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By Christine Benz | 01-24-2011 10:03 AM

Best Investment Ideas for Retirement Portfolios

Morningstar's Christine Benz discusses current pockets of opportunity with director of ETF research Scott Burns, dividend strategist Josh Peters, and associate director of fixed-income fund analysis Miriam Sjoblom.

Christine Benz: Hi, I'm Christine Benz, director of personal finance for Morningstar.com. We have a very special presentation for you today. We have three of Morningstar's investment experts who are going to sit down with us and discuss some of their best ideas for retirement portfolios.

With me today is Josh Peters. He is equity strategist and editor of Morningstar DividendInvestor. Josh is our resident dividend guy.

Next to Josh is Miriam Sjoblom. Miriam is associate director of fixed-income research for Morningstar, and a wealth of knowledge on bonds and bond funds. Miriam, thanks for being here.

Finally, we have Scott Burns. Scott is head of Morningstar's exchange-traded fund and closed-end fund analysis operations, and Scott is also editor of Morningstar's ETFInvestor newsletter. Scott, thanks for being here.

So let's kick this off. Top of mind for so many retirees right now is fixed income. Retirees are looking at the possibility of higher interest rates and wondering how that should affect how they position their portfolios.

Miriam, I'd like to throw it to you and talk about what you're thinking about fixed income these days and also what you're hearing from the many fund managers you are talking to. How concerned should retirees be about rising rates and should they be taking steps at all to try to protect their portfolios against rising rates.

Miriam Sjoblom: Sure, Christine. For starters, a lot of intermediate-term bond managers, which make up a most of the core holding of most U.S. investors' portfolios for bonds, there are definitely many managers who are thinking about these issues and concerned about it.

Normally, after a big rally for credit sectors like corporate bonds, you would expect to see...when corporate bonds get really cheap, managers sell Treasuries and buy corporates, and now you've had this huge rally for more credit-sensitive sectors. What they'd normally do in that time is sell corporates and buy Treasuries.

So now this kind of placeholder, the U.S. Treasury, that you would normally move the portfolio to to get neutral, to get back closer to your benchmark, is suffering from some real risk of rising interest rates down the line. Treasury yields are still near pretty low levels relative to where they've been historically.

Then you've got the concerns of the U.S. growing debt burden and the problem of entitlements down the line. So, there are some issues that are impacting that decision that used to be so natural.

So, some things managers are doing are looking for ways that [they] can very carefully build a little bit of a yield advantage into the portfolio. One extreme example is a favorite fund of ours, Loomis Sayles Bond, but [managers] Dan Fuss and Kathleen Gaffney and the rest of the team there, they've been focusing more on: "how do we minimize market risk, which is interest rate risk, and focus on specific risk--use our 30-some-person credit research team to try to identify really mispriced bonds that also offer a good yield advantage over Treasuries."

In addition, they are thinking that the equity market looks somewhat attractive these days, so you're seeing them add more convertibles--that could be for a lower-quality issuer, but it could also be for a high-quality issuer. They've been talking about Intel a lot. They have added Intel convertibles. It just gives you some upside potential from the appreciation of the stock price.

So, you're hearing more and more bond managers say, "oh, we kind of think the equity market is attractive and doing some things like that. That's an extreme example."

Benz: That's a pretty aggressive fund, a very good fund, but very aggressive. Is that another idea, though, to potentially look at some of these go-anywhere funds, and there have been more of them cropping up recently where the manager really can do a lot more than just focus on high-quality bonds. Is that another idea for investors' fixed-income portfolios?

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