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."