A new Northern Trust survey finds institutional investmentmanagers increasingly see inflation as likely in the near future,with oil prices and market volatility also rising over the next sixmonths.

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Approximately 70 percent of managers believe that the risk ofinflation will increase over the next six months, and a majority ofmanagers (62 percent) expect market volatility, as measured by the VIX Index, to increaseover the next six months. Responses on both questions were at theirhighest points since the Northern Trust survey began in the thirdquarter of 2008.

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This quarter, managers were also asked for their views on oilprices. More than half of those surveyed believe that oil priceswill continue to rise over the next six months, with 90 percent ofmanagers expressing the view that increased oil prices willnegatively impact economic growth. Twenty-six percent of themanagers increased their portfolio exposure to commodities duringthe first quarter, a possible result of the increasing expectationsthat inflation is set to rise over the next six months.

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“Global events during the first quarter of 2011 have given ourmanagers a lot to digest in a very short amount of time,” saidChris Vella, Global Director of Research for Northern Trust GlobalAdvisors (NTGA), the multi-manager investment arm of NorthernTrust. “With renewed unrest in the Middle East, it makes sense thatmanagers have become increasingly concerned about the impact that aspike in oil prices will have on economic growth. Likewise, asgeneral concerns around inflationary pressures persist, we wouldexpect some of our managers to increase their exposure tocommodities as a means to hedging out some of that risk.”

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Managers remain positive regarding U.S. market valuations. Themajority of managers (58 percent) stated that the U.S. equitymarket, as measured by the S&P 500 Index, is undervalued.However, there was a decrease in the number of managers who believethat corporate earnings will increase over the next three monthsfrom 80 percent in the fourth quarter of 2010 to 69 percent duringthe first quarter of 2011.

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Looking at Japan following the March 11 earthquake and tsunami,two-thirds of managers surveyed believe Japanese equities areundervalued. There was also an increase from previous quarters inthe degree of perceived undervaluation, as 31 percent of managerssee more than 10 percent upside in Japanese equities – a 12 percentrise from the previous quarter.

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The survey of approximately 88 institutional managers wasconducted by NTGA in mid-March. All respondents participate inNTGA's external manager platform and are utilized in investmentproducts including mutual funds, separate accounts, emergingmanager programs and other investment solutions.

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Other major findings from the survey include:

  • 36 percent of managers are morerisk-averse compared to last quarter when just 20 percent expressedthis view.
  • 42 percent of managers think that homeprices will decline over the next six months, an increase of 10percentage points over the prior quarter.
  • Investment managers cited technology,energy, industrials, emerging markets, and healthcare as the topfive most attractive market segments respectively.
  • The percentage of managers that believeemerging markets are undervalued rose slightly from 39 percent inthe fourth quarter of 2010 to 43 percent during the first quarterof 2011.
  • Portfolio concentration levels remainedlargely unchanged for the quarter relative to the fourth quarter of2010. Roughly 66 percent of managers stated that their portfolioconcentrations were the same as last quarter, while 21 percentstated that their portfolios were more concentrated, down slightlyfrom 24 percent last quarter. 13 percent of managers stated thattheir portfolios were less concentrated, a slight uptick from 11percent last quarter.

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