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Wise Words at Morningstar

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For investment advisors, the annual Morningstar Investment Conference experience is like the proverbial kid in the candy store. Held for the 22nd year in Chicago on June 23-25, following are excerpts from onsite reporting at the conference by Group Editor-in-Chief Jamie Green and Kate McBride, editor of See more comprehensive reports at; read Kate’s exclusive interview with keynote speaker Jeffrey Gundlach at right.

Robert Reynolds, Putnam Investments

Two years after leaving Fidelity Investments to run Putnam, Bob Reynolds said on June 24, that “we as a company know that if you’re going to do something great in this business, you have to do it over time.”

Reynolds famously changed the compensation model for his fund managers and analysts, with bonuses being awarded based on the manager’s ability to put his fund in the top quartile over a rolling three-year period, since “what clients are looking for is top-quartile performance.”

As for what’s next, Reynolds pointed out that “401(k)s now cover half of working America; we have to extend them to the rest of Americans.” He suggested that a National Insurance Charter, being discussed as part of financial services regulatory reform, “would allow an annuity to have an FDIC-like insurance paid for by the industry.” One other initiative that “we’re working on with Congress is that once retirees hit age 78, they start drawing down tax free.”

William McNabb, Vanguard

Speaking on June 24, Vanguard CEO Bill McNabb laid out the three main building blocks for restoring investor and advisor trust in the markets.

The first building block is simplicity, exemplified by the “five-minute rule” first coined by Richard Ennis of the pension consulting firm Ennis, Knupp: “If you don’t understand the thesis underlying an investment in five minutes or less, take a pass.” The second is transparency, which he said mutual funds like Vanguard’s already offer, but that many other investing vehicles do not. The third building block is candor, which he said meant “being out front, up front, and honest to a ‘T.’”

As for financial reform, McNabb said that regardless of its specifics, any law would be “a good thing” since there are “basics in the bill…necessary to restore trust,” including: dealing with systemic risk; derivatives regulation, though he cautioned that Congress should be careful in how …

… it regulates those products: “They’re an incredibly essential tool we all use to manage risk”; swaps, which “need to be centrally cleared; but that will mean more transparency”; and finally, “too big to fail.” McNabb said “one of the good steps in reform is some sort of Resolution Authority,” which would control “how you unwind a firm after it fails.”

Rob Arnott, PIMCO

PIMCO powerhouse Rob Arnott spoke to a standing-room-only crowd on June 24, asking “Is there a better way to allocate assets and construct portfolios?” He answered by saying “there are always interesting investments–the challenge is identifying opportunities wherever they might be.” One of those periods may be over the next 12 to 18 months when, he predicted, there will be a “generational opportunity to put inflation protection pieces in place when people aren’t worried about inflation.” The founder of Research Affiliates and manager of PIMCO All Asset and All Asset Authority funds, Arnott contended that in what he calls the “Noughties,” the “lost decade was only lost for [investors who were] equity-centric and anchored on cap weighting.”

Charles DeVaulx, International Value Advisors

Responding to a question from an audience member at a June 25 general session about investing opportunities in Japan, Charles DeVaulx said “We’ve been dealing in Japan since 1995 and made a lot of money; it’s been a wonderful experience.” DeVaulx, who came to prominence as the successor to Jean-Marie Eveillard at First Eagle SoGen Funds but then left First Eagle in 2007, said “the key to Japan is to know the intrinsic values” of Japanese companies, and to sell them before their stock prices have reached their full value.

As further evidence of the opportunity, DeValux cited Warren Buffett, who, he said, is “aware that there are some wonderful companies in Japan.” Moreover, DeVaulx pointed out that Japan now exports more to China than to the U.S., making Japanese companies “a sort of back door to China.”

Bill Miller, Legg Mason

The final session featured a panel including Legg Mason CIO Bill Miller, who runs the Value Trust and Opportunity Trust mutual funds. Miller said Value Trust holds about 10% large banks and that it has owned “financials in one form or another for 30 years,” adding, “it’s difficult to do well without financials.” He likes Citi, trading “below tangible book value,” and which he expects should move from earnings of $0.50 per share to $0.65 or $0.70 over the next two years. He also says he likes “Aflac, American Express, and Capital One.”


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