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July 4, 2015

Notes From the Morningstar Investment Conference

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Last week, I attended Morningstar’s annual Investment Conference. Attended primarily by financial advisers, the conference is notable for both its size and its mutual fund focus (as many of the speakers work for mutual fund companies). This week, I’ll share some of my notes and observations. In future issues of the AAII Journal, there will be transcripts of interviews with managers of a top-performing large-cap fund and of a frontier markets fund.

While I can’t point to any prominent theme at the conference, one thing I did observe was the lack of discussion about either Greece or the Federal Reserve. Perhaps it was the sessions I attended, but I do not recall hearing much about either. The only monetary policy forecast I did hear was from two of PIMCO’s chief executives, Douglas Hodge and Daniel Ivascyn. They expect interest rates to “remain relatively range-bound.” Given the PIMCO’s prominence in the bond industry—even with Bill Gross’ departure last year—it was expected that Hodge and Ivascyn would have an opinion on the matter.

Jeremy Grantham of asset manager GMO made some headlines when he said that U.S. stocks are very overvalued based on his analysis of long-term valuation ratios. He does not think domestic stocks are at a “two-sigma [two standard deviation] bubble,” however. Once domestic stock valuations do cross over into this unusually high range, Grantham says a “trigger” will still be needed to pop it. He further added that no bubble has ever been broken "without excess buying from individuals.” When asked by a conference attendee how he’s allocating in the current environment, Grantham wittily replied, “With great difficulty.”

There was an interesting workshop on exchange-traded funds (ETFs). Right off the bat, the panelists could not agree on the naming terminology of smart beta funds. Some panelists stuck with the “smart beta” name, while Morningstar is using the moniker “strategic beta” to describe index funds that do not weight their holdings by market capitalization. Doug Yones of Vanguard pointed out that strategies that look good in backtests don’t always work well as actual funds—something to consider before allocating money to any ETF with a short trading history. Michael Arone of State Street Global Advisors followed up by pointing out the existence of only about a half dozen factors of stock returns shown to work over the long term: value, small size, momentum, yield and low volatility. As far as active ETFs, the panelists were in consensus about the industry still being in the “early days” of such funds. Jones noted the lack of comfort many active fund managers have with disclosing their holdings on a daily basis.

Speaking of active ETFs, I met separately with representatives of NextShares. They are attempting to launch hybrid ETFs. These will be actively managed like mutual funds, but can be bought and sold throughout the day like a stock. What’s unique about these funds is the lack of transparency: The funds’ managers will only have to disclose their holdings once per quarter, following similar rules as mutual funds. (Traditional ETFs reveal their holdings daily.) The net asset value for each fund will be set daily, after the close of trading like a mutual fund. The Securities and Exchange Commission (SEC) has given an exemption from the regulatory rules covering funds to NextShares and some mutual fund companies have signed on to the concept, but a launch date still remains uncertain.

Sallie Krawcheck (whose experience includes serving as CEO of Sanford Bernstein and CEO of Citi Global Wealth Management) asked the audience—which was predominantly male—to change how they interact with women. She claimed that it is quite common for widows to pull their money from their husbands’ long-term financial advisers and to put the money into bank accounts. The primary underlying theme to her presentation was that the financial services industry is too focused on reaching out to men and not doing enough to address to the needs of women. At a Q&A with the media afterward, I and one of the executive editors for a well-known personal financial magazine had no success in getting Krawcheck to give specifics about how she thinks the financial industry—and particularly the financial media—should reach out to women. Krawcheck did express her belief that women are more concerned with risk than outperforming the market. She also wants husbands to have a “courageous conversation” with their wives about where the couple’s money is invested and what will happen should the husband die first.

Fund managers Bill Nygren of Oakmark Funds and Steve Romick of First Pacific Advisors shared some of their insights about stock selection and asset allocation. Nygren believes many investors underestimate what a tough competitor passive (index) investing is. He thinks good managers have a process that allows them to continue to do well. Nygren also discussed the importance of a low valuation. My notes quote him as saying “a cheap price can solve a lot a problems, and an expensive price can create a lot of problems.” (You’ll hear more from Nygren in a forthcoming issue of the AAII Journal.) Romick described returns as not just being “driven by what you own, but also from what you don’t own…what you avoid.” Known for not being afraid to allocate to cash [his FPA Crescent Fund (FPACX) had a 38% allocation to cash at the end of the first quarter], Romick says he buys when he finds something attractive.

Neither viewed stocks as being expensive right now. Nygren thinks the tight distribution among current price-earnings ratios is discounting quality companies by limiting their premium over weaker companies. Romick followed up by saying that many assets are reasonably priced right now because of the low-interest-rate environment.

I’ll end with a few additional insights. A panel on retirement outcomes described target date funds as not being appropriate for anyone, but still good for preventing behavioral errors. (In other words, the allocation used by target date funds is a compromised solution, but they may prevent investors from making even worse allocation decisions.) A different panel on robo-advisers was in agreement that there are too many firms providing online advisory services. Given the number of companies and high business costs, they expect both a “shake out” and acquisitions to occur.

The Week Ahead

Second-quarter earnings season will “officially” start on Wednesday when Alcoa (AA) reports. PepsiCo (PEP) and Walgreens Boots Alliance (WBA) will report on Thursday. It will be a quiet week for monthly economic data. The ISM’s June non-manufacturing index will be released on Monday. Tuesday will feature May international trade and the May Job Openings and Labor Turnover Survey (JOLTS).

The minutes from the June Federal Open Market Committee meeting will be released Wednesday. Several Federal Reserve officials will make public appearances. San Francisco president John Williams will speak on Wednesday. Minneapolis president Narayana Kocherlakota and Federal Reserve governor Lael Brainard will speak on Thursday. Federal Reserve Chair Janet Yellen and Boston president Eric Rosengren will speak on Friday.

About The Author - Charles Rotblut, CFA is  the VP and Editor for American Association of Individual Investors (AAII).  Charles is also the author of Better Good than Lucky.  (EconMatters author archive here

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters. © EconMatters All Rights Reserved | Facebook | Twitter | Free Email | Kindle

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