Morningstar Advisor - August/September 2010 - 79

In the Loop

New at Morningstar
New Index Follows StockInvestor’s Lead; PowerShares ETF to Use Index as Benchmark

2010 Morningstar Investment Conference: Gundlach, McNabb, and Reynolds Speak Up

June’s Morningstar Investment Conference featured more than its fair share of opinionated speakers, and the conference’s keynote speakers set the tone. DoubleLine’s Jeffrey Gundlach used his address on June 23 to explore the potentially devastating imbalance between the United States’ gross domestic product and its projected outlays. While some analysts have suggested solutions such as increasing GDP growth, lowering interest in government debt, or a transfer of foreign capital, Gundlach argued that each of these is either unrealistic or has already been done. Instead, he said, the country must prepare for fundamental and wholesale legislative solutions. “Policy change must happen,” he said. Vanguard president and CEO Bill McNabb dedicated June 24’s keynote presentation to urging attendees to consider the many reasons that restoring trust—among and between regulators, financial professionals, and investors—is critical to renewing economic prosperity. “Trust is absolutely essential in terms of how the currency system works, in how banking works, how the capital markets work,” he said.

Admonishing many of the financial industry’s practices, standards, and opaque investment vehicles blamed for contributing to the economic downswing, McNabb called for vastly improved simplicity, transparency, and candor. “If we can’t explain an investment to one of our clients in five minutes or less, we probably shouldn’t be putting that investment into their portfolio,” he said. Bob Reynolds’ wide-ranging conversation with Morningstar’s Don Phillips on June 24 covered 401(k)s, potential solutions to the United States’ obligations to retirees, and pending reform mandates from legislators. A veteran of the 401(k) platform, the Putnam CEO said the 401(k)’s greatest attribute is its adaptability, a trait he expects will prove critics wrong. “It’s up to industry leaders to take a step forward and say, ‘Wait a minute. The system’s not broken; it can be fixed,’ ” he said. Expanding the number of Americans investing in 401(k)s would help the country solve another major dilemma: how to fulfill obligations to retirees. Calling the looming reckoning with Social Security and Medicare “an easy problem to fix,” Reynolds said he expects major reforms to arrive next year. The next Morningstar Investment Conference is scheduled for June 8–10, 2011.

Morningstar has created the Morningstar StockInvestor Core Index, a diversified portfolio of stocks from the Tortoise and Hare portfolios featured in the popular Morningstar StockInvestor newsletter. The Tortoise and Hare portfolios comprise high-quality companies that are trading at sharp discounts to what Morningstar’s equity research analysts believe they’re worth. Invesco PowerShares Capital Management LLC has licensed the StockInvestor Core Index to serve as the new benchmark for the PowerShares Value Line Industry Rotation Portfolio ETF. The ETF has been renamed the PowerShares Morningstar StockInvestor Core Portfolio PYH to reflect the benchmark change. “The new StockInvestor Core Index harnesses the proprietary research and analyst expertise of Morningstar’s equity research team,” said Sanjay Arya, director of Morningstar Indexes. “This index spotlights Morningstar’s disciplined approach to investing and stock-picking, using fundamental analysis and the Morningstar Economic Moat Rating to determine whether a company’s stock price is fairly valued.” The StockInvestor Core Index holds almost all of the stocks from StockInvestor’s Tortoise and Hare portfolios. These portfolios focus on stocks of relatively stable, high-quality businesses that are well entrenched in the various markets in which they operate. Companies in the Tortoise and Hare portfolios span an array of industries and numerous geographic locales. When coming up with the ratings critical in selecting stocks for the portfolios, Morningstar’s equity analysts conduct extensive research on industry dynamics, competitive positions, and the sustainability of any advantages that the businesses have.

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Morningstar Advisor - August/September 2010

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