Insights for Investors from the 2012 Morningstar Conference
This year’s annual Morningstar conference in Chicago attracted more than 1,900 people, including advisers, individual investors, fund company representatives and journalists. The main attraction was the opportunity to hear -- and quiz -- about three dozen mutual fund managers over the course of the three-day confab, which ended on June 22.
To no one's surprise, the focus of this year’s schmooze-fest was yield -- that is, the search for yield and how to get decent income without taking excessive risk. The ideas I heard over three days included, among other things, corporate bonds, emerging-markets debt, master limited partnerships and plain, old common stocks. Also to no one's surprise, just about everybody hated Treasury bonds.
Below are highlights:
• Giving the keynote address at the opening session was Michael Hasenstab, manager of Templeton Global Bond (symbol TPINX), a $61 billion fund that invests in bonds from all over the world. In brief, Hasenstab said investors shouldn’t be panicking. The two things that would warrant panicking -- a breakup of the euro zone and a "hard landing" in China -- are not likely to materialize. As for opportunity, Hasenstab said the best bets are in bonds from emerging markets. Sounding a theme I heard many others articulate, he said those countries are in better shape financially than countries in the developed world (witness Greece, Spain, Italy and, some might say, the U.S.). For pure emerging-markets bond exposure, we like Fidelity New Markets Income (FNMIX), which is a member of the Kiplinger 251, the list of our favorite no-load funds.
• Two themes came up several times at a panel featuring managers of two very large and successful stock funds: 1) the desirability of stocks that pay dividends and, again, 2) the attractiveness of emerging markets. Will Danoff, manager of Kiplinger 25 member Fidelity Contrafund (FCNTX), sees opportunity in global blue chips such as Abbott Laboratories (ABT) and Wal-Mart Stores (WMT). He added, "There are a lot of companies like Nike [NKE] and Colgate-Palmolive [CL] that sell their products all over the world, to tens of millions of people in emerging markets who are just entering the middle class."
Brian Rogers, of T. Rowe Price Equity Income (PRFDX), argued that pervasive negative sentiment bodes well for stocks. "Today feels a lot like 1982," he said. That year marked the culmination of an awful 12-year period for stocks that left many investors depressed and caused many to throw in the towel. It was also the start of a mega-bull market that would run until 2000.
• Yield was the main topic at a morning panel on June 21. Mark Kiesel, manager of Pimco Investment Grade Corporate Bond (PBDAX), made a strong case for investing in corporate bonds (some might accuse him of "talking his book") over both Treasuries (that's a no-brainer, in my opinion) and stocks (more debatable). Kiesel said the expected return of stocks is basically nominal GDP growth (4%) plus the market's yield (2%), for a total of 6%. Noting that his fund yields about 5%, "You can basically get an equity-like return from corporate bonds with one-third the risk of stocks."
• Shares of Procter & Gamble (PG) have stumbled lately on disappointing earnings projections. The stock also happens to be one of the biggest holdings of the Yacktman Fund (YACKX). Manager Don Yacktman's take on P&G: "This is a classic example of time-horizon investing. If you're a short-term investor, you'll say this is the time to avoid the stock or short it. If you're a long-term investor, you will say this is the time to pick up a great property at a great price. I think it's safe to say that ten years from now, people will still be using Tide and Pampers."
Fund managers don't normally disclose what they're doing between issuance of their funds' quarterly reports, so, not surprisingly, Yacktman wouldn't say precisely what he was doing. "But knowing how we operate, you can probably imagine," he said, implying that his funds have been buying P&G shares as their price has been falling.
• The Dow Jones industrial average's 250-point drop on June 21 was attributed to growing concerns about a slowdown in global growth. Guy Pope, manager of the Columbia Value & Restructuring Fund (EVRAX), noted that four major companies -- Procter & Gamble, Philip Morris International (PM), Bed Bath & Beyond (BBBY) and Red Hat (RHT) -- have recently issued earnings warnings. Weakness in Europe, a slowdown in China and signs that the recovery in the U.S. has hit a wall may be starting to affect corporate bottom lines.
• Have the courage to invest in European stocks? A couple of managers said that stocks there are too cheap to pass up. Doug Ramsey, of Leuthold Core Investment (LCORX), said European stocks are selling at about 10 times earnings. "At these prices, you are likely to be well rewarded over the next three to five years." (See The Case for Investing in Europe.)
Steve Romick, manager of FPA Crescent (FPACX), a member of the Kiplinger 25, mentioned two stocks. One, advertising giant WPP (WPPGY), has been in the BRIC countries (Brazil, Russia, India and China) since before the BRIC acronym was invented, he said. WPP will have lots of opportunities once global growth resumes. Romick's other idea was a bit trickier. He suggested buying shares of auto maker Renault (RNO.PA) and selling short shares of Volvo (VOLVY) and Nissan (NSANY), parts of which Renault owns. The paired trade gives you purer exposure to Renault itself.
• Interesting stock endorsement from Pope: He talked up JP Morgan Chase (JPM), which he said is super-cheap. The stock trades for just above tangible book value and 5 times normalized earnings (what JPM would earn in a normal environment). "And despite what Congress thinks," Pope said, "I think JP Morgan is a well-managed company."
(Tempted? For our guidance given similar situations, see Should You Buy Shares of a Scandal-Tainted Company?)
• One of the more awkward moments came when Mason Hawkins, the respected manager of Longleaf Partners (LLPFX), was asked to explain why Chesapeake Energy (CHK) was his fund's biggest holding. The company has been roiled by corporate-governance issues, not to mention declining natural gas prices. It just installed a new chairman and four other independent directors. The stock was worth $69 in July 2008 and $29 last year and closed at $18.61 on June 22. Hawkins’s initial response was that Longleaf owns the stock because "it sells for $18 and it's worth $51." In my opinion, he should've just left it at that. Instead, he went on for what seemed like ten minutes about all the changes at the company and the growing role of natural gas in the economy.
• Surprising fact from Steve Walsh, chief investment officer for Western Asset Management, a large bond fund manager: If you invested in high-yield bonds (a.k.a. junk bonds) on the first day of January 2008, you'd have earned, on average, a 9.6% annualized return through yesterday, and that's after first suffering a 36% loss in 2008.
• One of the conference’s best quotes, also from Walsh: Commenting about the euro zone crisis, he said, "The outcome is unknowable. The outcome is largely going to be politically determined" in 17 countries, and that's not something Walsh is willing to bet on. That strikes me as unusually candid for a professional who controls billions of dollars in assets.
There are two things you can do in these circumstances, said Walsh. You can come up with your own opinion or, better yet, look at what the markets are telling you. And seeing such things as ultra-low bond yields in the U.S. and rising bond yields in places like Spain, Walsh's conclusion was that the "markets are now priced for a lot of bad outcomes."
• The keynote speaker on June 22 was the ever-glum Jeremy Grantham, the G in GMO, a major institutional money manager and the firm's chief strategist. His firm makes seven-year forecasts on a variety of asset classes. It currently expects big U.S. stocks to return 4.8% annualized, after inflation. It sees emerging markets stocks returning 6.7% annualized, also after inflation. The firm forecasts negative real returns for all bond classes. In short, said Grantham, "Equities are boring, and bonds are disgusting."
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