Kinnel: Managers Growing Wary of U.S. Stocks

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Russ Kinnel: Hi, I'm Russ Kinnel, director of manager research at Morningstar. I'm here at the Morningstar Investment Conference in Chicago. It's Thursday morning and, one of the first themes I'm picking up is that value managers are sad. Valuations have really crept up here in the U.S., and we're hearing U.S. managers are building cash, or just not very enthusiastic about their investments.

We heard from a global panel today, where they're definitely less enthusiastic about the U.S., and like just about every place more than that. We heard from Charles Pohl of Dodge & Cox, Amit Wadhwaney of Moerus, and Noriko Chen of American Funds, and they're all saying, emerging markets are maybe their favorite, then they like Europe, and finally U.S. last.

Charles Pohl, though he's a value manager, went so far as to say maybe growth stocks will outperform in the next couple of years, because valuations are so compressed, you're not getting that added bang for your buck, when you buy a low priced value stock these days. When you put that together with the sentiment we're hearing from both individual investors and from those here on the floor who are dealing with a lot of individual investors, you get the sense that, that ‘08, ‘09, bear market is starting to recede and into investors’ memory.

Some of the bond managers here are saying that, they have to restate the case for why you'd want to own bonds, given that bonds are generally returning less than equities, and they have to remind people, Oh yeah, there's a lot of diversification value that you may not have appreciated, and the next bear market, you're going to be happy you own bonds.

Likewise, I wrote a column a little while back on Morningstar.com, where I looked at funds that lost the least in the bear market. For equity funds, that meant the best ones from peak to trough maybe lost 30%, 32%, and a lot of the comments I heard were, wow, that's terrible. Why would I buy, if it's supposed to be conservative, why would a fund lose that much? I would never touch a fund like that. Well, if you own an S&P Index fund, or a large-cap fund, you've probably lost about 40 to 50% at peak to trough. Those funds I mentioned losing 32% were among the best, but you just get the sense that, that bear market has receded.

So once again we're at one of those points where, there's kind of a big divergence in investment professional view, and individual investor view, where the investment professionals are getting more and more wary of the U.S. Not because they see doom, but simply because valuations are quite high, whereas individual investors, have maybe forgotten just how much equity risk there is in the world. An equity fund means you get paid better returns usually, but occasionally, you might have to give back, 30%, 40%, 50% of your investment.

I'm Russ Kinnel for Morningstar.