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Seven Burning Questions for Investors and Fund Managers

Big issues we'll learn about at the Morningstar Investment Conference.

Russel Kinnel, 05/19/2009

Last year, the economy hacked a path into uncharted territory. We'd never seen a financial meltdown like this one and the market meltdown and government response took us a long way from where we'd ever been. Today things feel a lot better than in the winter, but we still don't have much visibility as we hack our way through the jungle. With that in mind, I'll outline seven burning issues that will tell the tale of where we go next.

When some of the best investing minds gather at Morningstar's annual investment conference May 27-29 in Chicago, these issues will be front and center. I expect a fierce debate from all quarters and I think this year's lineup is our best ever.

1. How Will the Great Unwind Work? 
In cartoons, characters get hit with a frying pan, shake it off, and their faces go back to normal. This recession is not like that. Although past recessions may have worked that way, we've got years of hangover ahead of us with this one. Maybe the hardest part to predict is how the government will unwind its foray into the private sector and how the economy will react. The Fed has bought $300 billion in Treasuries and $750 billion in mortgage-backed securities and could buy more. How do they start to unwind those positions without crushing the market? How does the government start to sell off its banks, insurers, and automaker holdings in an orderly way? What will become of Fannie and Freddie? That's a lot to sort out and it's going to have a huge impact on the economy and the markets.

There's also the matter of inflation. One way of thinking about the global stimulus plans is that governments are spending trillions in order to avoid the devastation of deflation. So if their goal is inflation, isn't there a chance they'll meet that goal? Generally printing a lot of money leads to inflation. But not in the case of Japan in the 1990s.

PIMCO's Bill Gross (of Total Return PTTRX), FPA's Bob Rodriguez (of FPA Capital) FPPTX, and GMO's Jeremy Grantham were prescient in their predictions for the economy the last two years. All three will be speaking at the conference, so it will be fascinating to hear their take on where we are headed and what that means for the bond and stock markets.

Maybe the economy will gradually but steadily grow from here or maybe all of these tectonic shifts will have us lurching up and down for years. When you consider how important housing and autos are to the economy and how long it will be before either is healthy, you have to think we've got at least some trouble ahead.PAGEBREAK

2. What Are the Lessons of the Bear Market?
When the markets go down as much as they did in 2008, it's easy to let emotions get the best of us and to point fingers and swear off investing in an industry or a security type forever. But the investors who can keep their heads and continue to do superior research will profit the most. In other words, you don't want to overreact but you also don't want to put your head in the sand and refuse to adapt. You also want to learn from what you got wrong. The best investors do this while the worst fight the last war.

Our conference features some great managers with solid long-term records, but several of them, like Chris Davis of Selected American SLADX and Diana Strandberg of Dodge & Cox DODFX, got singed by financials last year, and it will be interesting to hear their takeaways. In fact, that really applies to all the managers at the conference. We have some very experienced managers such as Marty Whitman of Third Avenue TAVFX, Chuck Royce of Royce Funds PENNX, and John Rogers of Ariel ARGFX who can share their perspective on how this mess compares with other messes they've seen.

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