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Morningstar ETF Invest Live Blog, Day 2: Morgan Stanley vs. iShares on the Future of Advisors

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5:15 p.m. CDT, Oct. 4, Joyce Hanson here:

Live Blog Face-Off!

Morgan Stanley’s Paul Hatch faces off against iShares’ Mark Wiedman in a late Thursday afternoon panel at Morningstar ETF Invest 2012.

The topic: “The Changing Advisor Landscape”

Guess who favors wirehouse reps as portfolio managers? You got it: Hatch.

Guess who’s a big fan of a transparent future where fee-only planners build ETF portfolios? That’s right: Wiedman.

But when Morningstar analyst Scott Burns asked them about the future of fee-only planning, here’s the surprise – they both like it.

“If you want to know what happens to ETFs,” says Wiedman, “look to what happens in the fee-based world. Wherever fee-based arises, ETFs follow.”

“Transparency is good,” says Hatch. “It’s like competition. When it becomes a better value for clients, we’ll have more people coming to the business.”

As for the fiduciary standard, Hatch doesn’t pull any punches: “I think it’s a lot of hot air. All of the advisors in this room who don’t think they’re a fiduciary, raise your hand.”

Nobody in the room raises their hand.

3 p.m. CDT, Oct. 4, Joyce Hanson here:

Remember inflation? Whatever happened to it?

Break-out sessions are back in swing here at Morningstar ETF Invest, and I’m sitting in on an inflation session starring currency guru Axel Merk along with Chris Goolgasian of State Street Global Advisors and Mark Carlson of Northern Trust: “The Inflation Boogeyman—How Do I Protect My Portfolio?”

In answer, Goolgasian name checks Ernest Hemingway and quotes from one of Hemingway’s novels: “How did you go bankrupt?” a man asks his bankrupt friend. “Two ways,” the friend answers: “First gradually, and then suddenly.”

Keep that in mind when inflation seemingly strikes overnight and you’re paying $10 for a gallon of milk, Goolgasian says.

“The danger is in the future, and it’s important to manage portfolios for the future,” he notes. “Real assets can give you some assurance against that chance.”

Goolgasian likes inflation protected bonds, commodities and equities related to commodities, with a goal of beating CPI.

Axel Merk, meanwhile, likes gold as an inflation hedge—while acknowledging its volatility.

“It’s the purest indicator of the monetary madness that’s out there,” Merk says. “The rise of gold correlates perfectly with central bank easing around the globe. Gold by all means should do well, but we realize that it’s volatile.”

Read more from Axel Merk at Currency Manager Axel Merk Talks Money as Inflation Hedge at AdvisorOne.

2:30 p.m. CDT, Oct. 4, Joyce Hanson here:

Lunch just finished here at the Radisson Blu Aqua, and we’re all a bit stunned with the powerful, sad (but happy!) and inspiring story from keynote presenter Christopher Gardner, now CEO of his own firm but only after a year or two of homelessness while he scratched out a living cold-calling as a junior broker at Dean Witter.

Check out the movie starring Will Smith based on Gardner’s memoir “The Pursuit of Happyness.” And also listen to him talk if you ever get the chance – he’s a dynamite storyteller, with tales of being a single dad who had to change his baby’s diapers while sleeping in a San Francisco subway station. Some very successful business people here at Morningstar ETF Invest, and they gave Gardner a standing ovation.

Noon CDT, Oct. 4, Joyce Hanson here:

Sean Clark of Clark Capital Management Group is high on gold.

Speaking in an “Alternatives—Beyond Long/Short” breakout session here at Morningstar ETF Invest, Clark says gold is hitting new highs and sees it moving higher because governments are in a race to the bottom to see who can devalue the most.

“Gold is obviously a currency – it’s money,” Clark says.

11:35 AM, CDT, Oct. 4, Joyce Hanson here:

Just finished talking to Morningstar analyst Mike Rawson – a guy who clearly knows his way around an ETF. The big guns here in Chicago brought him into the Morningstar ETF Awards announcement to talk about the technical stuff: selection criteria, who’s up, who’s down, expense ratios, index data, etc.

Mike told me that when it comes to Morningstar’s Large Blend Category Award, he would tell his mother-in-law that if she were to have only one ETF in her portfolio, it would be Vanguard’s VTI and not SPDR’s SPY. SPY doesn’t hold small caps or most mid caps, while VTI does, and the SPY expense ratio is not the cheapest. SPY’s expense ratio is 9bp while VTI’s is 6bp.

P.S. For this third Morningstar ETF Invest conference, we’re in swank digs at the newly built Radisson Blu – just open about six months.

11:25 AM, CDT, Oct. 4, Joyce Hanson here:

The newly launched Morningstar ETF Awards have picked these best providers in five U.S. asset classes:

1) Commodities: iPath ETNs

2) International Stock: iShares

3) Sector Stock: Vanguard

4) Taxable Bond: iShares

5) U.S. Stock Vanguard

More to come on SPY versus VTI—with a few surprises. Watch this live blog!

11:05 AM, CDT, Oct. 4, Joyce Hanson here:

Big News here at Morningstar ETF Invest: Morningstar is launching awards for best U.S. ETFs and ETF providers. No suprise: biggest winners are iShares and Vanguard.

10:10 AM, CDT, Oct. 4, James J. Green:

There are four main functions of using alternatives in portfolios, according to Joanne Hill of ProShares:

  1. Improve return-risk profile/diversification: For example, through hedge fund replication, managed futures, equity long/short.
  2. Manage equity risk: For example, through inverse equity; VIX fugtures 
  3. Manage Interest rate/inflation risk: Through TIPS, inverse fixed income; currencies, commodities, real estate 
  4. Manage exposure to asset classes: geared ETFs, sector’/industry; country equity/debt

10:05AM, CDT, Oct. 4, James J. Green:

Joanne Hill says ProShares VIX ETFs have attracted $1 billion in assets so far:




 10:00AM, CDT, Oct. 4, James J. Green:

Dr. Joanne Hill, head of investment strategy at ProShare Advisors, begins her speech on ETF alternatives tool kit by noting how well the S&P 500 has performed this year, but calling it “the least romanticized equity rally ever.”

Discussing the relatively slow rate of alternatives adoption in clients’ portfolios, she said that it was in the 1970s that endowments started to look at alternatives and many pension funds began to do so after 2000-2002, as “bonds tumbled.” After all that time, both groups are only now “getting into double digit allocations” to alternatives.

“So we’re in a similar situation today with our clients,” Hill says, but also “we’ve learned a lot within the past 10 years about liquidity,” so the alternative solutions for individual clients will share many commonalities with institutions, but also be different.

Since, she says, market volatility has spiked, just as we build houses to withstand storm, “we have to build portfolios to survive these (volatile) times in the markets.”

9:35 AM, CDT, Oct. 4, James J. Green:

Morningstar says 430 attendees this year for its ETF Invest conference at the Radisson Blu hotel in Chicago; up from about 400 last year

9:15 AM, CDT, Oct. 4, James J. Green:

Looking at the economy and markets in 2013 and beyond, BlackRock’s Russ Koesterich says at the 2012 Morningstar ETF Invest Conference:

Chances of:

“Great Idle” (slow growth) in developed markets:  65% probability Global recession: 30% probability Accelerated growth: 5% probability

So under such a scenario, BlackRock is recommending investors “get defensive, casting a wider net,” including:

  1. Mega-cap, dividend-paying stocks
  2. Smaller developed markets, specifically the “CASSH” countries—Canada, Australia, Switzerland, Singapore and Hong Kong 
  3. In bonds, favor investment grade and municipals 
  4. Maintain strategic allocation to commodities, including gold.

9:05 AM, CDT, Oct. 4, James J. Green:

Fiscal cliff and recession? Koesterich says no one on the sell side believes economy will contract in Q1, despite looming fiscal cliff. Most investors expect last-minute compromise, which he says is not unreasonable, but he says BlackRock has been speaking to “people in Washington” who suggest there’s a better than 50-50 chance we’ll go off the fiscal cliff at least for a short time. After all, he says, with our experience of the past few years, “why would politicians get things fixed between Nov. 7 and New Year’s Eve.?”

The most likely election outcome: Obama wins in a tight race, GOP holds onto the House, and there’s near-equilibrium in the Senate. But even there, it’s likely there will be more polarization, esp. with retirement of some moderate Senators like Lieberman, Snowe, Nelson.

8:55 AM, CDT, Oct. 4, James J. Green:

On demographics, Russ Koesterich of BlackRock says one troubling trend is the number of people dropping out of the workforce—the participation rate—which also puts strain on entitlements. He points out that the average age of retirement in 1950 was 67; average age today: 62,

But just cutting entitlement spending has its own drawbacks: Half of all income growth consumers have had since fiscal crisis has come from federal government transfer payments—cut back on them and you increase the chances of recession, he argues.

8:40 AM, CDT, Oct. 4, James J. Green:

Russ Koesterich,  global chief investment strategist of BlackRock, speaking at the opening keynote session on day two of the 2012 Morningstar ETF Invest conference, says Europe may not be completely out of the woods, but the Europeans have mitigated tail risk. Risk, he suggests, is moving away from Europe toward the U.S.

“We’ve never seen such high debt levels in peacetime,” he began, “we’ve never seen the Fed with $3 trillion on its balance sheet.” The main tail risk in the U.S. is government debt and the fiscal cliff. It would have been better to tackle the government debt issue in the 1990s when the economy was growing at a 4% to 5% rate. At the current growth rate of 2%, however, Koesterich says “growth is so slow that any exogeneous shock could push us back into recession.”

So how to build portfolios at such a time? “We’re recommending to clients: don’t abandon stocks but allocate to semi-safe havens…think about credit rather than duration in fixed income, and keep some commodities, even gold, in the portfolio.” Advisors should ask themselves, he says “What instruments do you have that can protect purchasing power?”

7:30 AM, CDT, Oct. 4, James J. Green:

The third annual Morningstar ETF Invest conference began on Tuesday afternoon, highlighted by Schwab Chief Market Strategist LizAnn Sonders addressing the current and possibly future states of the economy and the markets.

First up on the first full day of the conference is Russ Koesterich of BlackRock, who will address the possible implications of an Obama second term or a Romney first term for the American economy. The second general session of the morning will have Joanne Hill of ProShares relating the ways that institutional investors are using alternative ETFs to mitigate risk and boost returns.

The lunch speaker is Chris Gardner, the author of the book and film The Pursuit of Happyness.