While Rodney Hobson takes a brief break from this column, Hemscott and Morningstar UK Editor Holly Cook has been visiting her US colleagues at the 2011 Morningstar Investment Conference in Chicago. A national event with footfall this year in the region of 1,650, the MIC draws a long line of hugely knowledgeable and respected investment brains. PIMCO’s Bill Gross kicked things off on Wednesday afternoon with a keynote address that had the bond king telling delegates they’re being pick-pocketed if they invest in US Treasuries and instead large-cap stocks (“dividends over coupons”) and fixed income in countries such as Brazil, Canada, Mexico and Germany offer more attractive returns. “You don’t have to look far afield into the emerging markets to find a less repressive financial environment,” Gross told his audience, before quipping that a US Treasury investor would be better off taking their money to a casino.
It often feels as if the market is at an inflection point when Morningstar hosts its annual Investment Conference--but it feels especially so right now. Is the economy going to strengthen and continue to provide a tailwind for the market or will we see the opposite happen? Meanwhile, equity investors are faced with a market that looks roughly fairly valued overall, and bond investors continue to rightfully worry about the possibility of rising rates and inflation wreaking havoc on their fixed-income portfolios.
With nothing a screaming buy right now, investors will have to settle for relative values, was one of the key messages coming out of the three-day event. Panellists on an Asset Allocation Lightning Round panel discussion on Thursday said that by and large they see some areas of long-term potential, mostly coupled with short-term worries about lacklustre performance or even a pullback in some areas, including commodities.
Peng Chen, president of Morningstar’s global Investment Management division, pointed out that in the long term, government bonds are not where you want to be given return expectations but in the short term they could be an okay investment as the recovery muddles along in fits and starts. Looking at current yield and inflation you are likely to lose money in developed world government debt, but a diversified investor shouldn’t completely shy away as that’s the point of allocation.
In conversation with Rick Rieder, the CIO of Fixed Income at BlackRock said Thursday that there are some interesting opportunities in corporate credit, financials being one of them. With regulators on both sides of the Atlantic demanding banks hold more cash, these are actually becoming safer and more attractive opportunities for a fixed income investor.
Turning to equities, Rieder’s colleague, long-standing manager of the BlackRock Global Allocation fund and Head of the firm’s Global Allocation team Dennis Stattman said that he is very underweight bonds. "We still think stocks are the best game in town," he said, echoing remarks made by Bill Gross, co-founder of PIMCO, in his keynote address Wednesday. Within global equities, Stattman had some interesting points for equity investors. “Japan is a very cheap market compared to its own history,” Stattman said, adding that there are very undemanding valuations compared to developed markets.
As commodities are increasingly becoming a fixture in investors' portfolios, several managers put their stamp on the argument for investing in natural resources. GMO portfolio manager Ben Inker relayed the well-trodden argument that the world is running out of wide number of resources for which there are limits to the substitutions, and demand is rising, but warned on valuations: "Just because there is a paradigm shift doesn't mean there can't be a [price] bubble."
For exposure, Inker recommended avoiding commodity futures, which are not wealth-creating investments, but a zero-sum game. He recommended those who want commodities exposure look to commodity-related equities. "There are lots of ways to speculate [in commodities], but not a lot of good ways to invest in commodities but equities," he added.
Chen said that over the longer term, given the supply/demand dynamic, commodities should be a decent place to invest, but they are a volatile asset class. "Even from a long-term perspective, you shouldn't put too much into them," he said. "Short term, we think there will be some slowdown in emerging markets, particularly China," which could be a headwind to commodity prices. Chen recommends a commodities stake of no more than 5%-15%, including precious metals.
In a separate panel discussion, Anne Gudefin, another PIMCO star, put the spotlight on one her favourite investment stories, that of Danish company Carlsberg. The brewer owns Baltika, which sells beer to Russians, who can no longer afford vodka because of government-imposed levies, said Gudefin, who manages the Pathfinder funds. The story hits on another theme on conference: Investing in large multinationals with emerging-markets exposures as a way to reduce risk while still gaining exposure to the developing world.
Large-caps, beer and gold isn’t a wholly unattractive message to come out of the 23rd annual investment conference from Morningstar’s Chicago headquarters. The conference continues today and more highlights and video interviews will be available on Morningstar.co.uk in the coming week.
