What I Learned at the Morningstar Conference

Fund Watch

What I Learned at the Morningstar Conference

Top fund managers and investment gurus shared their outlooks on everything from emerging markets to municipal bonds.

Two marquee names in mutual funds, Pimco’s Bill Gross and Fairholme’s Bruce Berkowitz, were on the hot seat at Morningstar’s annual investment conference, in Chicago, last week. They were in the uncomfortable position of defending what have proved in recent months to be losing strategies. Although both managers took center stage at the conference, the breakout sessions also yielded plenty of useful advice on subjects of interest to Kiplinger readers.

But first to Bill Gross, who continues to be bearish on U.S. Treasury securities, even though prices have risen. He once again criticized the Federal Reserve’s easy-money policy, which Gross says has artificially lifted stock prices, punished fixed-income investors and, if it continues unchecked, will inevitably lead to inflation.

Meanwhile, Berkowitz, the manager of Fairholme Fund (symbol FAIRX) and Morningstar’s manager of the year in 2010, was hampered by a severe case of laryngitis as he struggled to explain why his fund’s return is in negative double digits thus far in 2011. He’s been done in by a heavy bet on financial stocks, which he thinks was poorly timed but may yet pay off. In his opinion, investor pessimism about companies such as Bank of America is more a sign of “perverse psychology” than problems with the business itself.

“People are just wildly pessimistic about Bank of America [because] they’re hated,” said Berkowitz. “People say, ‘I lost my job because of them; I lost my house because of them.’”


Here are more noteworthy nuggets from my notebook:

On how to generate income. Investors who want to put more cash in their pockets with dividends should consider bank stocks, such as Wells Fargo (WFC) and BB&T (BBT), said Josh Peters, editor of Morningstar’s DividendInvestor newsletter. Peters thinks these institutions are “well protected” against default by Greece or some other country. Peters is also a fan of companies, such as Abbott Labs (ABT) and Procter & Gamble (PG), that combine an attractive yield (though not necessarily the highest) with good growth potential.

On Treasury inflation-protected securities. If you’re attracted to TIPS, buy an individual security that matures in the year you’ll need the money, and live with it until then to lock in your return and avoid market gyrations, advises Robert Johnson, Morningstar’s director of economic analysis. “Matching the bond to your income needs is key,” he said.

Right now, yields on short-term TIPS are competitive with regular Treasuries, so TIPS are better suited for the “very long term or a very high inflation spike,” said Ben Inker, head of the asset-allocation group at GMO. For shorter-term needs, Inker is holding cash and cash-like instruments.


Inker wasn’t the only fan of cash. Asked how he would defend against risk in an unsettled world, Ross Levin, president of Accredited Investors, said that he would “keep three years’ worth of expenses in cash.” He’s even investing in online savings accounts and five-year certificates of deposit that carry light early-withdrawal penalties of a couple of months’ interest.

On commodities. Diversification among commodities offers inflation protection, said Bob Greer, Pimco’s real return product manager. He cautioned, however, against making a big bet on rising commodity prices.

GMO’s Inker belongs to the camp of managers that believes if you’re going to invest in natural resources, you should do it through companies that own the commodities, rather than the commodities themselves (see Buy Commodity Stocks). “You deserve to get a return on your investment,” said Inker.

On emerging markets. “We still believe there are better returns in the long term, but we expect some slowdown in the near term,” said Peng Chen, president of Morningstar’s global Investment Management division. In fact, Levin of Accredited Investors has moved money out of emerging markets and into Europe this year. And not only is Inker concerned about a real estate bubble in China, but he also thinks there may be a bubble in related assets, such as cement.


Asked for his favorite foreign stock picks, Robert Smith, manager of T. Rowe Price International Stock Fund (PRITX), chose Brazilian banks. David Herro, manager of Oakmark International (OAKIX), likes Samsung. And George Evans, director of equities at OppenheimerFunds, opted for spirits powerhouse Diageo (DEO). “People trade up to better booze when they can afford it,” said Evans. “The next big ‘bubble’ is when India trades up to scotch.”

On ETFs vs. mutual funds. David Stein, chief investment strategist at Fund Evaluation Group, has been investing with active managers instead of in ETFs for corporate bonds. “You want someone who knows the companies, especially with high-yield bonds,” Stein explained.

On municipal bonds. BlackRock chairman Laurence Fink doesn’t see any muni problems among the big issuers. “There might possibly be isolated problems with smaller entities,” said Fink, “but overall the market is solid.” Meanwhile, John Cummings, head of Pimco’s municipal-bond desk, declared that he “wouldn’t pay a dime for bond insurance.” (See Goodbye Muni Bond Insurance.)

On pensions and retirement. BlackRock’s Fink thinks that there may still be a future for traditional defined-benefit pension plans if they’re managed properly by focusing on long-term liabilities instead of short-term returns. “Companies don’t think they can afford them. But could they afford a 4% guarantee instead of 7% or 8%?” Fink wondered. He’s also a fan of target-date retirement funds, but thinks people need more guidance on how to manage defined-contribution plans, such as 401(k)s.


Retirement planning was one theme of the conference’s closing session, at which Harvard economist David Laibson, whose specialty is behavioral economics, delivered a downbeat analysis of how the ability to solve economic problems and make financial decisions peaks at age 53, after which it’s all downhill -- sometimes steeply (see How Aging Imperils Your Finances).

One obvious solution, said Laibson, is to simplify decision-making with annuity-type products. Unfortunately, people don’t like annuities. So the next challenge for the financial-services industry is to come up with “products that make people feel they’re in control even when they’re not,” he said.

Follow Janet’s updates at Twitter.com/JanetBodnar.