Fund Managers Keep the Faith

Mutual fund managers are finally starting to like what they see.

The surprising optimism was quantified last week in a Merrill Lynch survey of some 300 mutual fund managers. Essentially their message is this: Forget any economic woes; it's all going to work out fine.

Institutional investors are more confident that the Federal Reserve's current monetary policy is just as it should be. Fully 79% of the fund managers polled from Dec. 5 to Dec. 15 think monetary policy is "about right," up from only 56% in November.

In addition, 67% of the fund managers think the global business cycle will get stronger over the next 12 months, up from 42% in November and 37% in October.

Specifically, 71% of the survey participants said that cost-cutting -- rather increased sales or higher prices -- will be the key driver behind corporate earnings. The fund managers had a few suggestions for Corporate America as well: 55% said companies should use their cash to repay their debt, while 19% wanted companies to put the money towards paying higher dividends; 13% said companies should buy back stock with their excess cash.

Tactically, fund managers are getting more cyclical, with some 60% of those surveyed saying that cyclicals will do better than defensive stocks in 2003, compared with 45% in October. There's also a bit more interest in small-cap stocks, which is in keeping with an improving business cycle. Fund managers aren't expecting a rapid upswing in small stocks, though; 56% still favor large-caps.

Banking on the Big Picture

The fund managers polled said that today's monetary policy is "about right," and 55% said that short rates will be higher a year from now.

With monetary policy about where it should be, the next place to look is at fiscal stimulus, according to a few fund managers that spoke to TheStreet.com.