In lieu of their regular Friday Five feature, our colleagues from Morningstar.com Jason Stipp and Jeremy Glaser discuss five key ideas investors can take away from the 23rd Morningstar Investment Conference, which took place in Chicago shortly after the 2011 Morningstar Investment Conference in London.
Jason Stipp: I'm Jason Stipp for Morningstar and welcome to a special Morningstar Conference edition of the Friday Five.
The Morningstar.com team has been sitting in on the panels, talking to the managers. We have five key takeaways for you. Joining me with a wrap-up is Morningstar markets editor, Jeremy Glaser.
Jeremy, thanks for being here.
Jeremy Glaser: Jason, I'm glad to be here.
Stipp: So the first big takeaway that we have for viewers is something that's related to what Mohamed El-Erian calls the "cleanest dirty shirt." It has to do with your opportunity set out there, the choices that you have. What is that takeaway?
Glaser: It's really been incredible that all of the panellists, all of the keynote speakers, none of them are excited about anything. It seems like every asset class is just completely out of favour. People think that stocks are pretty richly valued, that fixed income is not a good place to be, that Treasuries are not a good place to be. That no matter where you look, there aren't a lot of opportunities out there. I think it really just shows that with the huge runup that we've had in the market and with some of the problems we're seeing in the fixed-income market, no one's very excited and they're really trying to temper people's expectations for what returns are going to look like going forward.
Stipp: One area that people really seem to be avoiding is the Treasury market. Bill Gross, obviously, one of the biggest proponents of avoiding treasuries, but we heard a lot of other voices here. What did they have to say about Treasuries?
Glaser: Bill Gross started the conference out with a keynote in which he just blasted the Treasury market. He basically said that once the Fed pulls out of it, there is not going to be anyone to really take their place, and ... we're going to see a lot of trouble in that market in the coming years. And it doesn't seem that a lot of other panelists necessarily share that opinion. I think it seems that there certainly are some people who are a little bit worried about the Treasury market, but no one kind of sees this cataclysmic event that's going to happen. We even had some people who were downright bullish on the Treasury market. They think that maybe the yields right now aren't terribly attractive, but they have faith in the government to long-term bring the budget into order, and over the next 30 years pay it down and be able to really keep those yields into a more acceptable level.
So we still don't really know what the answer is there, but there seems to be a big diversity of opinion, more so than a lot of other topics here at the conference.
Stipp: Most people would agree that the yield that you're getting on Treasuries is not great right now, but are you finding yield anywhere else? There was a panel about that. What were the answers there?
Glaser: There's absolutely no magic bullet to finding yields. Everyone who might be looking for that secret junk bond or that secret account that's all of a sudden going to give them that yield that they're expecting or they might need for income: it's just not out there.
Again, it's a matter of looking for the best of the worst options. We heard a lot about finding stocks that may not have great yields, but potentially could grow them over time, and that's still going to be better than losing 3.5%-4% due to inflation and just holding cash.
So really being cautious, doing your research, getting into safe investments, not reaching for too much yield. But really there's no great answer to that question of where to find yield today.
Stipp: We're a little bit past two years of the market bottom from the financial crisis. Some people are talking about financials again now. Is this is a place where investors feel like it is safe to go back after we saw such horrible events a few years ago?
Glaser: Well, Bruce Berkowitz definitely thinks so. He really thinks that financials are in his circle of competence, and he's been buying them very aggressively. He owns a lot of big banks, and he was saying that he thinks that a lot of the concerns about regulation of the banks are overblown.
He used the analogy of the same way that the health-care companies, people were very worried about them. They thought that health-care reform was going to completely kill them; it didn't. In the same way, he thinks that people are afraid that Dodd-Frank and other banking reforms [requiring] higher capital levels are going to kill the banks. He doesn't think that's going to happen. He's in there pretty heavily.
But at the same time we heard from other panellists such as Will Browne from Tweedy, Browne who discussed that they think that these things are just so complex, and they're trying to look at a trillion dollar balance sheet and come up with exactly what's happening with those banks; it's virtually impossible. ... A lot of people are really sticking to--even if they are financial companies--the ones that they can really understand, ... Wells Fargo ... that are less esoteric investments. They're really focused on that space. So again a mix of opinion on financials, but certainly something that was on a lot of people's minds here.
Stipp: One last asset class I think that is also on investors' minds is commodities. It may be on their minds because they're paying more at the gas pump, but what about from an investment perspective, what are the range of opinions on investing in commodities?
Glaser: Certainly when people discussed commodities at the conference, they really talked about how the prices are extremely high and how they're likely to stay extremely high for some time. There's a lot of demand for raw materials from emerging markets for things like oil, for things like steel, which obviously impacts the iron ore market, and there's also talk about how even precious metals like gold and silver are also going to continue to do well over the coming years. But there is a bit more of a mixed opinion about how to work that into your investment portfolio.
A lot of managers really talked about how the idea that having commodities as a big part of your asset allocation doesn't necessarily make sense for them, as it's not something that's a real asset; it's not something that's going to earn you income, that's going to grow with you over time like an operating business would, and they'd really like to focus on those operating businesses.
While others like our own Peng Chen from Ibbotson Associates really thinks that [commodities] deserve to have a small sliver of your portfolio to help with some diversification, and they can really help boost your returns over time.
Certainly, people don't know exactly what to do with commodities. I think it's an asset class that a lot of people are still figuring out, but it definitely was top of mind given just how expensive they are right now or how pricey they are right now.
Stipp: Well, it seems maybe the big idea from the conference this year is that there really are no big ideas right now, but certainly a very interesting time to be hearing from some of the experts. Thanks for joining me today.
Glaser: You're quite welcome, Jason.
Stipp: Be sure to check out the rest of Morningstar's Conference coverage on morningstar.com. Thanks for joining us today. I'm Jason Stipp for Morningstar.
