-specific risk. the value of investments is subject to changes to management, product distribution, investor confidence, internal operations and the company’s business environment.

Canadian equity (Small Cap) Index Source: S&P/TSX Small Cap Index5

these securities are small capitalization stocks which are represented by the S&P/tSX Small Cap Index. the S&P/tSX Small Cap Index is a benchmark of smaller Canadian companies that have been included in the S&P/tSX Composite Index, but are not members of the S&P/tSX 60 or the S&P/tSX midcap Indices.

U.S. equityIndex Source: Russell 3000® Index6

u.S. equity is a growth asset involving the purchase of ownership interests—and the rights to profits and voting that this implies—in companies listed on an American equity benchmark, such as the Russell 3000® Index.

the Russell 3000® Index offers investors access to the broad u.S. equity universe representing approximately 98% of the u.S. market. the risks faced by u.S. equity include liquidity risk, market risk and company-specific risk. the value of investments is subject to changes to management, product distribution, investor confidence, internal operations and the company’s business environment.

EAFE equityIndex Source: MSCI EAFE Index3

mSCI eAFe is a morgan Stanley Capital International index that is designed to measure the performance of the overseas developed stock markets of europe, Australasia, and the Far east. International equities have historically produced higher long-term returns than lower risk investments; however they tend to be relatively less liquid and more volatile than domestic equities.

International equities entail different risks than those typically associated with domestic equities, including currency fluctuations, political and economic instability, accounting changes and foreign taxation.

Asset class definitions


Emerging markets equityIndex Source: MSCI Emerging Markets Index3

Index investments in emerging or developing foreign 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. As a result, emerging markets securities may be less liquid and more volatile than domestic and more developed foreign markets.

Canadian bondsIndex Source: DEX Universe Bond Index4

Index Canadian bonds (Canadian fixed income) are a defensive asset providing debt capital to organizations in return for coupon payments and return of capital at expiry. Canadian bonds may be sold which finance a variety of sectors including government, corporate, and international fixed income products. the sector chosen will determine, in part, the bond’s level of risk.

the primary risks associated with Canadian bonds include interest rate risk, inflation risk and credit risk. In general, there is a negative relationship between interest rates and the value of bonds.

Canadian high yield bondsIndex Source: DEX High Yield Bond Index4

Index high yield bonds are non-investment grade debt obligations. In general, when interest rates rise, the value of bonds will decline. Bond investors should carefully consider risks such as interest rate risk, credit risk, inflation, securities lending, repurchase and reverse repurchase transaction risk. Portfolios that invest primarily in high yield bonds are subject to additional risks such as limited liquidity and increased volatility.

CashIndex Source: DEX 30-day T-Bill Index4

Index cash is a defensive, low-risk asset that typically involves instruments such as 90-day government treasury Bills, high quality short term notes and commercial paper issued by major financial institutions and blue chip companies. Cash provides diversification and liquidity benefits to a portfolio; however cash generally provides lower investment returns than investments such as fixed income or equities. While highly liquid, cash generally has not kept pace with inflation.

Asset class definitions (continued)


methodology and background about Russell

Methodology

Russell Investments conducted the Russell Investment manager Outlook survey between may 27th and June 4th, 2009. the survey was sent to investment managers with a variety of investment focuses. Having a financial relationship with Russell Investments was not part of the criteria for being included in the survey.

In total, 27 investment management firms and 38 investment managers from Canada participated in the survey. the large majority of individual respondents to the Russell Investment manager Outlook have senior-level investment decision responsibilities, and are often portfolio managers. Other participants included investment strategists, research analysts and others. the manager research that Russell Investments conducts for investment purposes is done entirely independent of Russell Investment manager Outlook, and responses to the survey are on a purely voluntary basis.

About Russell Investments

Russell Investment group provides strategic advice, world-class implementation, state-of-the-art performance benchmarks and a range of institutional-quality investment products. With more than C$171 billion in assets under management as of march 31st, 2009, Russell Investments serves individual, institutional and advisor clients around the world. Russell Investments provides access to some of the world’s best money managers. It helps investors put this access to work in corporate defined benefit and defined contribution plans, and in the life savings of individual investors.

Founded in 1936, Russell Investments is a subsidiary of northwestern mutual and is headquartered in tacoma, Washington, with additional offices in new york, toronto, london, Paris, Sydney, Singapore, Auckland and tokyo. Russell Investments Canada limited is a wholly-owned subsidiary of Frank Russell Company.

For more information, please visit www.russell.com/ca.


1We 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.2We 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.3mSCI Index Information: mSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any mSCI data contained herein. the mSCI data may not be further redistributed or used to create indices or financial products. this report is not approved or produced by mSCI.4PC-Bond, a business unit of tSX Inc. Copyright © tSX Inc. All rights reserved. the information contained herein may not be redistributed, sold or modified or used to create any derivative work without the prior written consent of tSX Inc.”5tSX Copyright 2009 tSX Inc. All rights reserved.

tHe uSeR AgReeS tHAt tSX InC. AnD tHe PARtIeS FROm WHOm tSX InC. OBtAInS DAtA DO nOt HAve Any lIABIlIty FOR tHe ACCuRACy OR COmPleteneSS OF tHe DAtA PROvIDeD OR FOR DelAyS, InteRRuPtIOnS OR OmISSIOnS tHeReIn OR tHe ReSultS tO Be OBtAIneD tHROugH tHe uSe OF tHIS DAtA.

tHe uSeR FuRtHeR AgReeS tHAt neItHeR tSX InC. nOR tHe PARtIeS FROm WHOm It OBtAInS DAtA mAke Any RePReSentAtIOn, WARRAnty OR COnDItIOn, eItHeR eXPReSS OR ImPlIeD, AS tO tHe ReSultS tO Be OBtAIneD FROm tHe uSe OF tHe DAtA, OR AS tO tHe meRCHAntABle QuAlIty OR FItneSS OF tHe DAtA FOR A PARtICulAR PuRPOSe.6Russell Indices are registered trademarks of Frank Russell Company and are used under license by Russell Investments Canada limited.

this is a publication of Russell Investments Canada limited. It should not be construed as investment advice. It is not a solicitation or recommendation to purchase any services of any organization.nothing in this publication is intended to constitute legal, tax, securities or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. the contents are intended for general information purposes only, and you are urged to consult your own investment advisor concerning your own situation and any specific investment questions you may have. For further information about these contents, please contact Russell Investments Canada limited. the information contained herein has been obtained from sources that we believe to be reliable, but its accuracy and completeness are not guaranteed. Russell Investments Canada limited reserves the right at any time and without notice to change, amend, or cease publishing the information. It has been prepared solely for information purposes. It is made available on an “as is” basis. Russell Investments Canada limited does not make any warranty or representation regarding the information. Without prior written permission from Russell Investments Canada limited, it may not be reproduced, in whole or in part, in any form, other than for your own personal, non-commercial use. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.multi-Asset multi-Style multi- manager®, Russell Investments, the Russell Investments logo and the Russell 3000® Index are either trademarks or registered trademarks of Frank Russell Company and are used under license by Russell Investments Canada limited. Copyright © Russell Investments Canada limited, 2009. All rights reserved.Date of first publication: June 2009

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