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Kinnel's Take on Grantham, Tencent, and Manager Selection

Russel Kinnel
Christine Benz

Christine Benz: Hi, I'm Christine Benz from Morningstar.com. I'm here at the Morningstar Investment Conference where we're just wrapping up day three. I'm joined today by Russ Kinnel, he's Morningstar's director of manager research. He's going to provide his perspective on the conference today.

Russ, thank you so much for being here.

Russ Kinnel: Glad to be here.

Benz: Russ, we were all treated to quite a gloomy take on the world at the end of the day yesterday from Jeremy Grantham. Let's talk about that, your takeaways from his presentation.

Kinnel: My main takeaway is I would like there to be Prozac smoothies on hand when you leave a Jeremy Grantham speech. It really was remarkable. We've heard him before talk about climate change, and he emphasized that again, where the climate change is coming. But he also pointed out all these other difficult things--rise in disease, decline in fertility, erosion of soil brought on by climate change. Really difficult. He talked about how there are investment themes based on that such as renewable energy, but it certainly was a very gloomy speech.

I think one of the takeaways, too, is just we tend to lock into the present and the way things are now and think things will only change incrementally in the future. When you hear someone say 40 years from now the world could be very different, it's kind of shocking and it's hard to accept, but I think it's something you want to be open to because that's the way the world really does work.

Benz: To stay adaptable, I thought it was interesting that in contrast with years past where the focus of his presentation has been on investments and what to be worried about in the investment market, this was a much broader discussion about what to be worried about in terms of our climate and in terms of the future of our world.

Kinnel: Yeah, I mean it's hard to argue when you hear that nine of the 10 hottest years in the history of earth came in the last decade, and statistics like that. You see the information on rising water levels and so many very hard-to-refute statistics. You realize that's going to have a tremendous impact on our world, and in our investments too. Obviously the investments are secondary to the fate of the world, but still, obviously that will impact a lot of businesses as well as our lives.

Benz: We just came out of a session with Diana Strandberg and David Herro, both great international value investors. I was really interested in their presentation, what were your main takeaways from it?

Kinnel: I continue to feel great about investing with these two, their funds are rated
Gold, we really like them. One of my takeaways was I really enjoyed them talking about the impact of Tencent. David Herro called it the greatest Internet property out there, and they talked about owning it via Naspers, which owns a partial stake in it.

I also like to hear value managers who are really doing a lot of research on Internet companies and tech, the FAANGs in general, because I feel like the FAANGs are really destroying a lot of companies in the value space. You see a real difference between the successful value managers and those who are struggling, and I think it's the ones who really understand what the FAANGs are doing are less likely to own those value traps. The ones who don't, maybe doing kind of reversion of the mean analysis, expecting things to snap back for these companies, but maybe they won't.

The ones I worry about are the managers who are investing in old school media, advertising companies, and some others where you look and see Google might eat their lunch, or in the case of a retailer, Amazon might eat their lunch. You at least want the managers to really understand what are the real threats here, because I think that's gonna be crucial for value managers to succeed.

Benz: Diana Strandberg from Dodge & Cox, and David Herro from Oakmark International, you think do exemplify value managers who will be adaptable in the decades ahead.

Kinnel: Yeah, I think so. I think you see that in their portfolios today. Not a lot of obvious value traps in the portfolios, and obviously they're spending a lot of time understanding the dominant companies out there, as well as obviously China and how that's going to affect the companies they own.

Benz: You and the team at Morningstar spend a lot of time on manager evaluation and selection. You moderated a panel yesterday on that topic. Let's talk about some of the conclusions that you came away with. I think a lot of advisors who are looking at client portfolios have a little bit of a crisis of confidence in active management. How can people think about making smart decisions with respect to choosing and sticking with actively managed funds?

Kinnel: There's certainly a theme of, we heard from the panelists who were there, were very focused on finding the areas where active has done the best. But I also talk about how they research active, and I think they really understand that doing the fundamental work, so not just looking at returns but understanding the people in the funds, not just the managers but the analysts, the traders, but I think the culture too. We heard Michelle Ward from Morningstar was talking about how she looks for firms whose goals are really long term and aligned with her values and Morningstar's values. I think that's really important, I see that there's a significant difference I think from say experienced investment professionals versus individual investors. Even more some investment professionals who are new to the job is they think more about stewardship and culture because on the long run that really matters, and you really want to invest with the managers and the firms that really understand that and are really shareholder focused, really long-term focused.

Benz: One thing that came out in your session was PIMCO Total Return is kind of a case study in how investors manage through big changes at a giant fund like that where we saw an exodus of assets from the fund in the wake of Bill Gross' departure. What came out of that discussion for you?

Kinnel: I thought it was really interesting, all three of my panelists, all of them held onto PIMCO Total Return at a time when there was a mass exodus, one of the greatest exoduses in the history of the fund world. They talked about how, yeah we thought Gross was important, but we knew all of these managers and analysts, and PIMCO was a very deep team with tremendous experience, tremendous breadth, and a big trading desk. In the fixed-income world trading is really important, especially if you do derivatives as much as PIMCO does.

They felt really confident that PIMCO still had all those important players, and they pointed out that that fund has done much better than most of the funds that people rushed into. I think it really illustrates why there's a difference between what the general public sees and what some consultants and others who are investment professionals see. One of those things is just all of the depth behind the manager. For PIMCO Total Return, most commonly you would see Bill Gross on CNBC and not necessarily understand just how much was behind him. Really we've seen since then that that fund and firm has really stabilized. The fund handles the outflow as well, and you didn't see other people leaving to follow Bill Gross. In fact I think if anything, analyst and manager turnover slowed down after Bill Gross' departure, which tells you something about the firm and Bill Gross.

Benz: Right, and Morningstar maintained a medalist rating on PIMCO Total Return even after Gross departed as well.

Kinnel: That's right. We had the fund rated Gold, he left, we lowered it to Bronze because we were concerned about how the team of new managers would mesh, whether people would leave and what impact outflows would have. Over time we've become more confident as we've seen everything stabilize, so we raised it to Silver. And then more recently we raised it back to Gold.

Benz: Russ, thank you so much for being here to share your perceptions.

Kinnel: You're welcome.

Benz: Thanks for watching, I'm Christine Benz for Morningstar.com.