Fund Times: Report from the 2006 Morningstar Conference

Short-term thinking and its detrimental effects are rife in the business and investment worlds, but so are opportunities for investors who don't follow the herd, said Legg Mason Capital Management's chief investment strategist, Michael Mauboussin, at Morningstar's 2006 Investment Conference this week.

One reason for the business world's increased focus on short-term results over the past couple of decades has been a transformation in the way executives are compensated. According to Mauboussin, in 1985 about 1% of a CEO's pay was tied to the performance of his or her company's stock price, but by 2005 a full 60% of compensation was stock-price related. That gave CEOs incentive to maximize their companies' stock prices and, unfortunately, fixate on earnings-per-share growth, Mauboussin said. This fixation evolved even though the linkage between EPS growth and value creation is tenuous, stated Mauboussin. Therefore, in seeking to maximize their compensation, executives made decisions that had a deleterious effect on the long-term health of the company and on long-term shareholder value, he said.

Why should we care? According to Mauboussin, research has shown that short-termism in investing--for instance, as displayed by higher levels of portfolio turnover--can cost investors a great deal in both transaction and market-impact cost. In fact, in a study he conducted for Legg Mason, he identified low portfolio turnover as one factor that has led some firms' investment strategies to outpace others'. Factors that also seem to help are running portfolios in a concentrated style and focusing on intrinsic value investing. Interestingly, a firm's geographic location was another factor. The research suggests that investment advisors located in financial hubs, like New York and Boston, may have to sort through a great deal more informational "noise" than those located in more peripheral areas of the investment world, which puts them at a disadvantage.

Some of these factors have been part of our thinking at Morningstar for a long time, which is illustrated by some of our Fund Analyst Picks. Take Fairholme (FAIRX), for instance, a fund that practices a low turnover, high-conviction, and highly concentrated value strategy; its skilled manager, Bruce Berkowitz (another conference participant), has managed to create superior investment returns for shareholders in the more than six years he's run the offering.

If you weren't able to make the conference this year, the full range of panels and presentations will be available on audio CD.

International Fund Flows Continue to Lead the Pack
International and globally oriented mutual funds took in more money than their peers in May, with a net $10.1 billion of inflows, according to Financial Research Corp. The foreign large-blend category led the way with $4.1 billion, followed by the small-blend category ($2.0 billion), the foreign large-growth category ($1.98 billion), world allocation ($1.6 billion), and world stock ($1.5 billion). The best-selling fund in May was American Funds Capital World Growth & Income (CWGIX), which took in $1.3 billion in May, bringing it to roughly $65.6 billion in total assets. One surprise was Fidelity's loss of $1.2 billion in assets during May, but when one considers the fact that Fidelity Contrafund (FCNTX), Fidelity Mid-Cap Stock (FMCSX), and Fidelity Growth Company (FDGRX) all closed to new investments on April 28, the result becomes more understandable.

Calamos to Offer Fund of Funds
Calamos Advisors has filed with the SEC to offer a new fund: Calamos Multi-Fund Blend. The new offering will be a fund of funds that invests in existing Calamos funds on a fixed-percentage basis. Multi-Fund Blend will invest in the I share class of  Calamos Growth (CVGRX), Calamos Value (CVAIX), and Calamos Global Growth & Income (CVLOX) in roughly equal proportions. The advisor plans to rebalance the portfolios whenever the underlying funds' actual allocations deviate from the one third target allocation by plus or minus 5%.

Wells Fargo Goes Passive on Target-Date Funds
Wells Fargo Funds has announced that the firm's lineup of target-date retirement funds, the Wells Fargo Advantage Outlook Funds, will be renamed the Wells Fargo Advantage Dow Jones Target Date Funds and will have a completely changed approach. Previously, the funds were actively managed, but now the firm plans on indexing the offerings to the Dow Jones Target Date Indexes. According to the new prospectus, the funds will charge from 1.15% to 1.22%, which is only a slight reduction from their previous expense ratios and far too expensive overall.