Mutual Fund Confab Attendees: We're Bullish (But Not About Bonds)
CHICAGO--Whatever optimism advisors and fund managers came armed
with to the Morningstar 2003 Investment Conference quickly evaporated
when the bond gurus took to the podium this morning. The fixed-income
gang had nothing good to say about the prospects for the economy and,
by extension, the future of the recent bull run. "Paul, that was
totally depressing," Morgan Stanley Senior Market Strategist Byron Wien
said as he followed Pimco's Paul McCulley on the program.
Wien, famous for his own gloomy prognostications, ticked off reasons
why he is now a bull: attractive valuations, "generous" liquidity and
an overwhelming bearishness by investors (although he allowed that
sentiment has been improving recently). "Fiscal and monetary policy
will work," Wein said, "and we will have economic growth in the second
half," perhaps as high as 4 percent. His advice? Go for large-cap
growth stocks, particularly capital goods, energy and healthcare.
Yet, Wein echoed some of the bearish themes made by McCulley and Dan
Fuss, a bond manager for Loomis Sayles, and even advanced them. "The
bond market today is where the Nasdaq was at 5,000," he said. Then he
worried aloud about terrorism, recalling how the sniper attacks in
Washington, D.C. "brought the economy [there] to a standstill."
Still, he argued, "The economic recovery is imminent." And, while
stocks won't return the 15 percent compounded average annual return
they did since 1981, they should post around 10 percent --- which is
better than the 3 percent bonds will likely yield going forward.
Keynote luncheon speaker Bill Miller, CEO of the Legg Mason, spoke at
length about behavioral finance, using Michael Lewis' book about the
Oakland A’s, "Moneyball," as an example. Miller, who has beaten
the S&P 500 Index for 12 straight years, also dropped in some quote
from philosopher Ludwig Wittgenstein to wow the crowds. "There are a
lot of behaviors people persist in doing despite any evidence that
these behaviors worked well," he noted. The advisors in the audience
nodded knowingly.
In his comments, he noted that the recent rally has included a
substantial run-up in technology stocks, which he characterized as
investors buying "what they wished they'd bought in the previous
rally."
He says he's trying to avoid those errors (by committing his own, he
joked). In particular he is limiting the number of stocks the Legg
Mason Value Trust owns (one Legg Mason fund with $1 billion in assets
has only 32 holdings), and by limiting turnover to around 20 percent.
Turnover on many growth funds exceed 100 percent and value funds can
average 80 percent turnover, he said.
From a more secular point of view, McCulley said he believes that the
last two decades, which he termed a celebration of capitalism, is on
the retreat. That improvement in what he called "private property
rights" was born out of the 1960s and 1970s growth in government
regulation. Government intervention was brought down by government
hubris, McCulley said. And hubris brought down the bull market, when
investors and businessmen "started believing their own press."
Either way, caution seems to be the operative word here at the
conference despite the recent market rally. Attendees and mutual fund
marketers chatting at the Hyatt Regency here note a generally improved
attitude among advisors and clients alike. Still, the fund company reps
says there’s less foot traffic in the exhibit hall in the lower
level of the hotel. However, Morningstar says that total attendees
number around 1,200, up from the 700 or so the conference pulled over
the last couple of years. "It feels like there's more exhibitors here
than people sometimes," said one lonely boothkeeper midday Thursday.
Maybe the bodies are in the sessions.
There's been much discussion here about the proposed legislation to
increase mutual fund disclosure, with regard to the various costs
embedded in the fees and expenses paid to brokerage firms by fund
companies in so-called soft dollar arrangements. By and large,
wholesalers and fund managers at the conference say they're in favor of
more disclosure but that they need the soft dollar arrangements to help
pay for certain expenses. Their overriding worry: too much regulation
and housekeeping chores that would drive up costs to fund consumers.
(For a detailed story on how the legislation may affect reps, see the
June issue of Registered Rep.
Don Phillips, managing director of Morningstar, said, "We need to roll
up our sleeves and figure out a way to improve the entire investor
experience. The reason people lost money was not because they paid an
extra seven basis points in a fee, but because they had 80 percent of
their money allocated to technology."
Morningstar Mutual Funds newsletter editor Kunal Kapoor, however, said
he has been surprised at the level of resistance by large fund
companies to increasing their disclosure to at least a quarterly basis.
"With the emphasis that they place on the managements of the companies
to disclose information, I'm surprised that there was so much
reluctance to do that." Phillips noted yesterday morning that most fund
companies now supply Morningstar with holdings data monthly.
Oh, and Bill Miller's investment advice? Riffing on the famous line
from The Graduate, Miller said: "I have one word for you: stocks. And I
have one country for you: Japan. And I have one stock for you:
Sony."
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