Morningstar Advisor - August/September 2012 - (Page 7)

Letter From the Editor Muni University When it comes to the municipal-bond market, caution is the word. In our On Topic survey of more than 350 advisors (Page 10), 98.6% of respondents said that they’re either playing it safe in the muni market going forward or staying the course. Hardly anyone said that they’re looking to be more aggressive. After reading articles by analysts Miriam Sjoblom and Eric Jacobson for this issue’s Spotlight section, I’d say that these advisors have a clear-eyed view of the municipal-bond market. In “Lessons From the Muni-Bond Rebound” (Page 38), Sjoblom argues that technical factors, such as low supply, high demand from retail investors, direct purchases, are having a much greater impact on the muni market than fundamentals. Meanwhile, prices of munis are looking very expensive as yields have plummeted. That hasn’t stopped a massive flow of assets into muni-bond funds over the past year, as many funds were putting up double-digit returns. Add it all up, and Sjoblom says that it is a long shot that munis can keep up this torrid pace. “So, if you’ve loaded up on munis in recent months hoping for more of the same, you’re likely to be disappointed,” Sjoblom says. Jacobson has noticed another trend that should concern muni investors: The correlation between munis and U.S. Treasuries is heading back to pre-crisis levels (“Municipal-Bond Landscape Shifts,” Page 43). That has been a benefit to muni investors, but Jacobson says that this shift could very easily turn into a negative should Treasuries experience a sustained sell-off. “Holding a large allocation to municipals may have meant something very different over the past few years than it does today.” One of the things that makes the muni-bond market unique is that a large proportion of muni investors directly buy issues. This summer, Morningstar is launching coverage of individual munis. To give a glimpse of how Morningstar’s new team of muni-credit analysts approach the often-opaque muni market and research issuers, we asked them to look at two obligors and walk us through their analytical process. They chose the cities of San Antonio and Detroit as their examples (“A Tale of Two Cities,” Page 49). You can probably guess which city’s credit quality surpasses the other’s. Still, it’s an interesting take on the wide variety of factors that analysts must weigh when deciding the credit worthiness of municipalities. For this issue’s Morningstar Conversation, Gideon Magnus, who is Morningstar’s director of quantitative research, wanted to talk about money (“Unraveling the Mysteries of Money,” Page 52), so he invited two experts to Morningstar’s auditorium: University of Chicago professors John Cochrane and Harald Uhlig. They discuss what money is and how it interacts with monetary and fiscal policies during times of economic crises. Finally, you’ll want to read about how Morningstar researcher James Xiong was able to predict the end of the Chinese art bubble (“The Chinese Art Market and the Origin of Bubbles,” Page 64). The model he used, by the way, was also able to predict the end of dozens of other market bubbles. Thank you for reading this issue. If you have any feedback, please let me know via Twitter. Jerry Kerns Follow Jerry on Twitter @ jerrykerns 7

Table of Contents for the Digital Edition of Morningstar Advisor - August/September 2012

Morningstar Advisor - August/September 2012
Letter From the Editor
How Much of the Behavior Gap Is Your Fault?
What’s Your View of the Muni-Bond Market?
A Balanced Life
How to Get to Know EMMA
A Strong, Robust Fund Business
Dividend Investing Abroad
Four Picks for the Present
Investment Briefs
Fund Expenses Through the Decades
Autos on Comeback Track
Lessons From the Muni-Bond Rebound
Municipal-Bond Landscape Shifts
Municipal Bonds 101
A Tale of Two Cities
Unraveling the Mysteries of Money
Small Companies Mean the World to Him
The Chinese Art Market and the Origin of Bubbles
The Myth of the Dumb Investor
Stocks That Can Stand the Heat
Our Favorite Mutual Funds
50 Most Popular ETFs
Undervalued Stocks With Wide Moats
The War on Savers

Morningstar Advisor - August/September 2012