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Morningstar '07 Confab Draws Crowd of 1,500

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Fund managers speaking at the Morningstar Investment Conference 2007 — held June 27-29 in Chicago — say this year is a time to watch out for hot markets. They are keeping an optimistic, yet cautious tone about returns.

Starting off the conference, Jeffrey Gundlach — TCW Group chief investment officer and recipient of Morningstar’s 2006 Fixed-Income Manager of the Year award — shared his views on the sub-prime mortgage crisis. “Sub-prime is a total unmitigated disaster, and it’s only going to get worse,” he explains. That’s because “the delinquency rate is climbing.”

Gundlach’s fund TCW Total Return Bond Fund does not invest in debt obligations with sub-prime mortgage exposure or asset-backed security collateralization. Its emphasis is on high-quality mortgage-backed bonds and collateralized mortgage obligations issued by federal agencies or government-sponsored agencies.

Overall, Gundlach sees little pressure on interest rates and even an easing cycle in the short run. Long-term interest rates should be stable.

The indexing debaters making the conference circuit, Jeremy Siegel of the Wharton School at the University of Pennsylvania and Gus Sauter of the Vanguard Group, also made an important appearance at the Chicago event.

Siegel’s main argument is that the fundamental approach to indexing — weighting stocks based on metrics like book value, sales, profits, or dividends — is best for investors. “The efficient market people have a hard time explaining the value- and small-cap bias. But the bias exists, so cap-weighted indexes, though serving investors well over the years, are no longer optimal,” he says.

Sauter, chief investment officer and managing director for the Vanguard Group, argues that non-traditional indexing costs more and can hurt performance. “The value of a market-cap-weighted index is that, before costs, investors are getting the market rate of return, because they own the market,” he says. “After costs, most investors will get less than the market rate of return.”

Putting in a plug for the role of dividends in portfolios was Jim Rothenberg, chairman and principal executive officer of Capital Research, American Funds’ parent company. This is related to Capital’s focus on new retirement strategies that emphasize a “transition phase,” between accumulation and distribution, when both income and growth investments will play a critical role.

“My message here is really twofold,” Rothenberg says. “First of all, there is an extraordinarily important role for advisors to help individuals with retirement, and secondly, most conventional wisdom does not capture the risk of longevity on cash flows.” Rothenberg also encouraged advisors to look globally for investment opportunities, especially in the long term.

Rothenberg and several other conference speakers did note that the recent double-digit growth rates in some global equity markets may see a cooling off in the near future.

In a related discussion, author Stuart Lucas, CFA, urged advisors to help clients by taking a holistic view of their finances. “The two greatest variables affecting the long-term success of any wealth-management strategy are the level of client spending and how well taxes and fees are controlled,” says the wealth advisor and fourth-generation Carnation heir. He suggests that advisors regularly share and discuss information about clients’ spending from their portfolios, including taxes and fees.

For its part, Morningstar is striving to further improve advisors’ ability to better serve clients; it bought Standard & Poor’s global mutual fund data business in March 2007. At the confab, the organization introduced advisors to new products such as its Principia Asset Allocation Module and the Principia Presentations and Education series. Its Advisor Workstation Office Edition now includes hedge-fund data, as well as portfolio accounting and archiving capabilities.

“We continually look for valuable new ways to help you improve your practice,” concludes Morningstar Managing Director Don Phillips.

Janet Levaux is the managing editor of Research; reach her at [email protected].


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