Fri, 14 Jun 2013
Five stats from the Conference and the stories behind them: 10 more years of financial repression, three retirement train wrecks, 7% more dividends on the S&P, and more.
Jason Stipp: I'm Jason Stipp for Morningstar, and welcome to The Friday Five. This week we're bringing you five stats from the 25th Anniversary Morningstar Investment Conference. Here, as always, with The Friday Five is Morningstar markets editor Jeremy Glaser.
Jeremy, thanks for joining me.
Jeremy Glaser: You're welcome, Jason.
Stipp: What do you have for the special Morningstar Conference Friday Five?
Glaser: We're going to look at the numbers 100, 53, 10, 3 and 7.
Stipp: 100 is the basis points of improvement you can get from "Gamma." This is the financial-planning improvement you can have on a portfolio by just getting some financial things right.
Glaser: We hear a lot about alpha, we hear a lot about beta, but Gamma is a new term that David Blanchett here at Morningstar along with some other of our colleagues have coined for the gains that you can get from making better decisions: from timing your withdrawals better, from making sure that you are in the correct accounts, better asset location.
We've talked about this a few times over the last couple of years now. But it's interesting to see this concept really starting to seep into the conversations across the conference. There is not a lot of talk of hot stock picks, or what are some areas of the market to really be focused on. There's been much more conversation about creating a holistic portfolio that's going to make sense for advisors' clients, and make sense for getting to that total return picture … how do you deal with things like very low interest rates, or with some of the other problems that investors face right now, such as uncertainty over growth in emerging markets.
So it's been interesting to see that idea taking hold of really taking that broader look, and making sure that you can control everything that you can and not worry so much about the things that you can't.
Stipp: 53 is age 53, and this is the year that you and I will be making the best financial decisions of our lives.
Glaser: That's what we learned at the opening keynote by Michael Mauboussin, who told us that this intersection between luck and skill is really what you need to keep in mind when you start investing.
He said that research shows age 53 is that ideal age where you have enough experience that you intuitively make good decisions, but you still have enough mental agility that you're willing to explore other options, check your work, and make sure that you're getting things right.
He pointed to a lot of examples of how luck plays a really big role in investing and in a lot of what you're doing in your life. You can't just assume because something worked really well for one person or because there is little bit of skill there, that it means you could just ape that and you're going to be very successful.
He said that investors really need to focus on having a real process, making sure they have an analytical framework in order to evaluate their ideas, and make sure they figure out what's luck and try to gain as much skill as they can and get as much edge as they can in the places that it's possible to use their skill in order to get better outcomes.
It was definitely an interesting take not only on investing, but also across some other fields--baseball and some other places, too.
Stipp: 10 more years could be the amount of time that we still have to deal with financial repression or the downside of all of the accommodative Fed policy. This is what we learned during a macro panel today.
Glaser: Yes, and that could be at a minimum. I think that's been mentioned not only on the macro panel, but across almost every panel we've been to. No one expects the Fed to start tightening particularly soon. With all the worries about the so-called taper of QE3, with all of the worries that we've seen in the bond market just in the past couple of weeks, it seems like the managers, at least at this conference, don't think that a huge tightening from the Federal Reserve is coming anytime soon.
They said if you look exactly at what Bernanke is saying, if you look at that unemployment rate which is not at 6.5% yet, inflation remains incredibly low, particularly on the personal consumption expenditure number that the Fed really focuses on, [it seems clear that] the Fed is going to continue to be in the market, and they're likely to be late out of the cycle. Even if in the past they might have started tightening, at this time they're just so cautious that they might stay a little bit later than usual.
This creates some interesting problems. If you think that you're going to be in this financial oppression for another decade, for 15 years, or for however long it might be, it really changes a lot of your investment calculus, depending on how you view risk, depending on how you view what's happening.
James Montier from GMO seems to think that it means Treasuries just aren't a great investment right now, and that you will get a much better potential reward in equities. It's not great. It's not something that is going to give you wonderful returns, but it's better than Treasuries.
If you look at someone like [Mendelson] from AQR, he feels much more strongly that it's good to hold some Treasuries. On a risk-adjusted basis for him, on a volatility-adjusted basis, it makes sense to have some Treasuries in there. So hearing those differing opinions about what to do with this broad spectrum of financial repression has been one of the key tension points among different managers here at the conference.
Stipp: And more worrisome news: not one, not two, but three retirement train wrecks that we're headed toward according to Jack Bogle. He spoke on Thursday morning with Morningstar's Don Phillips.
Glaser: Jack Bogle is not one to hold back, and when asked about his recent appearance on a Frontline documentary that's been somewhat controversial, John Bogle came out again and said that there really are three of these retirement train wrecks that are hurtling toward the United States and that we really need to take action to solve them.
The first one was the idea of Social Security being potentially in trouble. He thinks that this is not a major problem, that with some relatively minor changes--he suggested raising the retirement age, changing the way the cost of living adjustments are made, and also increasing the cap of which you pay Social Security taxes--would solve it without a lot of pain. He thinks that's an important part of retirement. It needs to be shored up.
He said that defined pensions that do exist also are in trouble. These 8% returns that a lot of state and companies are assuming in their plans just aren't realistic. There is no way they're going to see those returns over time with their asset mix right now, and that's going to create a big underfunding problem, and one that's going to have to be reckoned with.
Finally, he says the 401(k) was never really designed to be a retirement plan. It was designed to be a thrift savings plan, and he said they should make 401(k) plans less flexible. It shouldn't be as easy to pull money out of it. You shouldn't have as many options to play around with it and to, every time you move a job, have to make more decisions, and it should be a stricter plan that would really provide retirement income and not just be a more general savings plan.
Stipp: 7% refers to the growth that we've seen in dividends on the S&P 500. Here at the conference we've also heard talk about a possible dividend bubble. There's some debate around that. What does the 7% growth say to you?
Glaser: 7% was a statistic that came from Jesper Madsen of Matthews Asia Dividend, Matthews China Dividend, and he was comparing it to growth in the U.S. that was a little bit slower than growth in Asian dividends over the same time. But I think even here in the U.S., it's still an impressive growth from the big, big cut that we saw after the financial crisis, particularly when you consider that a lot of financial companies that were big dividend payers before the crisis have really been restrained in how much they've been allowed to pay out for regulatory reasons.
I think this points that this idea of the dividend bubble, no one really seem to think that dividend stocks were so overpriced that you wouldn't be able to get a good return, both on an absolute or a relative basis, from what we heard around the conference.
When you do have this pretty sizable growth, it shows that management teams are committed to dividends now. They're not just going to walk away from them. They are wanting to return their shareholder capital more so now than in previous years. They see that they might not have great internal investment opportunities and that investors are really demanding these dividends.
So when you get a lot of this dividend yield upfront, it means that you don't need to demand as much growth in order to get to that good total return picture, which is something that's very appealing right now. When you compare it to the paltry yields you're getting at bonds, those numbers look even better.
So it seems like across a bunch of different panels there is some discussion about the relative [valuations]; some people thought they were fairly cheap, some people thought they were little bit expensive. But overall, no one really sees this big dividend bubble, and they do see them as relatively attractive compared to some of the other options out there.
Stipp: Jeremy, five interesting stats from a very compelling conference so far. Thanks for joining me.
Glaser: You're welcome, Jason.
Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.