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.