"Guarded optimism" is how a new survey from Towers Watson characterizes fund managers' views on investing in 2013.

According to The Global Survey of Investment and Economic Expectations, fund managers are "more optimistic" about the prospect for equity returns. However, they continue to view world growth and medium-term government bonds with hesitation, as they still expect a sovereign debt default in the Eurozone and fear weak fiscal situations in the U.S., U.K. and Japan.

The biggest concerns for managers in 2013 include government intervention, global economic imbalances and sovereign debt defaults, with inflation being a significant concern in the next five years.

Carl Hess, global head of investment at Towers Watson, said the U.S. is displaying "some positive economic signals," which "seem to be reflected in managers’ view that the U.S. is the region with the most rewarding investment opportunities in 2013, followed by China, the Eurozone and frontier markets. While government policies are clearly intended to stimulate growth and address the massive U.S. fiscal deficit, we see the risk skewed toward deflation rather than inflation. That said, the housing market still remains key to a U.S. recovery — if the headwind of negative equity can be overcome."

But “a sustained global economic recovery is likely to remain fragile, set as it is against the unavoidable situations of extreme indebtedness in the Western world: ongoing double- and triple-dip recessions, and weak and uncertain prospects for growth in many markets," Matt Stroud, head of strategy and portfolio construction, said.

“Volatile markets and heightened risk awareness continue to make asset allocation very challenging, as investors balance priorities such as long-term de-risking, short-term market opportunities, rebalancing and maintaining a strategic asset allocation mix," he added.

While institutional investors expect to either maintain or modestly increase their portfolio risk level in 2013, Stroud said investors are more often diversifying investment portfolios with alternatives rather than equities. They are also buying fewer bond funds, he said.

Managers foresee better equity returns in 2013 in most markets except the U.S. and Australia, where expectations at 7% (versus 8% in 2012) in the U.S. and 6% (versus 7% in 2012) in Australia are the lowest they have been since the survey started in 2008. That said, managers still lean toward the U.S. and China, where they expect equity returns of 10% compared with 7.8% in 2012. Meanwhile, managers expect returns of 6% in the U.K. versus 5% in 2012, 7% in the Eurozone versus 6%, and 6% in Japan versus 5%.

Expected equity volatility for 2013 is in the 15% to 20% range for major economies. This is somewhat lower than in previous years but still elevated compared to longer-term averages. In their five-year outlook, most managers in the survey have high hopes for emerging market equities, public equities and real estate, while they remain wary of nominal government bonds, money markets, investment-grade bonds and inflation-indexed government bonds.

Meanwhile with 10-year government bonds, managers again predict falling yields down to historic lows in 2013. They expect yields of 2% in the U.S. versus 3.8% in the 2011 survey.

Findings were derived from a survey of 169 investment managers. The majority of managers surveyed manage more than $5 billion in institutional assets and more than $1 billion in retail assets.

Towers Watson Investment, a division of Towers Watson’s risk and financial services business, boasts assets under advisory of over $2 trillion.