Thoughts on the Morningstar Conference

My thoughts on the annual Morningstar Conference.

Thoughts on that Bill Gross Speech:
I was really interested to hear what Bill Gross had to say after the well-publicized management shake-up at PIMCO, the giant fund manager, earlier this year.

Most of the major media outlets covered the speech by the Bond King (see this one from CNN Money).  The stories mainly focused on the odd Manchurian Candidate references to the media, the self comparisons to Justin Bieber and of course those sunglasses he wore to start his talk (hat tip @michaelkitces):

I had a different takeaway once Gross finally got into the meat of his speech. He shared the three main reasons he thought PIMCO has had such a successful 30+ year run in the investment business.  Gross started out by saying his structural template was much like Ray Dalio’s at Bridgewater Associates and Warren Buffett’s at Berkshire Hathaway.

But then he gave the 3 structural elements: (1) Using a total return framework (price & income) for bonds, (2) Sticking with intermediate maturity bonds and (3) Selling insurance when it makes sense.

While I’m sure these strategic moves have had a large impact on investment performance over the years, Gross failed to mention anything at all about PIMCO’s overarching philosophy, organizational culture or the firm’s employees.  These are the areas that Dalio and Buffett harp on all the time when they talk about their success stories.

Gross seemed absolutely miffed (and wasn’t shy about saying it) that his fund has had $50 billion in redemptions over the past year yet didn’t seem to understand why that is.

He’s obviously an extremely successful guy considering he pulls in hundreds of millions of dollars a year and has built one of the largest funds in the industry.  One of the problems with too much success is that it can go to your head.

Gross doesn’t exactly need advice from me, but my feeling is there’s more to running an investment shop than a solid portfolio strategy.  Client communication, the right people in the firm and proper organizational culture are also very important.  I thought Gross missed a golden opportunity to show some humility and highlight these aspects of his firms’s success.

Thoughts on Investor Sentiment:
Whenever I attend an investment conference, I’m generally more interested in the mood of the attendees and speakers than the actual investment ideas being presented.  Mainly this is because fund managers will rarely share balanced views of their own portfolio, strategy or investment space when they have potential clients sitting in the audience.

But it’s also because the markets are shaped by human emotions and behavior.  While it’s impossible to use with any certainty it’s interesting to consider what the possibilities are based on investor sentiment.

If there was one overarching theme I picked up on from talking to investors and listening to fund managers discuss the markets it’s that just about everyone has lower expectations about financial market returns in the years ahead.

In fact, most were in agreement that we should expect lower stock market returns over the next decade in U.S. markets after the huge run-up in prices over the past few years.

Nothing ever happens exactly according to consensus but this could mean a few things:

(a) Lowered expectations could keep this market from getting out of control and turning into another bubble.

(b) The market could continue to climb the wall of worry since most investors still aren’t fully on board with the bull market.

(c) Maybe all of these investors are just giving themselves an out in case things turn bad but they’re really all fulling invested right now.  Sentiment measures are so hard to use because it’s generally watch what they do not what they say.

(d) All or none of these scenarios could be true and we could, and probably will, see a completely different result.  This is why the markets are so difficult to predict.  You’re forecasting emotions and creating decisions trees based on those ever-changing emotions.

This is why a sustainable long-term process is so much more important than focusing on short-term outcomes.

Now for some conference awards…

Most interesting stat:  Michael Kitces, financial planner extraordinaire, shared that the 4% withdrawal rate rule of thumb for taking retirement distributions has worked for all 30 year historical periods tested.  That includes using the peak right before the Great Depression as a starting point.  This stat surprised even some of his fellow panelists. Read here for more on Kitces’ research.

Most overused buzzword (non-smart beta category):  Unconstrained.  Since just about everyone is in full agreement on the possibility of lower returns going forward there were plenty of go-anywhere/unconstrained/best ideas/create-returns-in-any-environment funds being sold to fill that potential gap.  We’ll see how these funds do under real world market conditions.  So far not many have proven their worth.

Best speech:  Hands down the best speech of the entire conference was given by Cliff Asness of AQR Capital Managment.  His talk on quantitative investing, how he got started in the business, the efficient market hypothesis (read more here) and how to think about the stock market was fascinating.  He was funny, told some great stories and was interesting (which is not an easy combination to find at an investor conference). 

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