Sat, 21 Jun 2014
Gross posits the New Neutral, Hasenstab likes emerging-markets bonds, international stocks have blurred lines, strategic beta remains up for debate, and more.
Adam Zoll: For Morningstar, I'm Adam Zoll and welcome to The Friday Five. Today, we're at the Morningstar Investment Conference, and here with five key takeaways from the conference is Morningstar's markets editor Jeremy Glaser.
Jeremy, thanks for being here.
Jeremy Glaser: You're welcome, Adam.
Zoll: The first thing you have for us involves emerging-markets bonds. What did you learn?
Glaser: [Templeton Global Bond manager] Michael Hasenstab kicked off the conference with a discussion of why he's liking emerging-markets bonds right now. It was pretty fascinating, and his big takeaway was that the market tends to treat the emerging markets as this monolith, that either they're really euphoric about them or they're just totally down in the dumps on them and that, that seems to just rotate on these six month cycles. He says it's not the way investors need to approach them. They really need to do fundamental analysis, look at the credit, look at the current account deficits that are happening in each of those markets, and make sure they place those bets in the right place. That's why he has these contrarian bets in places like Hungary or the Ukraine, and I think that that was probably a good lesson that you can't treat all of these markets the same.
Zoll: From emerging-markets bonds to emerging-markets equities, there was also a discussion about how international investing in general is sort of changing in its complexion.
Glaser: There was a conservation with [Oakmark funds manager] David Herro, Rob Lovelace [of the Capital Group], and [Causeway's] Harry Hartford just about how challenging in a lot of ways, and how blurred the lines have become in international equities because so many companies do have that global scale that they're selling into emerging markets and selling to developed markets, and where their domiciled may matter less.
The way that they think about it is that you think about the story in China or in other emerging markets. The exciting part is that you have this growing consumer middle class, this growing purchasing power. But then if you look at the companies that are domiciled there, you're looking at financial services, companies that might not be all that attractive, commodities firms. And the panelists wondered if you're excited about a growing consumer, you probably don't want to be in commodities. You want to be in places like autos or in other kind of consumer-facing goods, and the panelists might look outside of those locally domiciled companies to get that exposure. That's the way they invest. You have to be objective-based. You can't just look at those benchmarks.
Zoll: Our keynote speaker of the conference this year was Bill Gross, founder of PIMCO. He spoke about this "New Neutral" concept and what it means with regard to what's going to happen with interest rates. What did you hear from him?
Glaser: This has been a theme that PIMCO has been pushing for a couple of months now, that all central bank policy might remain a lot more lenient for longer than many people are expecting, that growth is not going to, all of a sudden come, roaring back in any meaningful way, that the banks are going to have to remain in a very easy monetary policy mode, and that, therefore, long-term rates may be lower than we've seen in the past and may be lower than many are expecting right now. We can really see how that is playing out in terms of portfolios. You look at something like PIMCO Unconstrained Bond. We talked to Mohit Mittal who's one of the managers on the fund, and he's saying that they're going out on duration [a measure of interest rate sensitivity], that they're taking more duration risk because they see rates as maybe not rising as fast as many others in the market expect. And he's a little bit more hesitant on credit risk; that's something that PIMCO is being very careful about.
Zoll: From interest rates to withdrawal rates, you chaired a panel on withdrawal in retirement. What did you hear from the panelists there about whether the so-called 4% rule is still applicable?
Glaser: I'm not sure we came to really clear conclusion about if it works or not because there are so many swing factors that it's really almost impossible to say if it's going to be right for any individual person. But there was somewhat of a consensus that maybe that 4% rule is a good starting point. [Financial-planning expert] Michael Kitces generally argued very heavily that at that 4% rule, for most people they're going to be fine under almost all market environments, and that really says that even in a low-return environment, you'll be able to have enough money potentially without having to make big adjustments.
But others like [Wealth Logic's] Allen Roth we're a little bit more cautious thinking that because you have things like fees, that because investor behavior isn't perfect, you can't really count on things working just like what the model predicts, and that 4% maybe is a little bit too high, that you have to tack that down, maybe even as low as 2.5%. That's a big difference. It gives investors in retirement a lot to think about.
But the real key theme was that these really are just rules of thumb, and that you have to use common sense. You have to look at your spending habits, you have to continue to rebalance, you have to think year to year when you're making those withdrawal decisions, and you can't just set it and totally forget about it.
Zoll: Another hot topic has been so-called strategic beta funds; some people call the smart beta funds. These are index funds with a twist. What have you learned about those?
Glaser: They are. Strategic beta is the idea that we should have index funds that aren't market-cap-weighted. That there is other ways to look at kind of these rules-based indexes that maybe you're trying to capture a momentum factor, or maybe you're trying to think about value funds, or a size factor that you're trying to gain exposure to.
The jury's, I think, still really out, and from talking to people at the conference, the jury really does seem to be out as to whether these [strategies[ are going to be useful for investors or not. There was a camp that really sees that this is going to improve people's risk/return profiles, that they're going to be able to gain access to these better types of investments, and that it's going to be a net positive. There are others who think that maybe [strategic beta is] more marketing driven. A lot of these strategies, even though if they work a back test, when you actually put them into practice, they won't work as well, or perhaps whatever arbitrage opportunities that are there will be competed way and kind of lose any of that excess return and that [strategic beta] might not work, as well.
I think the truth's probably in the middle. There's going to be some funds that are going to be useful, that are going to find ways into investors' portfolios. There will be others that aren't useful. We're going to have to continue to do research, continue to know what you own, and be careful with them. But it definitely is an interesting part of the market to keep an eye on.
Zoll: Jeremy, it's always great to hear from you on the Friday Five. Thanks for sharing your insights on the conference.
Glaser: You're welcome, Adam.
Zoll: For Morningstar, I'm Adam Zoll. Thanks for watching.