Volatility, Global Outlook Are Main Focus at Forum

(Chicago) On the heels of some significant market volatility and in anticipation of news from the Fed on interest rates, Morningstar hosted its 2006 Investment Conference June 28-30 in Chicago. Speakers highlighted global investing and long-term strategies and also shared their short-term outlook on specific stocks, sectors and economic patterns. The conference drew some 1,300 advisors and other financial professionals.

“There’s been some performance chasing and associated turmoil recently,” said Dan Lefkovitz, a Morningstar fund analyst and moderator. “But investors want their portfolios to reflect the global reality.” And they’re looking for the best global valuations, analysts say.

During the session moderated by Lefkovitz, Institutional Capital CEO and CIO Robert Lyon outlined the latest thinking behind his shop’s large-cap approach. “We’re attracted to growth and see opportunities for older, mainstream European firms to take advantage of via their deep, colonial roots,” Lyon said. “Some [European firms] are better positioned in commodities” than rivals based in other parts of the world, he said, giving examples such as BP (BP), Total (TOT) and Rio Tinto (RTP). He also pointed to European banking giants UBS (UBS), Deutsche Bank (DB) and Credit Suisse (CSR) as being very well positioned in the global financial marketplace.

Dodge and Cox International Stock Fund portfolio manager Diana Strandberg agreed. Long-term investors should have multinational companies based outside the United States in their portfolios. And David Antonelli, CIO of non-U.S. and global equity investments for MFS Investment Management said, “There are great companies and franchises overseas.”

Many overseas companies are not priced where they “should be,” Lyon said, because there are not hundreds of equity analysts following them.

In terms of emerging-market conditions, Antonelli says to expect more volatility, risk and growth potential in the short- and medium-term. Long term, he maintained, returns should be “handsome,” but investors should “keep an eye on valuations.”

“We were drawn into the emerging markets one company at a time,” Strandberg said, through share purchases of companies like Petroleo Brasileiro (PBR) and LG.Philips LCD (LPL). And Antonelli gave the example of MFS Investment’s stake in Samsung Electronics. “It’s not where a company is domiciled but who is in charge,” he explained, adding that MFS has been targeting shares of Korean banks lately.

The mutual fund executives said they are bullish on Japan, given the dramatic restructuring efforts many companies have made there. “There’s been an increased focus on improving returns,” said Strandberg.

As for the recent run-up in the small-cap sector, Antonelli explained, “There are always new companies and things happening. There are always opportunities to look for.” Still, he cautioned that many of these stocks are now trading at “a premium” and, hence, aren’t worth the risk. Long term, he views this sector as “in uncharted territory as an asset class.”

In terms of correlation, Lyon said, the divergence of U.S. and foreign stocks is on the decline. The world’s different monetary authorities operate more in sync than ever, he added. With the U.S. trade deficit at record levels, Lyon described, the U.S. dollar should continue to decline — making international returns more attractive.

When asked about whether investors should get into more emerging-market holdings or European franchises (like Nestle), the fund executives urged consideration of corporate valuations. Lyon also stressed that it’s a good time to look at the banking sector in both regions.

Despite the global push by the panelists, several advisors polled by Morningstar during the conference said they see investment opportunities in the U.S. as being good or better than those overseas.

During a separate talk, Eileen Rominger — who heads the value-equity team at Goldman Sachs — underscored a common conference theme: expect rising volatility and look more closely at large-cap stocks, especially those with attractive valuations.

Rominger’s top picks are:

o Ambac Financial (ABK)

o Cisco Systems (CSCO)

o EOG Resources (EOG)

o Motorola (MOT)

o Oracle (ORCL)

o Time Warner (TWX)

Bill Nygren, portfolio manager of the Oakmark Fund and Oakmark Select Fund, explained his investment style: closely track “fallen growth stocks.” He agreed with some other speakers that today’s market presents investors with “good buying opportunities,” pointing to:

o Citigroup (C)

o Dell (DELL)

o Harley-Davidson (HDI)

o Hewlett-Packard (HPQ)

o Home Depot (HD)