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Fund Times

Fund Times: Gross, Sauter Speak at Morningstar Conference

Plus, Fidelity manager changes and more.

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At the 17th annual Morningstar Investment Conference, investors came together in Chicago for three days this week to share insights and discuss their current views on the economy, the markets, and mutual funds. Below are highlights.

Bond king Bill Gross said that "a mild reversal in secular thinking" has taken place, and that the "struggle between disinflation and reinflation, globalization and high-debt countries" must be balanced out. And yet, he continued, "We think that disinflation ultimately wins here." Thus, he sees "a 10-year (U.S. Treasury) rate of 3.5% to 4.5%," which contrasts with most rivals, who believe that interest rates are headed higher.

There was also lively debate between PIMCO's Rob Arnott, creator of a new twist on traditional indexing, and Gus Sauter, chief investment officer of Vanguard and former manager of the world's largest index mutual fund,  Vanguard S&P 500 Index (VFINX). Arnott proposes weighting indexes by sales, cash flows, dollar dividends paid, and book value, and equally weighing between the four.

During a panel discussion, Arnott stated, "This isn’t a debate about the merits or demerits of indexing or nonindexing. You have low cost, low trading costs, and you end up beating the average active manager." He went on to say that the discussion was a debate about market-cap weighting. "The problems I have with cap-weighting are…cap-weighting will overweight every stock above fair value and underweight stocks below fair value. That will drag (down) your return."

Sauter countered by pointing out that there is an "implicit assumption that big is bad. GE is a collection of smaller companies. Just saying that you should underweight GE is an active bet. It creates a factor, a smaller-cap and value bias. They do well at some times, and poor at other times. A combination of indexes can get to the same result as (Arnott's) fundamental indexes. It's the fundamentalist that determines what is value and (what is) growth." This debate isn't dying out any time soon.

Finally, Whit Gardner of  Chesapeake Core Growth (CHCGX), David Corkins of  Janus Mercury (JAMRX), and Robert Hagstrom of  Legg Mason Growth (LMGTX) made the case for growth investing. The consensus among the three panelists was that growth stocks have fallen to attractive valuations. In fact, it was a sentiment shared by others at the conference, including  T. Rowe Price Equity Income's Brian Rogers. Look for more on this topic in Monday's Fund Spy column.

Manager Changes at Fidelity
Lawrence Rakers replaced Louis Salemy at  Fidelity Advisor Balanced (FAIGX). We think this move is justifiable; Salemy had a solid bear-market showing but got too many big bets wrong--media and telecom, in particular. Rakers, who also runs  Fidelity Balanced (FBALX), may institute a pretty significant style shift, but he's an upgrade.

Victor Thay will replace Salemy on  Fidelity Growth & Income II (FGRTX). Thay previously ran  Fidelity Convertible Securities (FCVSX). Thomas Soviero will succeed Thay on the Convertible fund, and Soviero will continue managing  Fidelity Leveraged Company Stock (FLVCX). In spite of the success that the Convertible fund has had, we're getting tired of all of the manager changes.

Fidelity veteran Richard Fentin is taking over  Fidelity Value Strategies (FSLSX) from fellow longtime manager Harris Leviton. Fentin will continue managing  Fidelity Value (FDVLX). Despite Value's recently improved performance, we're lukewarm on Fentin. And, given that Value has nearly $11 billion in assets as of May 31, 2005, we're not thrilled that Fidelity is giving Fentin another $2 billion in Value Strategies' portfolio (a number that doesn't include the money in the variable annuity version of the fund) to run.

 Fidelity Aggressive Growth (FDEGX) has replaced manager Rajiv Kaul with Steven Calhoun, manager of  Fidelity Mid-Cap Stock (FMCSX) since March 2005. Kaul crafted quite a volatile portfolio over his short tenure running Aggressive Growth, with insufficient upside. However, Calhoun doesn't have a very long record, either. We think investors have better options elsewhere.

Legg Mason and Citigroup Swap Businesses
Citigroup and Legg Mason Inc. have agreed to exchange part of their businesses. Under terms of the deal, Legg Mason would essentially gain all of Citigroup's asset management business, which includes 80 mutual funds under the Smith Barney name containing nearly $120 billion in assets, and Citigroup would get Legg Mason's 1,500-broker network. The firms are removing an apparent conflict of interest by disaggregating sales and management.

Vanguard Reopens Shrinking Fund
In typical timely fashion,  Vanguard Convertible Securities (VCVSX) reopened to all investors on June 23, 2005. The fund has had a tough 2005 thus far, which has led to a mass investor exodus, to the tune of 40% of assets. And yet performance hasn't soured that much. For the year to date through June 22, 2005, the fund lost 2.85%, which ranks near the mid-point of its typical convertible fund's peer. Vanguard also upped the minimum investment from $3,000 to $10,000, and also slapped a 1% redemption fee on the fund for assets held less than one year.

Dieter Bardy does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.