At the first day, June 23, of the annual Morningstar Investment Conference, a group of Morningstar analysts called for more disclosure on actual mutual fund costs and their holdings. Don Phillips, president of fund research, called for “mutual fund accounting to be cleaned up,” arguing that such an accounting would be a “statement of where our money goes. And it is our money!”
Phillips went on to say that like any business, advisors and mutual fund end investors want to know “What’s the cost of goods sold? What’s the cost of distribution? What’s the overhead?” but that under the current state of mutual fund accounting, “it’s now near impossible to do that,” citing as exhibit one an item like 12b-1 fees, which by right should be considered a distribution cost but isn’t broken down that way.
He gave a wry defense of the Morningstar star-ranking system for mutual funds, which is just one of the innovations for which he is personally responsible. The stars, he said, are “a grade on past performance; it’s an achievement test, not an aptitude test.”
Jeffrey Gundlach, founder of DoubleLine Capital, LP and former CIO of Trust Company of the West (TCW) also spoke on June 23. He gave the keynote address at the 2007 Morningstar confab, warning early that the mortgage securities market was “a total, unmitigated disaster.” That alarm was sadly true and three years later, Gundlach warns “deflationary pressure is undeniable.”
Gundlach is also very conscious about consumer and government debt, especially unfunded liabilities in Medicare and Social Security–”in 2009 [there was] $62.3 trillion in…promises to pay against a $14 trillion economy.” Further, that’s up “$36 trillion over the past seven or eight years” versus a total cumulative economy of $104 trillion over that same time.
He mentioned that the best performing asset class recently has been long-term U.S. Treasury bonds. They are “a reasonable investment right now.”
Gundlach spoke of a “new world scenarios” strategy: buying select residential mortgage backed securities (RMBS) that offer inflation protection at a steep discount to provide an expected double-digit return, combined with low-risk long U.S. Treasury bonds, which offer deflation protection.
He cautions, though that when buying sovereign debt from any country, including the U.S., “if sentiment changes,” meaning investors lose confidence in sovereign debt or if”government default risk” rises, “sell sovereign [debt] including the U.S. immediately.”
On day two of the confab, three dividend-focused mutual fund managers talked about what they called the great opportunities in dividend investing now and played down worries that higher taxes on dividends would lead companies to cut their payouts.
Hersh Cohen, chief investment officer for Legg Mason’s Clearbridge Advisors, argued that a money manager who focuses on a company’s dividend “asks simple questions, but gets profound answers.”
Cohen added that companies “will not stop increasing dividends because of higher taxes; it’s not that simple” a decision-making process for many companies that continued to increase their dividends even through the 2008-2009 crisis.
Joe Matt of American Funds expressed some concern over the current payout ratio, noting that even companies that are paying dividends have slowed the growth in those payouts, and that part of his job was to encourage companies to “look at the dividend equally with stock repurchases.”
Don Kilbride of Wellington Management, portfolio manager of the Vanguard Dividend Growth Fund, agreed that “when dividend policy is set, at the board level, taxes are not part of the equation.”
Speaking at lunch on June 24, Vanguard CEO Bill McNabb laid out the three main building blocks for restoring both investor and advisor trust in the markets: simplicity, transparency and candor.