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By Adam Fisch and Christopher Davis | 06-12-2013

Analyst takeaways from MIC25 in Chicago

Search for yield is a major theme.

Christopher Davis: Hi, I'm Christopher Davis, here in Chicago at the Morningstar Investment Conference. I'm here with my Canadian fund analyst colleagues talking to other global fund analysts, learning what's going on in the fund industry and hearing new ideas from world class investment managers. I'm here with Canadian fund analyst Adam Fisch, thanks for joining me Adam.

Thanks for joining me, Adam.

Adam Fisch: Sure, let’s get started.

Davis: Alright. Well what have you learned? What are some of the key takeaways that you've surmised over the past few days?

Fisch: First I would say that it’s been a really interesting experience. It’s a great opportunity for advisors to come out and put some faces to the names of portfolio managers that they’ve maybe invested with over the years or just to hear different ideas. There are certainly some themes that, I think, we’ve started to see developing over the course of the conference. One of them that I think is worth noting is the search for yield. Which has been true in Canada, as it’s been true in the U.S. and how that’s played out in terms of some equities getting overpriced.

Davis: I mean, rates are just as low in the U.S. as in Canada. This seems to be a major dilemma for investors. I don’t know if we have any really good solutions to these dilemmas from the conference. My takeaway is hearing all of these managers talk. They seem confident that the U.S. economy is getting better. Emerging economies may be getting worse, but overall the picture for the world is brightening.

At worse, things aren’t getting any worse; however, the situation for savers probably is not going to improve anytime soon. The Federal Reserve is probably going to keep rates really, really low for a really long time.

Fisch: I think the takeaway for any investor is where are things positioned? And then how can I take advantage of that? So, right now as you said, yields are very low, and people that are looking for a steady stream of income are looking elsewhere.

So, the natural point to start is dividend payers which we’ve seen in Canada as well as in the U.S. and a lot of those securities have arguably gotten very expensive. And if you’re comfortable without that steady stream of income, it may present some good opportunities elsewhere.

Davis: Wondering if you had any thoughts of what might be bubbling underneath the surface often, what happens in the U.S. ends up happening elsewhere around the globe?

Fisch: Absolutely. As you alluded to, things in the U.S. are starting to seem pretty good. Corporate balance sheets are looking much healthier than they were a couple of years ago. And a lot of portfolio managers that we heard seemed pretty positive on it.

That said, the Canadian economy while it benefits from a strong U.S. economy, they are not perfectly identical as everyone in Canada knows it’s much more resource focused. So, even if the U.S. economy is doing well, if commodity prices struggle, then Canadian commodity producers might still have a hard time.

Davis: Yes, we heard some mix sentiment on emerging markets. James Montier from GMO was very notable in his discussion of emerging markets. He said that GMO forecasts something like 7% to 9% annualized returns over the next seven years in emerging markets, which is really good. I think that’s their – they think that asset class could fare best, but their confidence in that projection was fairly low. They worry about a housing bubble in China, and China is in the driver seat for emerging markets and natural resources consumption.

One thing that struck me is two emerging trends. One that I think could be good for Canada is the emergence of solutions products. So, like target date funds, meaning all an investor needs to know is when they’re going to retire or all they need to know is when their kid is going to go to university and the investment industry will design solutions to meet this goal. It seems like a good thing, but then we also hear about the rise of alternative investments. You have yield-hungry investors looking for alternative solutions, but these don’t necessarily seem better than traditional solutions.

Fisch: I think the benefit for alternative sort of remains to be seen. I think, we will remain a little skeptical until we maybe have a better understanding of the ins and outs of them. But I think with regard to some of those target-date solutions, I think they can be beneficial. We recognize a lot of Canadian investors, they don’t want to spend all day, every day, worrying about their investments and making investment decisions. In a lot of cases, it might actually be a net negative for them to do that because it’s easy to get caught up in emotion and buy at the wrong time, sell at the wrong time. There is mountains of evidence that market timing is often the biggest drag on performance.

So, if they can find their way into a broad-based solution that might give them some peace of mind that it’s being managed properly over the long term. It may allow them to sit back a little bit and maybe not try to time to market themselves.

Davis: I think that’s a great point. On the other hand, you have these alternative investments that promise absolute returns or when the stocks go down they promise to go up or stay flat. We already have a product like that – it’s called bonds, government bonds. And so, you can buy government bond index funds for 20 basis points or you could buy one of these alternative funds having expense ratios north of 2%. Who knows how expensive they’d be in the Canadian marketplace, they are expensive here in the U.S.

So I’m really skeptical about this trend, and I think investors should always be skeptical when it comes to newfangled products.

Fisch: Yes, I’d agree.

Davis: Well, thank you very much for joining me, Adam. It’s been an insightful conference, and I look forward to bringing some of our insights home. For morningstar.ca, I’m Christopher Davis.

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