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A Focus on Fixed Income

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Morningstar kicked off its 2007 Investment Conference June 27 in a new venue, Chicago’s McCormick Place, and with a timely keynote speaker, Morningstar’s 2006 Fixed Income Manager of the Year Jeffrey Gundlach, who is CIO of TCW Investment Management.

Morningstar managing director Don Phillips introduced Gundlach as “a gifted navigator of the bond market,” and noted how apropos it is that the “conference both starts and ends with fixed income,” this year, given the way the bond markets have been roiled by fallout from the sub-prime mortgage and junk bond leveraged buy-out debacle.

Gundlach set the tone for the three-day conference with a metaphor that compares using the guidance one gets from the GPS systems available on many new cars, to the guidance financial planners provide to clients, adding that he is comforted when the navigation system’s voice tells him “you have arrived at your destination.”

On a more serious note, Gundlach argues that despite the recent spike in bond yields, “I do not believe that we can say the trend to higher interest rates is upon us,” citing a number of reasons for the spike, including vast amounts of sub–prime debt being sold in the past several days as well as a “tiny dip in China’s Treasury holdings.” But he also says that bond markets are at a crossroads. He warns that the sub-prime issue is a “total unmitigated disaster,” and that sub-prime debt and LBO junk bonds “belong together.” He says some sub-prime debt that is trading at yields of up to 35% has investment grade ratings.

The keynote was followed by general sessions on mutual finds and stocks with Morningstar analysts reporting in their typically intelligent fashion.

Day two opened with Morningstar founder Joe Manuseto giving a corporate overview of his publicly-held company, followed by a lively debate about the differences between cap-weighted and fundamentally-weighted index investing, between Gus Sauter, CIO and managing director at Vanguard, a proponent of cap-weighted index funds, and Dr. Jeremy Siegel, author, the Russell E. Palmer Professor at The Wharton School of Business at The University of Pennsylvania, and senior investment strategy advisor to Wisdom Tree Investments, which has created fundamentally-weighted indexes and ETFs.