Morningstar Advisor - June/July 2010 - 9

Letter From the Editor

Bonds’ Glow Fades
Hit with huge losses in 2008, mutual-fund investors have been placing their assets into fixed-income funds in record amounts. It’s an understandable reaction. Investors were reawakened to the fact that investing in the stock market is risky—that markets don’t always go up, even over the long periods of time, and that equity prices are volatile. That bond indexes handedly outperformed stock indexes over the decade only hammered home the point. Bonds might be boring, but after 2008, boring is where many investors want to be. Of course, investors specialize in fighting last year’s battles. The factors that made bonds attractive investments before and during the financial crisis are disappearing. Although investors may have had legitimate reasons to have dialed down their stock allocations in favor of fixed income, piling into bonds and counting on them to keep up their staid, winning ways has the look and feel of a classic case of bad investor timing. Veteran Morningstar fixed-income analyst Miriam Sjoblom is very concerned. In this issue’s Spotlight (“The Game Is Up,” Page 30), she argues that bond investors are in a very tight spot. Income is a problem because of low yield levels, and price appreciation would become price depreciation if (or when?) interest rates rise. Sjoblom reports that bond-fund managers are wrestling with what to do, too. Those managers who are uncertain about the economy’s recovery (she calls this camp “The Gross,” after the PIMCO manager) are trading credit risk for other risks, such as interest-rate risk. Those who are more confident about the economy (“The Fuss” camp, named after the Loomis Sayles manager) are essentially doing the opposite—taking credit risk over interest-rate risk. Both approaches have merits. Which camp is right remains to be seen, but the important point today is that advisors should be aware of the trade-offs that their clients’ bond managers are making. Are they in The Gross camp or The Fuss camp? If the bond markets do become more volatile, opportunities may arise for “bond-pickers” of individual issues. In our poll in On Topic (Page 10), 60% of advisors say their clients invest in individual bonds. Morningstar’s equity research group recently started rating the credit quality of companies that issue bonds. The team is also judging whether individual issues are good investments. In Spotlight, Haywood Kelly, who leads the research group, unveils a handful of bonds that are offering good yields relative to their credit risk (“Bonds We Like,” Page 37). It’s an exciting new area for Morningstar that will help investors make better bond investments. In the April/May issue (“Markowitz 2.0”), Stanford professor Sam Savage and Morningstar researcher Paul D. Kaplan wrote about their new scenario-based approach to mean-variance optimization. They portrayed their work as bringing MVO into the 21st century. We wondered what the inventor of portfolio optimization thought of their effort, so we invited Nobel Prize winner Harry Markowitz to join the Savage and Kaplan for a Morningstar Conversation (“What Does Harry Markowitz Think?” Page 43). Markowitz was complimentary, but was especially fond of the name of a tool Savage built to show how the model works. “How can I refuse anything to a man who has named an important contribution the Markowitzatron.” Finally, we made some changes to the Investments a la Carte section (“Four Picks for the Present,” Page 57). We changed the section’s layout, and the graphics for each pick present more-relevant information. Let us know what you think at magazine_editor@ morningstar.com.

Jerry Kerns

MorningstarAdvisor.com

9


http://www.MorningstarAdvisor.com

Morningstar Advisor - June/July 2010

Table of Contents for the Digital Edition of Morningstar Advisor - June/July 2010

Morningstar Advisor - June/July 2010
Contents
New on MorningstarAdvisor.com
Contributors
Letter From the Editor
What Risks to Bonds Are You Most Concerned About?
The Irrational Lizard Brain
Investment Briefs
The Problem With Financial Plans
Preparing for Turbulance
Different Models, Similar Results
The Game Is Up
Some People Are Bullish on Bonds
Bonds We Like
What Does Harry Markowitz Think?
Escape From the Pack
Four Picks for the Present
Rising Rates Could Affect Equities, Too
The Banking Sector Knocks on Wood
Back to Basics
On the Prowl for Smooth Operators
Mutual Fund Analyst Picks
50 Most Popular ETFs
Undervalued Stocks With Wide Moats
New at Morningstar
R-E-S-P-E-C-T
Morningstar Advisor - June/July 2010 - Morningstar Advisor - June/July 2010
Morningstar Advisor - June/July 2010 - Cover2
Morningstar Advisor - June/July 2010 - 1
Morningstar Advisor - June/July 2010 - 2
Morningstar Advisor - June/July 2010 - Contents
Morningstar Advisor - June/July 2010 - 4
Morningstar Advisor - June/July 2010 - 5
Morningstar Advisor - June/July 2010 - New on MorningstarAdvisor.com
Morningstar Advisor - June/July 2010 - 7
Morningstar Advisor - June/July 2010 - Contributors
Morningstar Advisor - June/July 2010 - Letter From the Editor
Morningstar Advisor - June/July 2010 - What Risks to Bonds Are You Most Concerned About?
Morningstar Advisor - June/July 2010 - 11
Morningstar Advisor - June/July 2010 - 12
Morningstar Advisor - June/July 2010 - 13
Morningstar Advisor - June/July 2010 - The Irrational Lizard Brain
Morningstar Advisor - June/July 2010 - 15
Morningstar Advisor - June/July 2010 - Investment Briefs
Morningstar Advisor - June/July 2010 - 17
Morningstar Advisor - June/July 2010 - The Problem With Financial Plans
Morningstar Advisor - June/July 2010 - 19
Morningstar Advisor - June/July 2010 - 20
Morningstar Advisor - June/July 2010 - Preparing for Turbulance
Morningstar Advisor - June/July 2010 - 22
Morningstar Advisor - June/July 2010 - 23
Morningstar Advisor - June/July 2010 - Different Models, Similar Results
Morningstar Advisor - June/July 2010 - 25
Morningstar Advisor - June/July 2010 - 26
Morningstar Advisor - June/July 2010 - 27
Morningstar Advisor - June/July 2010 - 28
Morningstar Advisor - June/July 2010 - 29
Morningstar Advisor - June/July 2010 - The Game Is Up
Morningstar Advisor - June/July 2010 - 31
Morningstar Advisor - June/July 2010 - 32
Morningstar Advisor - June/July 2010 - 32a
Morningstar Advisor - June/July 2010 - 32b
Morningstar Advisor - June/July 2010 - 32c
Morningstar Advisor - June/July 2010 - 32d
Morningstar Advisor - June/July 2010 - 33
Morningstar Advisor - June/July 2010 - Some People Are Bullish on Bonds
Morningstar Advisor - June/July 2010 - 35
Morningstar Advisor - June/July 2010 - 36
Morningstar Advisor - June/July 2010 - Bonds We Like
Morningstar Advisor - June/July 2010 - 38
Morningstar Advisor - June/July 2010 - 39
Morningstar Advisor - June/July 2010 - 40
Morningstar Advisor - June/July 2010 - 41
Morningstar Advisor - June/July 2010 - 42
Morningstar Advisor - June/July 2010 - What Does Harry Markowitz Think?
Morningstar Advisor - June/July 2010 - 44
Morningstar Advisor - June/July 2010 - 45
Morningstar Advisor - June/July 2010 - 46
Morningstar Advisor - June/July 2010 - 47
Morningstar Advisor - June/July 2010 - 48
Morningstar Advisor - June/July 2010 - 49
Morningstar Advisor - June/July 2010 - 50
Morningstar Advisor - June/July 2010 - 51
Morningstar Advisor - June/July 2010 - Escape From the Pack
Morningstar Advisor - June/July 2010 - 53
Morningstar Advisor - June/July 2010 - 54
Morningstar Advisor - June/July 2010 - 55
Morningstar Advisor - June/July 2010 - 56
Morningstar Advisor - June/July 2010 - Four Picks for the Present
Morningstar Advisor - June/July 2010 - 58
Morningstar Advisor - June/July 2010 - 59
Morningstar Advisor - June/July 2010 - Rising Rates Could Affect Equities, Too
Morningstar Advisor - June/July 2010 - 61
Morningstar Advisor - June/July 2010 - 62
Morningstar Advisor - June/July 2010 - The Banking Sector Knocks on Wood
Morningstar Advisor - June/July 2010 - 64
Morningstar Advisor - June/July 2010 - 65
Morningstar Advisor - June/July 2010 - Back to Basics
Morningstar Advisor - June/July 2010 - 67
Morningstar Advisor - June/July 2010 - On the Prowl for Smooth Operators
Morningstar Advisor - June/July 2010 - 69
Morningstar Advisor - June/July 2010 - Mutual Fund Analyst Picks
Morningstar Advisor - June/July 2010 - 71
Morningstar Advisor - June/July 2010 - 72
Morningstar Advisor - June/July 2010 - 73
Morningstar Advisor - June/July 2010 - 50 Most Popular ETFs
Morningstar Advisor - June/July 2010 - 75
Morningstar Advisor - June/July 2010 - Undervalued Stocks With Wide Moats
Morningstar Advisor - June/July 2010 - 77
Morningstar Advisor - June/July 2010 - 78
Morningstar Advisor - June/July 2010 - New at Morningstar
Morningstar Advisor - June/July 2010 - R-E-S-P-E-C-T
Morningstar Advisor - June/July 2010 - Cover3
Morningstar Advisor - June/July 2010 - Cover4
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