Fund managers, while showing some increased optimism about the world marketplace and economy, still have “considerable misgivings” about the nature of the recovery in the medium term, and continue to shorten their investment time horizon, according to the latest Merrill Lynch Fund Manager Survey issued today.

Although three quarters of participants were surveyed before the Federal Reserve’s November interest rate reductions, “the evidence also suggests fund managers want companies to repay debt rather than use funds for capital expenditures, ” said David Bowers, chief global investment strategist, in his regular survey. Fund managers recognize “we are operating in a low nominal growth environment and 75% believe that cost-cutting — as opposed to top-line sales growth — will be the prime driver of earnings growth over the next 12 months,” Bowers said.

Despite the concerns of fund managers, the Merrill Lynch Stock Market Conditions Indicator, which looks at profit expectations, interest rate prospects, equity valuation and investment sentiment, improved for the second consecutive month, rising to 16.6 in November from 15.8, the highest level in a year, he said. Moreover, fund managers’ projections for earnings per share growth for the coming year also rose to 7% from 6%, with a mode of 10%, he said.

The latest Merrill Lynch survey also showed managers still see the market as undervalued, and many still consider themselves overweight cash. That means “there is some liquidity ‘waiting in the wings,’ although a lot less than a year earlier,” Bowers said.

A striking feature of the latest survey, Bowers said, is that asset allocators have closed many of their sector positions. The most widespread underweighting is now to be found in the global utilities sector, he said, while the most widespread overweight is of healthcare and pharmaceuticals.

There were 286 fund managers polled from October 31 to November 7. These institutional investors manage a total of US$677 billion.