Investment Manager
OutlookDate: March2008Author:Erik Ristuben, Managing Director, Client Investment StrategiesCountry: UnitedStatesSynopsis:Russell’s quarterly survey of managers and theirviews of the market.Russell Investments // Investment Manager Outlook // March 2008 p 1RUSSELL INVESTMENT MANAGER OUTLOOKSummary of key findingsKey Trends / March 2008 Investment Manager Survey** Compared to survey results from 12/07 Investment Manager Outlook Poll.Corporate BondsMOREBULLISHMaterials & ProcessingLarge Cap GrowthTechnologyMOREBEARISHMOREBEARISHMOREBULLISHIn a new high for the Investment Manager Outlook, 42 percent of investment managers
now believe the markets to be undervalued. That figure is up eight points from 34
percent in fourth quarter 2007 and double where it was in second quarter 2007.Of note, managers completed the on-line questionnaire in early March, but before the
Federal Reserve Board’s innovative responses to address the credit crunch’s impact on
the financial services sector.Though markets have been tumultuous the first quarter, two-thirds of the more than
250 managers responding to the survey still believe that U.S. equity performance will be
positive in 2008 – only a drop of 10 percentage points from the December 2007 survey.
In fact, 26 percent of managers believe market returns will exceed 10 percent by year-
end, a drop of only four percentage points from last quarter.Sectors that benefit the most from the continued high level of demand for commodities—
other energy, integrated oils and materials and processing—saw double-digit increases in
manager bullishness from the December survey and reached highs not seen in more than
two years.Manager bullishness for corporate and high-yield bonds recorded the highest scores in
the history of the survey, 37 and 32 percent respectively, but an equal or greater number
of managers were bearish on these asset classes. Meanwhile, managers reduced their
expectations for growth stocks across all sizes: large, mid cap and small cap.While manager bullishness for health care remained stable, the great enthusiasm for
technology dipped noticeably and posted the largest major sector decrease this quarter,
from 78 percent to 63 percent.■Russell Investments // Investment Manager Outlook // March 2008 p 2As a pioneer in multi-manager investing and the creator of the Russell Indexes, Russell
Investments seeks to understand capital markets and identify investment managers we
believe have exceptional capabilities. To achieve these goals, our analysts hold more than
5,000 research meetings each year with investment managers around the world. The
cumulative knowledge we gain from this unparalleled access to senior-level investment
decision makers serves as the foundation for all of our products and services.Prior to the end of each quarter, Russell surveys a sample of these decision-makers
to collect their top-line opinions about market direction, sectors/styles to watch, and
economic trends that could impact investment strategy. The result of this survey is
the Investment Manager Outlook.■Media relations
contactsTACOMAJennifer Tice
253-439-2921NEW YORKMatt Burkhard
718-875-2122About the
Investment Manager OutlookRussell Investments // Investment Manager Outlook // March 2008 p 3Beaten, Battered and Bowed—
But Not BrokenBy Erik Ristuben, Managing Director, Client Investment StrategiesSomewhere between falling home values and rising gas prices, between higher
unemployment and low GDP growth, there’s an economy struggling to stay above
water. Held down by declining consumer confidence, a weakening U.S. dollar, and the
specter of inflation, it can’t catch a break. Stock markets are floundering in a quagmire
of negative economic data and uncertainty.If not a recession, this must be the mother of all slowdowns.But despite being beaten, battered and bowed, investment managers responding to
Russell Investments’ March survey remain unbroken. They’re resilient in their belief
that government action will revive the economy, that U.S. equities have room to grow,
and that equity performance will reclaim positive territory in 2008.Given their mostly optimistic response, it appears many investment managers believe
that the market may have already priced in “a doomsday scenario,” but such a calamity
is unlikely to manifest itself. Indeed, the market’s relatively quick recovery following the
Bear Stearns & Co. debacle and the Federal Reserve’s quick action to address it, may
be an indication of managers’ belief in the economy’s fundamental resilience.Two questions in the survey speak directly to managers’ expectations about the market.
One asks about valuation; the other about timing.More respondents than ever in the history of the survey, 42 percent, now say the
market is undervalued. That figure is up eight points from 34 percent in fourth quarter
2007, and double what it was in second quarter 2007.Two-thirds of the respondents say that U.S. equity performance will be positive yet
in 2008. In fact, one quarter go so far to say that equity performance will exceed
10 percent by year-end, only slightly fewer than who said so last quarter. When you
consider that year-to-date performance of the broad-market Russell 3000® Index wasdown nearly 12 percent as of March 7, when the survey closed, predicting a greater
than 25 percent reversal has to be considered an aggressive call.Managers’ Forecast for Market Returns% of Respondents3031264655408290102030405060Down 10%or moreDown lessthan 10%FlatUp lessthan 10%Up 10%or more121131205COMMENTARY & ANALYSISForecast for 2007
made in December 2006Forecast for 2008
made in December 2007Forecast for 2008
made in February 2008Russell Investments // Investment Manager Outlook // March 2008 p 4What’s significant is that managers were positive even before a volatile two
weeks that saw historic efforts by the Federal Reserve to, in Chairman Ben
Bernanke’s words, promote liquid, well-functioning financial markets.“Despite media headlines, the world is not going to end because of sub-
prime mortgage problems,” said Jack Newell, chief investment officer for
Dover Partners, Inc., who added that he believes domestic equity markets
are undervalued and a buying opportunity.Is this just unbridled optimism, or can managers point to something
substantive that will get the economy back in the swim?Managers are confident in government action.Investment managers’ comments indicate they have faith that the Federal
Reserve and the U.S. government can help the nation dodge a prolonged
slowdown or recession. The Federal Reserve’s recent emergency actions are
tantamount to economic CPR for the hard-pressed financial sector, which has
been hemorrhaging with heavy investor selling of mortgage-backed securities.
To aid overall liquidity, the Federal Open Market Committee has reduced
the key federal funds rate 300 basis points since last September, leaving the
benchmark overnight lending rate at its lowest level since late 2004.In February, Congress passed a $100 billion-plus economic stimulus package
that lawmakers hope will resuscitate the economy as soon as this summer.
And in early March, Treasury Secretary Henry Paulson announced tough
new steps to reign in mortgage brokers to prevent this kind of crisis from
ever occurring again.“The first part of the year has been a disaster,” summed up Terry Mason, a
portfolio manager with Marvin & Palmer Associates. “But, the Fed has lowered
rates, a stimulus package has been passed, and Europe will eventually have
to cut rates. I expect the second half to see a stronger U.S. dollar, falling
commodity prices, an improving economy and better equity markets as the
stimulus kicks in.”Are the rescue actions in time? It will be months before we learn the answer
with any certainty. The National Bureau of Economic Research (NBER) decides
whether the nation experienced a recession, generally regarded as two or
more successive quarters of negative growth in real gross domestic product
(GDP). We won’t have final information on even first quarter GDP until July.Manager Expectations by Asset Class(As of March 2008)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. Rounding
errors may occur. See detailed charts on
the following pages.Please refer to pages 14–16 for asset class
definitions and page 18 for Bearish &
Bullish definitions.26%57%77%48%U.S. LARGE CAP GROWTHU.S. LARGE CAP VALUEEMERGING MARKET EQUITIESNON-U.S. (DEVELOPED MARKET) EQUITIESU.S. MIDCAP GROWTHU.S. SMALL CAP GROWTHU.S. SMALL CAP VALUEU.S. MIDCAP VALUEREAL ESTATEHIGH YIELD BONDSCASHU.S. TREASURIESCORPORATE BONDS64%18%49%27%32%52%46%36%54%22%36%41%37%40%27%45%35%35%31%23%8%23%= % Bearish1= % Bullish2COMMENTARY & ANALYSISBeaten, Battered and Bowed—
But Not Broken(continued)Russell Investments // Investment Manager Outlook // March 2008 p 5Manager Expectations by Sector(As of March 2008)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. Rounding
errors may occur. See detailed charts
on the following pages.Please refer to page 17 for sector
definitions.HEALTH CARETECHNOLOGYOTHER ENERGYINTEGRATED OILSMATERIALS AND PROCESSINGFINANCIAL SERVICESCONSUMER DISCRETIONARY AND SERVICESUTILITIESPRODUCER DURABLESCONSUMER STAPLESOTHERAUTOS AND TRANSPORTATION71%16%55%21%63%17%62%17%31%47%28%36%47%26%48%29%29%41%30%50%12%14%15%64%= % Bearish1= % Bullish2Measured by GDP, the U.S. economy grew at an anemic rate of 0.6 percent in
the fourth quarter of 2007. Predictions for first quarter are zero-growth.In the absence of positive economic news, markets have swung wildly on
rumors and market chatter. Managers commented that the volatility rocking
the markets will likely continue through the first half of 2008. Volatility may
not diminish in the second half, but managers do expect stock prices to move
up. Some even said the current volatility is a return to more normal patterns
of standard deviation, and identified today’s situation as an opportunity for
stock-pickers.“Slower growth combined with high energy prices, declining home values
and a difficult credit environment make it difficult for investors to look beyond
the challenges. However, a resilient and flexible economy, aided by an
accommodative Fed and combined with attractive valuations, will hopefully set
the stage for better performance in the back half of 2008,” said Erick Maronak,
chief investment officer for Victory Capital.Managers back off growth stocks—slightly.Among asset classes, managers maintained their bullishness toward large
cap and mid cap growth stocks in addition to non-U.S. equities in both
developing and emerging markets. However, respondents backed off
growth stocks slightly, with bullish scores dropping 11 percentage points or
more each for large cap, mid cap and small cap between fourth quarter and
first quarter.Manager Sentiment in Growth Asset Classes% of Respondents64754960364701020304050607080U.S. Small Cap GrowthU.S. Midcap GrowthU.S. Large Cap Growth4Q071Q08COMMENTARY & ANALYSISBeaten, Battered and Bowed—
But Not Broken(continued)Russell Investments // Investment Manager Outlook // March 2008 p 6Apparent future beneficiaries of the damage done to the credit market and the
widening of spreads are corporate and high-yield bonds, which recorded their most
bullish scores, 37 percent and 32 percent, respectively, in the history of the survey.
However, we see a barbell pattern, with as many or more managers bearish on these
asset classes, 40% bearish in the case of corporate bonds, and 52% bearish for
high-yield bonds. This may indicate that managers collectively expect spreads to
effectively remain unchanged in the near term and that greater opportunity lies with
investment grade corporate bonds and equities. Bullishness for Treasuries fell 10
points, from 33 percent to 23 percent, perhaps a sign that managers believe the flight
to safety may have been overdone.“Most of the bad news is priced into the market at this juncture, and valuations
are attractive for most assets except Treasury bonds,” said Jeff Pantages, chief
investment officer with Alaska Permanent Capital Management.Manager Sentiment on U.S. Treasuries, Corporate Bonds and High Yield05101520253035401Q084Q073Q072Q071Q064Q063Q062Q061Q064Q053Q052Q051Q054Q043Q042Q04% of Respondents Who are BullishHigh YieldU.S. TreasuriesCorporate BondsCommodity sectors on the move.Many managers commented that they’re seeing a commodity-driven expansion as both
emerging and developed market economies compete for energy inputs and the raw
material to build out their infrastructures. Respondents upped their bullish scores for
the other energy, integrated oils, and materials and processing sectors, all of which
saw double-digit increases pushing them to highs not seen in more than two years.
These three sectors are the most highly leveraged to economic activity and underscore
managers’ optimism for a second-half recovery.COMMENTARY & ANALYSISBeaten, Battered and Bowed—
But Not Broken(continued)Russell Investments // Investment Manager Outlook // March 2008 p 7Manager Sentiment on Materials and Processing, Integrated Oils, and Other Energy% of Respondents Who are Bullish483455625043010203040506070OtherEnergyIntegratedOilsMaterials andProcessing“We are in a long-term bull market for commodities driven by demand from emerging
economies. This will continue to drive higher relative performance from the energy,
materials and industrials sectors,” said William Duncan, chief investment officer,
Duncan-Hurst Capital Management. “Once the Fed has sufficiently accommodated the
current credit squeeze, the U.S. economy should reaccelerate in 2009.”As they have now the past four quarters, the health care, technology and other energy
sectors held their lock-tight grip on managers’ bullish sentiments, with respective
scores of 71 percent, 63 percent, and 62 percent. Tech fell off the most, dropping
nearly 15 percentage points from its all-time high of 78 percent last quarter.Among the other sectors, managers voiced little change in bearishness from the
previous quarter towards financial services, consumer discretionary, and autos and
transportation. Stocks in these sectors have been beat up by the economy’s slowdown,
but managers apparently believe things won’t get much worse, though the survey did
have its naysayers.“The equity markets are in for a tough year,” said Gerard Heffernan, portfolio manager
with Lord Abbett & Co. “The issues within the financial sector run deep, and while
interest rate cuts may help, time is the only medicine that will cure this mess.”Survey says: “Mid-cycle slowdown.”Taking into account the survey’s raw scores and the managers’ comments, we conclude
that while managers don’t believe the economy is going to be great, they also don’t
believe the doomsday scenario that has been priced into the market will occur. The last
quarter has been painful, especially so for the financial sector. Call it payback for the
excesses of the startup of a new century and easy access to cheap credit.4Q071Q08COMMENTARY & ANALYSISBeaten, Battered and Bowed—
But Not Broken(continued)Russell Investments // Investment Manager Outlook // March 2008 p 8The unknown extent of subprime mortgage losses has made banks wary of lending to
each other, putting a damper on credit markets. This has made it difficult for individuals
and businesses to take out loans, which in turn drives consumer spending and
investment. By lowering interest rates and taking other actions to increase liquidity, the
Fed is attempting to keep the economy out of a recession while avoiding inflation.With the Fed’s recent emergency actions to boost liquidity and support financial
institutions, the government has demonstrated that it realizes it can’t afford for the
financial sector to fail. The increased liquidity may be sufficient lubricant to un-freeze
credit markets and make this crisis merely a mid-cycle slowdown instead of a drawn-
out recession.Negative economic news can shake people’s faith in the economy and capital markets.
The Fed’s actions and Congress’ stimulus package are necessary to restore consumer
and investor confidence. Survey respondents appear to be aware that history shows it
could take months for the economy to absorb and reflect those boosts, which is why
they’re pinning their hopes on the second half of 2008.Whether we’re really at the bottom yet only time will tell, but managers seem to be
saying we at least may be able to see it from here.■COMMENTARY & ANALYSISBeaten, Battered and Bowed—
But Not Broken(continued)Russell Investments // Investment Manager Outlook // March 2008 p 9The equity market is cheap, pessimism is
overdone, and investment opportunities are
better than we have seen in several years.Ed Loeb, Portfolio Manager
Harris AssociatesWe believe that the on-going flight
to quality should continue in 2008 as
corporate profits continue to decline.
Those few companies able to deliver good
earnings and cash flow growth in 2008
should be rewarded with higher multiples.George Fraise, Portfolio Manager
Sustainable Growth AdvisersThe volatility that capital markets
experienced in the first quarter of 2008
should continue. It is unclear if the U.S. will
avert a recession. However, the bond yield
curve is expecting a significant slowdown,
which has resulted in a decline in yields
across the curve.Gail Mudie, Portfolio Manager
Canso Investment CounselMany investors are confused because
markets are sending three different
messages. Bond markets are screaming
recession with spreads continuing
to widen. Equities are telling us the
economy is not great but is not collapsing.
Commodity markets are showing boom
with exciting growth and strong demand.
The U.S. has never had a recession begin
with inventories this lean, payrolls this trim,
wage growth this moderate, and capital
spending this restrained.Bob Baur, Chief Global Economist
Principal Global InvestorsWe believe that the rise in market volatility
that began in the summer of 2007 was
really a return to normal levels of risk.Geoffrey Gerber, Ph.D., Chief Investment Officer
TWIN Capital Management, Inc.The credit crunch continues to influence
market behavior, and this crisis appears
likely to persist for at least the next few
months. Consequently, we can expect the
recent equity market volatility to continue
until debt markets find more stable footing.Stephen A. Komon, Portfolio Manager
Westpeak Global AdvisorsWe feel that equity markets have started
to move toward fair value but aren’t there
yet. Our biggest concern about the equity
markets is that corporate profits are likely to
disappoint over the next several years and
the apparently reasonable P/E’s will prove
to have been something of an illusion.Ben Inker, Investment Strategist
GMOWe are expecting equities to face significant
headwinds over the first two-to-three
quarters of 2008 as the market digests
issues around increased risk aversion, credit
markets, weak economic results, and slowing
earnings growth rates. This should impact
both the U.S. and the other major developed
markets. As the economic backdrop begins
to stabilize, the environment for equities
should begin to lead the market—but not
until the end of the year.Daniel Farley, Managing Director
State Street Global AdvisorsCorporations, aside from financial services,
have strong balance sheets and high cash
balances that may allow them to invest in
productivity improvements, which in turn
may allow them to take advantage of a
weaker dollar to compete overseas.Brian Andrew, President
Ziegler Capital Management, LLCWhat managers are sayingA sample of manager verbatim comments from the March 2008 Investment Manager OutlookThe opinions expressed in this
material are not necessarily
those held by Russell
Investments, its affiliates or
subsidiaries. While all material
is deemed to be reliable,
accuracy and completeness
cannot be guaranteed. The
information, analysis, and
opinions expressed herein
are for general information
only and are not intended
to provide specific advice or
recommendations for any
individual or entity.Russell Investments // Investment Manager Outlook // March 2008 p 10RESULTSValuation of the U.S. equity marketQuestion:Which of these general valuation conditions best describes the current U.S. equitymarket?3Key Findings:• 42% of respondents believe the markets to be undervalued, an increase of eightpercentage points from 34% last quarter and double the percentage in second
quarter 2007.• Overall, 82% of managers believe the market is either fairly valued or undervalued.0204060801001Q084Q073Q072Q071Q07% of Respondents% of Respondents18404202040603 U.S. equity market refers tothe broad investable market
as defined by the Russell
3000® Index. Indexes areunmanaged and cannot be
invested into directly.OvervaluedFairly ValuedUndervaluedNote: Numbers may not add to
100 percent due to rounding.OvervaluedFairly ValuedUndervaluedRussell Investments // Investment Manager Outlook // March 2008 p 11RESULTSMarket forecast for 2008Question:What are your expectations for the performance of the U.S. equity market for the12 months ending December 2008?Key Findings:• Two-thirds, or 66% of respondents believe the market will be positive yet in 2008.• 26% believe market performance will exceed 10% by year end, versus 30% whobelieved so last quarter.• 25% of the respondents believe stocks will decline in 2008, up from the 15% whosaid so last quarter.Note: Numbers may not add to
100 percent due to rounding.% of Respondents2640901020304050Down 10%or moreDown lessthan 10%FlatUp lessthan 10%Up 10%or more205Russell Investments // Investment Manager Outlook // March 2008 p 12Methodology and background
about RussellMethodologyRussell Investments conducted the
Investment Manager Outlook survey
between February 28 and March 7,
2008. 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, 254 survey
responses were received representing
174 investment management firms. On
average, the companies that responded
individually manage an estimated $81
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 chief investment officers (CIOs).
Other participants include 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.About Russell InvestmentsRussell Investments provides asset
management and investment services to
institutional and individual investors. We
offer mutual funds, indexes, alternative
investments and implementation services
such as transition management and trade
execution. We have offices in most major
financial centers and serve clients in
more than 40 countries.Russell is one of the world’s most
influential and trusted providers of
investment services. A pioneer in multi-
manager investing and the creator of
the Russell Indexes, Russell manages
approximately US$228 billion in assets
as of 12/31/07. We work with more than
3,000 clients, ranging from small and
mid-sized organizations to many of the
world’s largest and most sophisticated
investors, responsible for hundreds
of billions of dollars. Our innovative
investment approach is made available
to individuals through a network of
strategic distribution alliances and
independent investment advisors. Our
clients include banks and insurance
companies, investment advisors, defined
benefit and defined contribution plans,
endowments, foundations and sovereign
wealth funds.We seek to understand capital markets
and identify investment managers we
believe have exceptional capabilities. To
achieve these goals, our analysts hold
more than 5,000 research meetings each
year with investment managers around
the world. The cumulative knowledge we
gain from this in-depth research serves as
the foundation for all of our products and
services.Founded in 1936, Russell is
headquartered in Tacoma, Washington.
Russell is a subsidiary of Northwestern
Mutual, and the company’s executive
management has a minority equity
participation in the firm. More
information about Russell’s investment
products and services is available at
www.russell.com.* Estimated assets undermanagement is based
on a majority of survey
respondents. Data reported
as of March 13, 2008 from
Standard & Poor‘s.Russell Investments // Investment Manager Outlook // March 2008 p 13Annualized Total Returns (%)Latest ThreeOneThreeFiveTenIndexSectorMonthsYtd Year Year Year YearRussell 3000®IndexAutos & Transportation–7.0–3.2–8.23.112.13.1ConsumerDiscretionary–11.6–8.6–13.6 0.59.7 2.7ConsumerStaples–8.4–6.7 6.5 9.212.8 5.9FinancialServices –14.7–10.8–24.2–0.68.2 4.5HealthCare–9.2–6.9–0.5 5.38.2 4.7IntegratedOils0.8–6.329.116.226.214.5MaterialProcessing –1.3–3.813.013.922.3 8.1Other–9.8–9.2 1.1 3.011.2 4.9OtherEnergy5.8–1.134.323.431.910.8ProducerDurables –7.6–7.4 2.2 9.818.4 6.9Technology–14.2–15.6–1.2 5.210.8 1.9Utilities–12.4–13.2–7.9 9.114.4 2.8Latest ThreeOneThreeFiveTenIndexAssetClassMonthsYtdYearYearYearYearRussell 1000® IndexLarge Cap–9.5–8.9–3.85.912.24.4Russell 1000® Growth IndexLarge Cap Growth–10.0–9.60.45.910.51.7Russell 1000® Value IndexLarge Cap Value–8.9–8.0–7.95.813.96.2Russell Midcap® IndexMid Cap–8.9–8.7–6.87.616.98.3Russell Midcap® Growth IndexMid Cap Growth–9.1–9.3–2.37.916.05.8Russell Midcap® Value IndexMid Cap Value–8.7–7.7–12.36.817.18.8Russell 2000® IndexSmall Cap–10.3–10.3–12.43.915.15.3Russell 2000® Growth IndexSmall Cap Growth–11.8–12.3–7.64.614.72.2Russell 2000® Value IndexSmall Cap Value–8.7–7.9–17.13.115.37.7Russell 3000® Index BroadCap–9.5–9.0–4.55.712.44.4MSCI World Ex-U.S.Non-U.S. Equities–9.1–7.33.214.022.27.4MSCI Emerging MarketsEmerging Markets–5.6–6.033.629.036.613.6Lehman Brothers TreasuryU.S. Treasuries3.83.711.46.24.66.2Lehman Brothers Aggregate BondCorporate & Gov’t Bonds2.11.87.35.24.56.0Lehman Brothers U.S. High Yield BondHigh-Yield Bonds–2.4–2.7–3.34.09.35.0FTSE NAREIT U.S. Real EstateReal Estate–9.3–4.5–24.18.917.410.2Citigroup 3-Month T-BillCash0.80.54.44.23.03.6Asset class and sector performanceIndex performance for the period ending February 29, 2008.Russell Investments 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.Russell equity sector returns are calculated by categorizing the securities that make up the Russell 3000® Index intodiscrete industry groupings and then computing the net return for each grouping.Russell Investments // Investment Manager Outlook // March 2008 p 14Large cap growthThese securities are growth stocks which
fall into the Russell Top 200® Index. Thisindex consists of the top 200 securities
in the Russell 1000® Index, as rankedby total market capitalization. This
“Blue Chip” large capitalization index
represents approximately 34% of the
value of the Russell 1000®. As of theJune 22, 2007 reconstitution, the average
market capitalization was approximately
$39.3 billion; the median market
capitalization was approximately $27.5
billion. Growth stocks tend to exhibit
higher price-to-book and price-earnings
ratios, lower dividend yields and higher
forecasted growth levels.Large cap valueThese securities are value stocks which
fall into the Russell Top 200® Index.This index consists of the top 200
securities in the Russell 1000® Index,as ranked by total market capitalization.
This “Blue Chip” large capitalization
index represents approximately 35%
of the value of the Russell 1000®. Asof the June 22, 2007 reconstitution,
the average market capitalization was
approximately $44.4 billion; the median
market capitalization was approximately
$24.6 billion. Value stocks tend to exhibit
low price-to-book and price-earnings
ratios, higher dividend yields and lower
forecasted growth levels.Mid cap growthThese securities are growth stocks which
fall into the Russell Midcap® Index. Thisindex measures the performance of the
smallest 800 securities in the Russell
1000® Index, as ranked by total marketcapitalization. This index accurately
captures the medium-sized universe ofsecurities and represents approximately
17% of the value of the Russell 1000®.As of the June 22, 2007 reconstitution,
the average market capitalization was
approximately $5.1 billion; the median
market capitalization was approximately
$3.8 billion. Growth stocks tend to
exhibit higher price-to-book and price-
earnings ratios, lower dividend yields
and higher forecasted growth levels.Mid cap valueThese securities are value stocks which fall
into the Russell Midcap® Index. This indexmeasures the performance of the smallest
800 securities in the Russell 1000® Index,as ranked by total market capitalization.
This index accurately captures the
medium-sized universe of securities and
represents approximately 14% of the value
of the Russell 1000®. As of the June 22,2007 reconstitution, the average market
capitalization was approximately $4.7
billion; the median market capitalization
was approximately $3.4 billion. Value
stocks tend to exhibit low price-to-book
and price-earnings ratios, higher dividend
yields and lower forecasted growth levels.Small cap growthThese securities are growth stocks which
fall into the Russell 2000® Index. Thisindex measures the performance of the
smallest 2,000 securities in the Russell
3000® Index, representing approximately5% of the value of the Russell 3000®.As of the June 22, 2007 reconstitution,
the average market capitalization was
approximately $712 million the median
market capitalization was approximately
$525 million. Growth stocks tend to
exhibit higher price-to-book and price-
earnings ratios, lower dividend yields and
higher forecasted growth levels.Asset class definitionsRussell Investments // Investment Manager Outlook // March 2008 p 15Small cap valueThese securities are value stocks which fall
into the Russell 2000® Index. This indexmeasures the performance of the smallest
2,000 securities in the Russell 3000® Index,representing approximately 5% of the
value of the Russell 3000®. As of the June22, 2007 reconstitution, the average market
capitalization was approximately $665
million; the median market capitalization
was approximately $486 million. Value
stocks tend to exhibit low price-to-book
and price-earnings ratios, higher dividend
yields and lower forecasted growth levels.TreasuriesTreasuries 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 bondsCorporate 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.Bond investors should carefully consider
risks such as interest rate, credit,
repurchase and reverse repurchase
transaction risks. Greater risk, such as
increased volatility, limited liquidity,
prepayment, non-payment and increased
default risk, is inherent in portfolios that
invest in high yield (“junk”) bonds or
mortgage backed securities, especially
mortgage backed securities with exposure
to sub-prime mortgages.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 pass-through securities, and
asset-backed securities.CashShort-term investments typically involve
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. While highly liquid, cash
generally has not kept pace with inflation.Citigroup 3-Month T-Bill Index is an
average of the last 3-month U.S. Treasury
Bill issues (excluding the current month-
end bill).Non-U.S. developed market equitiesEquities 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. IndexSM is afree float-adjusted market capitalization
index that is designed to measure globalAsset class definitions(continued)Russell Investments // Investment Manager Outlook // March 2008 p 16developed market equity performance
excluding the United States. As of August
2006 the index consisted of 23 developed
market country indices.High yield bondsHigh Yield bonds are non-investment
grade debt obligations. Issues included in
this classification are generally rated Ba1
or lower by Moody’s Investors Service or
BB+ or lower by Standard & Poor’s.Bond investors should carefully consider
risks such as interest rate, credit,
repurchase and reverse repurchase
transaction risks. Greater risk, such as
increased volatility, limited liquidity,
prepayment, non-payment and increased
default risk, is inherent in portfolios that
invest in high yield (“junk”) bonds or
mortgage backed securities, especially
mortgage backed securities with exposure
to sub-prime mortgages.The Lehman Brothers High Yield Bond
Index covers the universe of fixed rate, non-
investment grade debt. Pay-in-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 144-As
are also included. The index includes both
corporate and non-corporate sectors.Real estateInvestment 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 realestate, economic conditions, property
taxes and tax laws and interest rates
all present potential risks to real estate
investments.FTSE NAREIT U.S. Real Estate: 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 market equitiesEquities 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 IndexSM is afree float-adjusted market capitalization index
that is designed to measure equity market
performance in the global emerging markets.
As of August 2006 the index consisted of 27
emerging market country indices.Asset class definitions(continued)Russell Investments // Investment Manager Outlook // March 2008 p 17TechnologyPrimarily companies that serve the
electronics and computer industries or
that manufacture products based on the
latest applied science.Health careCompanies involved in medical services
or health care including biotechnology
research and production, drugs and
pharmaceuticals, and health care
facilities and services.Consumer discretionary and servicesCompanies 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 staplesPrimarily 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 oilsIncluded in this sector are domestic and
international integrated oil companies
involved in all parts of the exploration,
production and refining process.Other energyCompanies included in this sector are all
energy related businesses other than those
included in the integrated oils sector. Two
distinct groups are: (1) gas distributors
and gas pipelines and (2) other energy
companies which include mining, producing,
servicing, and drilling companies.Materials and processingThis 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 durablesCompanies 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 transportationThis 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 servicesThis sector consists of companies that
provide financial services including
banking, finance, life insurance, and
securities brokerage, and services
companies.UtilitiesUtility companies in industries heavily
affected by government regulation.
Electric companies, gas distributors and
water utilities are some of the industries
included in this sector.OtherThis category includes companies not
identified as fitting into any one specific
economic sector. These are sometimes
referred to as multi-sector companies.Sector DefinitionsRussell Investments // Investment Manager Outlook // March 2008 p 18Performance quoted represents past
performance and should not be viewed
as a representation of future results.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.Russell Investment Manager Outlook is a product
of Russell Investments, 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 Russell Investments and may not
represent the opinion of Russell Investments, 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 Washington, USA
corporation, which operates through subsidiaries
worldwide including Russell Investments, and
is a subsidiary of The Northwestern Mutual Life
Insurance Company.Please note, managers surveyed do not necessarily
manage Russell products.IndexRussell 1000® Growth Index: Measures theperformance of those Russell 1000® Indexsecurities with higher price-to-book ratios and
higher forecasted growth values, representative of
U.S. securities exhibiting growth characteristics.Russell 1000® Value Index: Measures theperformance of those Russell 1000® Indexsecurities with lower price-to-book ratios and
lower forecasted growth values, representative of
U.S. securities exhibiting value characteristics.Russell 3000® Index: Measures the performanceof the 3,000 largest U.S. securities based on total
market capitalization.Russell Fund Distributors, Inc. member FINRA, part of Russell Investments.Copyright © Russell Investments 2008. All rights reserved.First used March 2008 RFD–0037General disclosures

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