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Kinnel's Halftime Report From the Conference

FundInvestor editor Russ Kinnel recaps the discussion on the phony active-passive debate, GMO's dire predictions and current allocations, and why emerging markets may be the best pocket of value.


Russ Kinnel: We are at the halfway point of the Morningstar Investment Conference, and here are a few of the highlights I've noticed.

We had a really good discussion on active and passive, and I was happy because it confirmed my views that what really matters is low costs, sound strategy, and good stewardship. If you've got all those ingredients, you're in good shape whether you choose active or passive.

Rob Lovelace [of American Funds] asked the crowd how many of you have active and passive funds, and nearly everyone raised their hands. I own them, too, and I think it's in a way a phony debate.

On another less-happy subject, we heard from Jeremy Grantham of GMO, who had a fairly dire view of the world. He says we have a growing stock market bubble. In his view, it's not yet peaked. It will keep going up, but then when it collapses, it's going to be brutal.

But even though that's a grim view, it's worth looking at how GMO actually puts that into practice. If you look at what they actually invest in, their allocation portfolio, GMO Global Asset Allocation, has 15% long U.S. stocks, 45% long foreign stocks, 8% long bonds, 21% other, and the rest in cash. So, even when they're feeling a little more bearish, that means they're dialing down their exposure; it doesn't mean they're getting out. I think that's worth keeping in mind. Even when you hear these things, you don't want to get out; you don't want to just get into cash. No one times these things that well, and there's a huge opportunity cost of just going into cash.

Finally, I'd also mention we heard from David Kelly of JPMorgan, and one thing he shared in common with Jeremy Grantham was that they both thought emerging-markets equities are the best place to be. Otherwise, Kelly is much more bullish, but I thought that was interesting. Here's one thing both could agree on: Emerging-markets stocks are cheap, which is not something everyone out there is saying. And I think it's at least worth investigating when you have two really different speakers come to the same conclusion.

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