Fund Times: 2006 Morningstar Investment Conference Highlights

As Fed Tightens, PIMCO's McCulley Sees Soft Landing for U.S. Economy
About halfway through his keynote speech at Morningstar's 18th annual investment conference last week, PIMCO managing director Paul McCulley stopped to comment in real time as the Federal Reserve raised short-term interest rates by a quarter of a point to 5.25%. McCulley said the Fed's statement accompanying the hike was "right on the cusp between dovish and hawkish," but was still consistent with the central bank's efforts to rein in the risk-taking that has run rampant in the U.S. markets since 2001. But McCulley said he expects a "global soft landing" as the rest of the world starts consuming more while America begins to consume less. This will affect the valuations of risky assets, he said. "Risk-taking is not going to be subsidized, and excessive risk-taking will be penalized," McCulley said.

International Managers Revel in a Flatter World
Despite an abrupt emerging-markets sell-off in recent weeks, three leading international fund managers at Morningstar's investment conference agreed that investment opportunities still exist in all corners of the world.

As developing economies become more important, they are becoming less dependent on the more mature countries than they previously were, the panelists said during a general session that asked, "Is the World Flat?"

"Even though China has a shaky economic system, they have more control over their destiny than previously thought," said Rob Lyon, manager of ICAP International (ICEUX).

The panel's enthusiasm for foreign companies seemed undimmed by the recent downturn. MFS International New Discovery (MIDAX) manager David Antonelli said his basic investing thesis remains the same. "You will be rewarded in a more handsome way in emerging markets," Antonelli said. "The key is to keep an eye on valuation."

Diana Standberg, a manager of Dodge & Cox International Stock (DODFX) agreed, and said stewardship, not location, should guide investors. "When considering emerging markets, one of the things we ask ourselves is, 'For whose benefit is the company being run?'" she said.

MainStay Fires Jennison, Hires ICAP
MainStay is firing Jennison Associates as manager of 50% of MainStay MAP (MUBFX), a go-anywhere fund that currently resides in the mid-blend category. MainStay's board of trustees voted at its mid-June meeting to drop Jennison. ICAP will act as a temporary subadvisor for the rest of the summer, and should shareholders approve, will assume subadvisory duties on a permanent basis in late September. The Jennison portion of MainStay MAP has beaten its target benchmark, the S&P 500 Index, but it has trailed both the portion of this fund run by Markston International and the mid-blend category norm since Jennison joined this portfolio in late 2002.

Former Chairman of the Old PIMCO Equity Funds Guilty
On June 30, Steve Treadway, former chairman of the trust housing all of the equity funds formerly branded with the Pimco name, was found guilty of cutting secret market-timing deals with hedge funds. Regulators accused Treadway of allowing Canary Capital Partners, a hedge fund at the heart of the mutual fund trading fund scandals, to engage in the rapid trading of Pimco equity funds. Ken Corba, former CEO of Pimco, settled with SEC for $200,000 in fines and a year ban from the industry. Pimco equity funds are now branded with the Allianz name. The German insurer bought Pimco Advisors in 2000.

Barclays to Offer More New IShares ETFs
Barclays recently acquired SEC approval for two new fixed-income exchange-traded funds. One ETF will track the Lehman Brothers 1-3 Year U.S. Credit Index, and the other will imitate the Lehman Brothers U.S. MBS Fixed Rate Index. Barclays is the world's largest manager of indexed portfolios and is the only firm that offers fixed-income ETFs.

In addition, on July 5, Barclays announced the registration of iShares S&P U.S. Preferred Stock Index Fund. The S&P U.S. Preferred Stock Index measures the performance of a selected group of preferred stocks listed on the New York Stock Exchange, the American Stock Exchange, and the Nasdaq Stock Market. The index includes preferred stocks with market capitalizations over $100 million that meet certain profitability screening criteria.

IShares has other changes in store for investors. On June 30, Barclays announced that iShares Russell Microcap (IWC) will no longer track the Russell MicrocapX Index. Russell stopped calculating the bogy, which was a subset of the Russell Microcap Index, on June 30. Going forward, the fund will peg its portfolio to the entire Russell Microcap Index. IShares Russell Microcap started tracking the MicrocapX index because it screened out illiquid stocks. It will now attempt to track the entire Russell Microcap without the liquidity screens.

Pimco Releases TRAKRS on the Heels of Barclays' New ETNs
Pimco announced the launch of PIMCO CommodityRealReturn DJ-AIGCI TRAKRS (PIMCO CRR TRAKRS) on June 30. TRAKRS are non-traditional futures contracts that offer exposure to the Dow Jones-AIG Commodity Index. Like Barclays' iPath ETNs, the Pimco's TRAKRS offer more tax efficiency than traditional mutual funds that provide exposure to commodities. The offerings will trade on the Chicago Mercantile Exchange.

Janus Lowers Fees and Drops Manager
Due to foundering performance at Janus Worldwide Growth (JAWGX), Janus enacted a performance-based fee schedule seven months early. Shareholders were promised incremental breaks in fees for poor performance beginning in February 2007, but the fund's board decided that long-suffering fundholders shouldn't have to wait. Beginning July 1, 2006, investors are eligible for an annual break on the management fee of up to 0.15 percentage points under certain circumstances.

In addition, Bob Perkins has been removed from the management team at Janus Mid Cap Value (JMCVX) and Janus Aspen Mid Cap Value (JAMVX) but remains a manager at Janus Small Cap Value (JSIVX). The rest of the team remains intact.

American Century Churns Managers
Michael Perelstein, former portfolio manager for several American Century international funds, including American Century International Growth (TWIEX) and American Century International Stock , left the company on June 30. Alexander Tedder, who amassed a strong record at DWS International Select Equity (MGINX) before leaving in 2005, took over management of the funds on July 5.

 American Century Ultra (TWCUX) manager Bruce Wimberly also left the firm on June 30. Tom Telford, a comanager on American Century New Opportunities  and manager of American Century Technology , will replace Wimberly. Matthew Feretti, a senior analyst for American Century Select (TWCIX), will replace Telford at New Opportunities.

VIPERs to Vanish: Vanguard Changes the Name of its ETF Family
Vanguard announced on July 5 its exchange-traded funds, launched under the brand name VIPERs, will now be called ETF Shares. The move toward a plain-vanilla name is an anomaly in an industry filled with names such as SPDRs, iShares, StreetTRACKS, and PowerShares.

The SEC also granted Vanguard exemptive relief from investment limits outlined in the Investment Company Act of 1940. That means mutual funds and other registered investment companies can now invest more in Vanguard ETFs than previously allowed, which opens Vanguard's ETFs to funds of ETFs. The exemption was effective May 31, 2006, and applies to both current and future offerings.

Schroder Provides Investors with Multi-Cap Bond Option
Schroder Strategic Bond Fund, launched June 30, invests in debt securities of issuers from markets around the world. It holds primarily investment-grade securities, but can invest up to 40% of its assets in junk bonds. The new fund will initially charge a 1.15% expense ratio, which includes a 0.81% fee waiver. Robert Michele, global head of fixed income at Schroders, and Louise Davies will comanage the fund.

Oppenheimer Launches Two New Municipal Funds
OppenheimerFunds has launched two municipal-bond funds: Oppenheimer Rochester Michigan and Oppenheimer Rochester Ohio. The OppenheimerFunds/Rochester Investment Management Team, which includes Troy Willis and Scott Cottier, will manage both funds. The team is also responsible for 10 additional municipal-bond funds.