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By Jason Stipp | 09-16-2010 05:39 PM

Dorsey on Earnings, Dividends, and Downcast Sentiment

Morningstar's director of equity research answers the Friday Five on 3Q earnings expectations, Cisco's new dividend, and the disconnect between corporate and household wellness.

Jason Stipp: I'm Jason Stipp for Morningstar and welcome to the Friday Five. This is our look at five notable themes for investors.

Joining me this week on the Friday Five is Morningstar director of equity research, Pat Dorsey.

Pat, thanks for being here.

Pat Dorsey: Hi, Jason.

Stipp: First question for you, this week we wrote about some fund flow data. We saw some trends continuing there with money moving out of equity funds, especially actively managed equity funds, and moving into bonds and into some passive strategies. It seems like investors are saying, "This is not a stock-pickers market." Do you agree with that?

Dorsey: Typically, whatever investors are saying with regard to fund flows is wrong. Sorry to say, but fund flows are usually a pretty darn good contrarian indicator. We've done the study for years at Morningstar about funds, especially sector funds, that have had large outflows. They typically do pretty well over the subsequent periods. Once large inflow is there, they don't do too bad – but they do pretty badly coming soon. And I think it's going to be especially the case with the bond versus stock point.

Money has been flooding into bond funds, with Treasuries that are 2.8% yield, and I think frankly investors are just stuck in the rearview mirror. They are saying, what do I wish I had done 10 years ago, and they wish they'd put money in bonds, which have returned about 6%-7% annually over the past decade, and they wish they hadn't put money in stocks. But sadly, right now, we are investing for the next 10, not for the last 10.

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