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Fund Times: Morningstar Senior Fund Analysts Talk Shop at Conference

Plus, news on foreign funds, Calamos, Wells Fargo, Royce, PIMCO, MFS, and more.

Morningstar Analysts, 07/03/2006

In a roundtable discussion last week at the 2006 Morningstar Investment Conference, senior members of Morningstar's fund analyst team debated the state of the fund industry.

Asset bloat was at the top of moderator Ian McDonald's mind.  The Wall Street Journal reporter asked the panelists about the large size of funds at some of the biggest fund firms, including American Funds. The panelists--Russel Kinnel, director of mutual fund research; Dan McNeela, associate director of mutual fund analysis; Christine Benz, director of mutual fund analysis; and Don Phillips, a managing director at Morningstar--were in agreement that there was cause for concern. The panelists admitted, however, that American Funds is the most flexible firm in regard to handling huge asset bases and it has a great model in place for managing large asset flows.
 
The discussion then shifted to the growing interest in foreign funds. Phillips stressed that investors need to understand that the market is really a global market and one in which investors are still underinvested. Kinnel agreed and noted that while he is happy to see more interest in overseas markets, he is not convinced that this is a long-term trend. "We'll have to wait and see what happens when the foreign market underperforms," he said.

McDonald asked the panelists what their take was on expense ratios coming down recently. Phillips said that this trend is proof that the system works--investors are getting smarter and the industry is recognizing that. McNeela is not so sure, however. He said that there is much work to be done on behalf of funds' boards of directors and that investors too often pay for the promise of performance that is not delivered.

Regarding the Spitzer fund scandal, McDonald asked the panelists which firms have impressed them with their efforts to rebuild. Phillips named Alliance Bernstein and said that it is on the road to being a first-class asset management company. Kinnel agreed, noting that he likes that Alliance Bernstein has been hiring more growth managers of late. McNeela cited Janus as another firm that is bouncing back, both from poor performance during the bear market and the market-timing scandal. The panelists agreed that Putnam and Federated both have a ways to go to regain investors' trust.

When asked about his recent report on management ownership of funds, Kinnel named Janus among the top companies. He believes that this results in better behavior on the part of the managers, as their own money is on the line alongside that of other shareholders. Kinnel listed Morgan Stanley and TIAA-CREF as two firms that disappointed him. According to Kinnel, Morgan Stanley and TIAA-CREF run 21 and 17 funds, respectively, in which no money is invested on behalf of their own managers. 

McDonald asked the panelists to share one or two funds that they have among their own biggest holdings. Oakmark Select OAKLX emerged as a popular favorite, as all four panelists name it as a top holding. "There is no better stock analyst than Bill Nygren," said Phillips, who said he has owned the fund for years, along with Clipper Fund CFIMX.

Benz cited Selected American SLADX as another favorite, saying she is comfortable with its strategy. In addition to Oakmark and Selected, Kinnel named Dodge & Cox International DODFX and Vanguard International Growth VWIGX. McNeela included Fairholme Fund FAIRX on his list for its outstanding returns and solid strategy.

Note: Recordings of each panel and keynote address at the 2006 Morningstar Investment Conference are now available.

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