Manager bullishness for emerging market equities fell dramatically and reached its lowest level since March 2009, according to the latest Investment Manager Outlook, a quarterly survey of U.S. investment managers conducted by Russell Investments. While 51 percent of managers responding to the survey are still bullish on the asset class, this figure represents a significant decline from the 71 percent who were bullish in the December 2010 iteration of the survey. Non-U.S. (developed market) equities also saw a notable drop in bullishness, decreasing 9 percentage points from the last survey to 49 percent.

“Investment managers have favored emerging market equities for some time, but many believe the strong run may soon be over and the time for profit-taking is now,” said Rachel Carroll, client portfolio manager at Russell Investments. “Managers are taking note of the civil unrest in the Middle East and the impact of food inflation in emerging economies, and some have concluded that this often volatile asset class is less attractive than it once was.”

In the latest survey, Russell asked managers whether concerns about interest rate increases over the next 12 months are affecting their investment decisions. Just over half (54 percent) say concerns regarding interest rate increases are indeed impacting investment decisions.

Of the managers expressing concern, 30 percent say that they are increasing exposure to equities or to other asset classes with attractive valuations. Another 29 percent say they are reducing their exposure to U.S. Treasuries, and 14 percent indicate they are reducing exposure to fixed income.

“Many investment professionals are expecting interest rates to rise, but the managers are divided on whether potential rate increases will drive their investment decisions. Managers − where possible − seem to be shortening the duration of their fixed income investments and moving from fixed income to equities,” said Carroll.

In the latest survey, 72 percent of managers say they believe the markets to be fairly valued − an all-time survey high and a 20 percentage point increase from December 2010. Only 5 percent of managers responding to the survey see the markets as overvalued, an all-time survey low.

Russell’s Investment Manager Outlook is an ongoing survey intended to generate a meaningful snapshot of investment manager sentiment each quarter. For the current installment of the survey, Russell collected the opinions of 180 U.S. senior-level investment decision makers at equity investment management firms and fixed-income investment management firms. The survey was fielded before the devastating earthquake and resulting tsunami in Japan, and so responses do not reflect the impact of this tragedy.