What is down must go up sometimes, but when?

Mutual fund managers are waiting to find out themselves, but according to one survey, they are cautiously optimistic about 2009 after experiencing devastating losses in 2008.

The fourth quarter 2008 survey of 206 portfolio managers by Russell Investments in Tacoma, Wash., revealed that half believed the markets were going to rise at least 10%. The vast majority were buying, not holding or selling.

Another 27% thought the stock market would rise up to 10%. Seventy-two percent believed the market was undervalued. That's considerably more than the 45% who thought it was too low in the previous quarter and more than double the 34% who thought so one year earlier. The managers in the survey were most bullish in corporate bonds, U.S. small-cap and midcap stocks and high-yield bonds. Managers also showed a preference for growth investing rather than value, but the gap in the attractiveness of the two had shrunk considerably since the last survey.

"Managers believe that the market has overshot the damage done by the ongoing recession and is now oversold and undervalued," says Erik Ristuben, Russell's chief investment officer, North America.

Although the outlook for equities remained guardedly optimistic, the greater appeal of bonds in the survey represents a major development. Manager bullishness for corporate bonds reached a historic high of 60%, up from 37% the prior quarter, and from a survey low of 8% in the first quarter of 2006. The level of bullishness for high-yield bonds also soared to a new high, reaching 53% from just 39% the prior quarter and 28% one year earlier.

Last year was a miserable year for both stock and bond funds. Domestic stock funds, on average, declined 35%, according to Morningstar Inc. Meanwhile, high-yield bond funds dropped 25%, long-term corporate bonds lost 6% and multisector bond funds dropped 17%. Long-term municipal bond funds lost 10%.

The best-performing funds were long-term government bond funds, up 22%, and bear market funds that gained 24%. Inflation hedge investors saw precious metals funds and real estate funds both drop, by nearly 33% and 41%, respectively (see table).

The good news is that the bear market has matched the average loss during the 14 worst bear markets since 1900, according to Mark Salzinger, publisher of The No-Load Fund Investor in Brentwood, Tenn. "Many stocks are now cheap not only on a relative basis but on an absolute one," he says.

Meanwhile, investment strategists such as Milton Ezrati of the Lord Abbett Funds see a glimmer of hope that the housing market is improving. They cite a fed funds rate that has been almost zero and home mortgage rates that have hovered below 5%.

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