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13 Smartest Things Heard at the Morningstar Conference

Advisors, investors, analysts, experts and managers attended the 25th annual Morningstar Investment Conference in Chicago last week. Sessions covered a range of investing topics from actively managed ETFs, closed-end funds and alternatives to strategies to boost retirement income and solutions to the “yield conundrum.”

Here is a baker's dozen of the smartest things we heard at the conference:

Consider the big picture. The most important thing an advisor can do for clients is to consider a client’s financial well-being as broadly as possible -- including not just an investment portfolio but also real estate, mortgages, small businesses, Social Security and other income streams and liabilities. “It’s thinking about the whole-of-life portfolio,” is the way Scott Burns, Morningstar’s director of global fund research, put it.

Read More: Focus on ‘Whole-of-Life Portfolio,’ Says Morningstar Exec


Beware the hunt for yield. It’s a difficult landscape for yield-seeking investors. "From a pure value perspective, all of this income stuff is really expensive,” said Anne Lester, JP Morgan’s senior portfolio manager in the global multi-asset group “Everyone in the whole world is on one side of this trade right now and that’s uncomfortable.”

Read More: Bright Spots in Search for Yield


Focus on client outcomes. With the vanishing of defined benefit pension plans, everyone must now be involved in saving for retirement, Ron O’Hanley, Fidelity Investment’s president of asset management and corporate services, pointed out. “In a world where all the risk has moved back to the individual, we really do need to help them with outcomes.”

Read More: What Economic Trends Will Shape the Rest of 2013?


Don't fear a dividend bubble. There is no dividend bubble, according to Hersh Cohen, the co-chief investment officer of ClearBridge Investments. In fact he calls this a “golden age” for dividends. “A bubble is when investors don’t get their money back,” Cohen said.


No inflation, yet. Mihir Worah, Pimco's head of the real return portfolio management team, said he’s concerned about inflation looking out two to seven years from now. “Real inflation will go down from here,” Worah said. “The last month has been a perfect storm for inflation and bonds, but that won't last.”

Read More: Bright Spots in Search for Yield


Stop thinking of annuities as insurance. Insurance by definition shouldn’t have a positive expected value, noted David Blanchett, head of Morningstar’s retirement research. And annuities are, essentially, insurance that the purchaser won’t outlive their assets, he said: “If you run out of money, you fail.” Yet some clients (and advisors) seem to be looking at annuities as a way to increase their money. Forget it, Blanchett said. “Annuities will decrease wealth,” he said -- but they will also decrease the risk of running out of money.”

That said, advisors should have a holisitic perspective on how annuities contribute to the risk of a portfolio, Blanchett said. “Annuities become much more efficient when you think about it from a holistic perspective.”

Read More: 5 Ways to Boost Retirement Income


Build relationships now. Develop relationships in good times so they’re solid when the hard times come, said Fidelity Investments' O’Hanley. It’s a lesson he learned from Boston Police Chief Ed Davis, who, speaking at a recent Fidelity executive conference, said that working, training and developing strong relationships with other law enforcement agencies allowed them to work well together when a completely unexpected event, the Boston Marathon bombings, hit their community. 

O’Hanley saw the parallel for advisors. “Sometimes, when times are good, we don’t see the client much, but when things go bad, it’s a hard time to develop the relationship. It’s hard to talk to someone about the power of asset allocation when they see the markets declining before their eyes.” 

Read More: What Economic Trends Will Shape the Rest of 2013?


Consider longevity insurance. Two retirement specialists -- T. Rowe Price senior financial planner Christine Fahlund and Maria Bruno, senior analyst in Vanguard’s Investment Strategy Group -- recommended the annuity product for clients in good health and with a long life expectancy. “It’s an immature product, but the concept is very appealing,” Bruno said. “We don’t think they’re for everyone; it’s for someone who’s really concerned about longevity. ... But there’s a tradeoff: You’re giving up a liquid pool of assets for a guaranteed income stream.” One thing to keep in mind, cautioned Fahlund: If the client dies before the policy’s specified age, the money is gone.

Read More: Retirement Reality Check: Which Rules Still Matter?


Bond fears? Relax. Investors (and clients) seem to be disproportionately concerned about a bond crash, said JP Morgan’s Lester. “People assume it will be just like 2008, but in the bond market,” she said. But bonds are less volatile than equities. So unless your client is a 90 year old who is buying fixed income because she can’t afford any risk whatsoever -- in which case, Lester said, that’s a “different conversation” -- you can tell your clients to relax. “A balanced portfolio should be OK,” she said.

Read More: Bright Spots in Search for Yield


Think broadly. Fran Kinniry, a principal in Vanguard’s investment strategy group, says the firm’s multi-asset funds cast a wide net. “Our single-strategy funds have 90% of global capital,” he pointed out. There are a few things on his “steer clear” list, though: “things that are illiquid, have high costs, are hard to access or are tax inefficient.”


The Morningstar style box of the future. The traditional style box no longer cuts it, said Morningstar's Burns. So what will Morningstar’s style box of 2020 look like? It must factor in liquidity, correlation and currencies, he said: “It has to be more inclusive of what’s going on.”

Read More: Focus on ‘Whole-of-Life Portfolio,’ Says Morningstar Exec


Build trust. How should advisors handle boomer clients who desperately need yield but have no risk tolerance? ClearBridge Investments' Cohen, told one questioner that the most important thing an advisor can do is make sure client expectations are appropriate. Investments in dividend equities, for instance, “should be about income and not about asset value,” he said. But it’s important to develop a client’s trust over time, he advised: “The longer accounts are with you, the more tolerant they are.”


Mind the gap. Carl Richards, director of investor education for BAM Alliance, a CFP and an investment "artist" closed out the conference talking to advisors about how to help clients with the “behavior gap” -- the disconnect between what investors should do and what they actually do. “When clients are paying attention to noise, we call it dumb. When advisors do it, we call it research,” Richards said. "We spend all this time talking about the one thing we have no control over: the market." 

Scott Wenger, Rachel F. Elson and Kris Frieswick contributed reporting.

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