Morningstar Conference (2016)

Morningstar Investment Conference (2016)

“I see investing as the responsible act of the broad middle class, yet there’s still so many people we don’t touch today.” — Don Phillips, Morningstar

The annual shareholder meeting of Berkshire Hathaway has been called the Woodstock of capitalism, drawing tens of thousands of investors from all over the world.

I think the Morningstar Investment Conference might be “bigger” than the annual pilgrimage to Omaha.

Really? Yes, really. On a per capita basis, comparing the number of investors in Omaha versus the over 2000 advisors and practitioners in Chicago, the Morningstar Investment Conference, or #MICUS, might be a bigger “show.” Before you scoff, consider the population of registered advisors and representatives vs. how many attend. Morningstar puts on an effective event and while you’re scratching your head over the per capita comparison, don’t forget there’s an admission price for the Chicago program.

Make no mistake. Don Phillips and the Morningstar gang throw one heckuva party. We’re reminded about rampant fallacies with respect to passive vs. active investing, a growing discovery and emphasis on sustainability, the mistaken generalizations about advisors vs. registered reps, the new DOL fiduciary regulations and a litany of topics worthy of consideration and discussion.

  • “Supporting responsible investing is actually more closely related to behavior modification.” — Don Phillips
  • We’ve been fans of the Morningstar MOAT Fund for some time. Microsoft’s acquisition of LinkedIn (LNKD) provides quite a boost to the fund’s value in recent days. The merits of LinkedIn — and investment thesis — were covered by Morningstar’s Elizabeth Collins during an early panel session.
  • Best Ideas: Biogen (BIIB) and Williams-Sonoma (WSM). (Elizabeth Collins)
  • “Global growth over last four years has been slower … but it’s actually closer to long-term norms.” Prevalent themes: persistent strong U.S. dollar, U.S. treasury yields not justified and some scattered opportunities in emerging markets. (Michael Hasenstab, Franklin Templeton)
  • “Investors should not use a shot gun approach with respect to emerging markets. Use a rifle instead.” (Hasenstab)
  • Reminiscent of a couple of previous Morningstar conferences, Bill Bernstein served as this year’s “Grumpy Old Man” but he seems to agree with many of us on many issues. But he’s a delightful curmudgeon.
  • “The case for index and passive investing has been dramatically overstated.” (Phillips)
  • “Alternative funds are not an investment. They are a compensation scheme.” (Bernstein) [Told you …]
  • What hasn’t been overstated? The cleavage between high-cost and low-cost. (Phillips, Bernstein)
  • “I pride myself on not knowing what stocks are in my portfolios. I’m a Quant.” (Cliff Asness, AQR)
  • I respect and enjoy the work of Rob Arnott (Research Affiliates) and Cliff Asness (AQR). But watching them debate like sumo wrestlers trying to give each other a wedgie in a cage match on the head of a pin is not my favorite post-breakfast activity. I’m glad they believe in “Tin Cup”, grant permission for us to “sin a little” with asset allocation and speculation and I now have a greater appreciation for Smart/Strategic Beta and I’m thankful that at it’s core — we have been doing a lot of the factor-based opportunity stuff for a long time. But most of all, I’m grateful for the elegant simplicity of our methods. It’s a powerful reminder about Occam’s Razor.

(Continuing with our regularly scheduled programming and weekly update …)

MANIFEST 40 Updates

  • 9. Cisco Systems (CSCO)
  • 10. Qualcomm (QCOM)
  • 12. Walgreen Boots (WBA)
  • 37. CVS Health (CVS)
  • 40. LKQ Corp (LKQ)

Round Table Stocks: Cisco Systems (CSCO), CVS Health (CVS), Gentex (GNTX), Inteliquent (IQNT), ITC Holdings (ITC), LKQ Corp (LKQ), Neustar (NSR), Qualcomm (QCOM), Synaptics (SYNA)

Results, Remarks & References

Companies of Interest: Value Line (6/17/2016)

The average Value Line low total return forecast for the companies in this week’s update batch is 5.6% vs. 5.5% for the Value Line 1700 ($VLE).

Materially Stronger: Infinera (INFN), Drew Industries (DW)

Materially Weaker: American Movil (AMX), Synaptics (SYNA), Titan (TWI), Dish Network (DISH)

Discontinued: Time Warner Cable (TWC), Cleco (CNL), Fuel Systems Solutions (FSYS)

Coverage Initiated/Restored:

Market Barometers

Value Line Low Total Return (VLLTR) Forecast. The long-term low total return forecast for the 1700 companies featured in the Value Line Investment Survey is 5.6%, unchanged from 5.6% last week. For context, this indicator has ranged from low single digits (when stocks are generally overvalued) to approximately 20% when stocks are in the teeth of bear markets like 2008-2009.


Guggenheim has reinstated the S&P Small- and Mid-Cap equally-weighted funds: EWSC and EWMC

For a complete list of Guggenheim ETFs, see:

Market Barometers (Continued)

In honor of this week’s Morningstar Investment Conference in Chicago, their weekly determination of stock prices in general vs. the “fair value” for the overall stock market.

Mstar market fair value 20160615

Stocks to Study (6/17/2016)

  • LKQ Corp (LKQ) — Highest MANIFEST Rank
  • Neustar (NSR) — Highest Low Return Forecast (VL)
  • Borg Warner (BWA) — Lowest P/FV (Morningstar)
  • Arris Group (ARRS) —Lowest P/FV (S&P)
  • China Auto Systems (CAAS) — Best 1-Yr Outlook (ACE)
  • Juniper Networks (JNPR) — Best 1-Yr Outlook (S&P)
  • Verifone Systems (PAY) — Best 1-Yr Outlook (GS)

The Long & Short of This Week’s Update Batch

The Long & Short. (June 17, 2016) Projected Annual Return (PAR): Long term return forecast based on fundamental analysis and five year time horizon. Quality Ranking: Percentile ranking of composite that includes financial strength, earnings stability and relative growth & profitability. VL Low Total Return (VLLTR): Low total return forecast based on 3-5 year price targets via Value Line Investment Survey. Morningstar P/FV: Ratio of current price to fundamentally-based fair value via S&P P/FV: Current price-to-fair value ratio via Standard & Poor’s. 1-Year ACE Outlook: Total return forecast based on analyst consensus estimates for 1-year target price combined with current yield. The data is ranked (descending order) based on this criterion. 1-Year S&P Outlook: 1-year total return forecast based on S&P 1-year price target. 1-Yr “GS” Outlook: 1-year total return forecast based on most recent price target issued by Goldman Sachs.

Gone Gold: PRIMECAP Growth (POAGX)

It’s been nearly five years since Morningstar launched the medalist designations for mutual funds. This month, we cull the gold medal funds that also have a 5-star rating seeking long-term leaders.

It’s been nearly five years since Morningstar launched the medalist designations for mutual funds. The intent is to maintain a long term perspective and identify top tier investment opportunities. Morningstar Medalists are funds that have been assigned a Morningstar Analyst Rating of Bronze, Silver, or Gold, meaning that those are the funds that we think are likely to outperform their category peer groups and appropriate benchmarks on a risk-adjusted basis over market cycles of at least five years. This month, we cull the gold medal funds that also have a 5-star rating seeking long-term leaders, candidates for fund investors and as always, potential sources of actionable and investable stock opportunities.

PRIMECAP Odyssey Aggressive Growth (POAGX): Long-Term Performance. This actively managed fund has beaten the market by 4.5% (percentage points) over the trailing 10 years. The fund has achieved an absolute total return (annualized) of 11.4% during a period when the Wilshire 5000 advanced 6.9%. Although closed to new investors, as always, this type of outperformance may provide some study candidates. The fund appears to select carefully and has very low turnover.

Winner: PRIMECAP Agg Growth (POAGX)

The PRIMECAP Odyssey Aggressive Growth Fund has beaten the total stock market benchmark (Wilshire 5000) by +4.5% annualized over the trailing ten years. The absolute return has been 11.4% — clearly top tier performance as the fund has beaten the benchmark in 9-of-the-last-11 years.

Portfolio turnover is 15%. It doesn’t get much lower than that for an equity fund specializing in smaller companies and deeper value situations. The fund managers act with conviction after considerable diligence that attempts to identify companies with differentiated potential that exceeds Wall Street expectations.

The expense ratio is 0.62%, also an attractively low burden for fund investors and compares well to similar funds. But the fund is closed to new investors at the present — so it becomes a proving ground and source of stock study ideas because the fund managers are excruciatingly selective and any recent additions (or sales) from the portfolio is probably worth a closer look and further study.

$100 invested on 12/31/2004 had blossomed to $360.40 on 12/31/2015. For comparison, $100 invested in a Total Stock Market Index (VTSMX) was worth $217.10 on 12/31/2015. This is a rather dramatic reminder of the power of a 3-5% relative return over a period as short as ten years.

The fund’s largest holdings include: Abiomed (ABMD), Qiagen (QGEN), Sony (SNE), Seattle Genetics (SGEN), Royal Caribbean Cruiselines (RCL) and Nektar Therapeutics (NKTR). But more importantly, added during the 12/31/2015 update were new positions in Ruckus Wireless (RKUS), Hewlett Packard Enterprise (HPE) and Alphabet/Google (GOOG). Ruckus and HPE have advanced fairly dramatically but GOOG is still relatively near the 4Q2015 price levels. We’ll watch the 3Q 2016 update for potential ideas.

Funds: Back to Even?


One of my favorite news anchors gleefully read the card:

“Two-thirds of all mutual funds are at highs, reaching the levels not seen since the Great Recession.”

Equally accurate translation: “Over 60% of mutual funds have FINALLY reached the point where their 5-year returns are not negative.”

We’ve talked about this before. Most of us experienced “back to even” nearly three years ago.


Dave Ramsey: American Funds (AIVSX)

Via Twitter [on 5/17/2012], Dave Ramsey posed the following:

“I own a mutual fund with a 11.98% average return since 1934, 13.4% average over the last three years. Is your investment adviser too STUPID to find this?”

It’s not about STUPID. And this is a really good fund. The specific fund is American Funds ICA (AIVSX) and has — as Dave cited — been in operation since 1934, delivering solid results.

Be careful with averages. It’s better to measure performance of the fund using annualized returns — and going back over the last three years (thru 5/17/2012) — the annualized return for AIVSX is 12.8%. That sounds pretty good and it is — but the return on the S&P 500 (VFINX) over the same three years is 16.6%. So, AIVSX has lagged the S&P 500 by -3.8%/year for the trailing three year period.

We know better than to pass judgment on the basis of 1-year or 3-year periods and so does Dave. In fact, AIVSX outperformed the general stock market benchmark during 30 of its first 50 years of operation. An “outperformance accuracy of 60%” is exemplary. The won-loss record now stands at 43-35 (55.1%) over 78 years and performance has lagged for the last 28 years, denting the long-term record with a performance accuracy of 13-15 (46.4%) over more recent history.

We can look back at 78 years but many of us have a hard time wrapping our brains around that span. So we’ll take a closer look at three decades. Over the trailing 30-years, AIVSX has delivered an annualized return of 10.8% during a period when the S&P 500 advanced 9.9%. A relative return of +0.9%/year may not seem like much but the difference is significant. As the following graphics show, this relative return has been slipping in recent years but was bolstered by strong performance at the turn of the century.

Aivsx yr rets 20120517

Here’s a look at relative return (since 12/31/1982):

Aivsx rr 20120517

Small Differences in Returns/Expenses … Huge Leaps for the Long Term

As Dave often points out, constraining expenses and small differences in annualized returns can make a huge difference in long term results. As a case in point, 10.8% may not seem like that big of a difference vs. 9.9% over thirty years.

But $1000 grown at 10.8% over 30 years reaches a value of $21,687. That same $1000 invested in the S&P 500 (VFINX) and growing at 9.9% attains a value of $16,980. Most of us here like $21,687 better than $16,980.

Small incremental advantages can make massive differences from the long-term perspective. As another case in point, the investment club known as the Mutual Club of Detroit delivered 13.4% from 1941-2001. If 13.4% were achieved over the 30-year period cited, the $1000 grows to $42,354.

Make no mistake. AIVSX is a solid fund offering. Funds with a relative return of 0.9% are actually pretty rare.

An expense ratio of 0.61% and portfolio turnover of 28% place AIVSX in rare company among the alternatives. Our analysis of the holdings suggests a portfolio capable of generating 11.8% projected returns with an overall excellent quality rating. But that 5.75% front-end load is confiscatory and knocks 0.2%/year off the performance over those three decades — and we’ve shown that small differences matter. Perhaps Dave could use his considerable influence to persuade the industry to reduce those transaction costs … after all, this isn’t the 1980s and these types of loads have not tracked reductions seen in almost all areas of investment services.

No-load would be good too. There are a number of attractive alternatives to AIVSX these days as the team works on improving overall results. Funds like Fidelity Blue Chip Growth (FBGRX) with a return forecast of 14.5%, even better quality (vs. AIVSX) and Vanguard U.S. Growth (VWUSX) with its return forecast of 13.6% … and you’ll find that the holdings in these portfolios are not dramatically different than AIVSX.

AIVSX is in good standing at +0.9% over 30 years — but they’re not alone.

Aivsx perf map 20120517