June 2022 IssueLong scroll reading

A Return To Normalcy: MICUS Chicago 2022

By Charles Boccadoro

Morningstar held its annual investment conference [Morningstar Investment Conference US (MICUS) 2022] in Chicago during the beautiful month of May, beginning on the month’s 16th day.

And with it came the return of …

  • The expansive venue of Chicago’s McCormick Place … “the largest and most flexible use convention center in North America.”
  • In-person attendees of 1500, plus another 500 virtual participants.
  • In-person appearances of top money managers, like T. Rowe Price’s David Giroux and AQR’s Cliff Asness.
  • The massive keynote luncheon, which included large round tables with white table clothes and an army of waiters in black vests.
  • Dozens of mutual fund house kiosks with sharply dressed staffers answering questions and handing out promotional material and trinkets.
  • Roof-top social gatherings at venues like the Chicago Athletic Club, with lots of smiles and chatter.
  • The traditional press dinner where Morningstar executives and analysts give generous amounts of time answering questions and providing industry perspectives.

Gone were the masks and mandatory temperature testing before entering the venue.

It was a welcomed return to normalcy post COVID restrictions in the US.

Active Personalization
This year marked Kunal Kapoor’s 25th conference as a Morningstar employee; the last five as CEO. (See “A Leap of Faith – MICUS Chicago 2021.”) He described the conference: advisor focused, investing centric, and no pay-to-play. Its recurring theme: Morningstar’s desire to help advisors personalize their practices at scale, particularly with the growing younger investors aged 18-35, which represent 30% of its website’s visitors. “At Morningstar we believe that active personalization is the new active investing.”

Kapoor’s approach comprises three elements: returns (aka winning strategies), risk (aka personalized portfolios), and sustainability (aka investable world).

“Let’s face it, without good results no amount of personalization is going to matter,” he stated with brutal honesty. He then highlighted the how funds that receive Morningstar’s qualitative, analyst-rated gold, silver, and bronze medals outperform their peers. He doubled down on importance of these analyst ratings as well as its algorithmic quantitative surrogate ratings in helping advisors sort through the ever-expanding product offerings, especially in “avoiding bad apples.” He noted that gold-rated funds have nearly 100 times more advisor and investor engagement than non-rated and negatively rated funds.

Multi-Asset Oysters
The opening keynote session, entitled “The World Is Your Oyster,” contrasted multi-asset investing styles between David Giroux, manager of T. Rowe Price Capital Appreciation (PRWCX) and BlackRock’s Kate Moore, part of the team behind BlackRock Global Allocation (MALOX). Morningstar awards PRWCX a gold medal and describes it as “one of the best in the business,” while MALOX maintains a silver metal. PRWCX is also an MFO Great Owl and Honor Roll fund. Since the beginning of the current bull market back in March 2009, some 13 years ago, all of which under Giroux’s guidance, the fund has rewarded its investors with 14.2% per year. That kind of performance turns $10,000 into $60,000. Its outperformance remains remarkably consistent, as evidenced in Ferguson and rolling average ratings available in MFO Premium.

Giroux does not see a recession coming, certainly not a severe one, but it’s probably already priced in. He believes recessions are rare, but recession predictions are constant. He keeps things simple, takes a 3-5 year view, using a 90% company fundamentals and 10% macro economic approach. He believes macro views can change rapidly and are usually wrong, so taking the opposing view has served the fund well. “Our mantra is we zig when the markets zag.”

He likes stable growth at reasonable price (GARP) stocks. And he likes levered-loans in fixed income part of portfolio. Treasuries are starting to pay decent yields. The fund used the current correction to reduce its cash from 12% to 3% and go overweight equities. If equities decline further, he will add more, but does not see a systemic risk in markets like 2008. If there is not a recession, like there was not when predicted in 2011 and 2018, the portfolio is now well positioned to grow.

Giroux believes deploying capital well is the most important responsibility of company leadership and ultimately drives stock price. He recently authored a new book, entitled “Capital Allocation: Principles, Strategies, and Processes for Creating Long-Term Shareholder Value.”

In the press room session, he stated GE under Immelt “is just a really, really sad story.” It represents one of the greatest destruction of capital ever, by what was once considered the best American company. And GE now? They’re doing everything right under new leadership, but just having a string of bad luck (e.g., COVID). He avoids empire builders. He avoids commodity stocks, like oil companies, because traditionally they have been bad capital allocators, have high volatility, and marginalized influence of company leadership … all companies rise and fall with the commodity price.

He finds Amazon the most disappointing stock. Its cloud operation alone (AWS) is worth $2000 per share, which means the rest of company is run “like a non-profit … good for customers, but bad for shareholders.”

Per Moore: “I’m not bearish just more measured” in her positioning. BlackRock takes a more macro view and employs a full suite of asset classes, including heavy use of options. Contrary to Giroux’s fund, MALOX holds close to 30% cash and is overweight energy. While she too sees little chance of recession, valuations remain elevated, and she does not see a lot of positives driving equities higher.

An Uncomfortable Luncheon
The keynote luncheon speaker was not Daniel Kahneman, Doris Kearns Goodwin, Michael Lewis, or Eugene Fama. Instead, Mary Childs discussed her new book about the rise and fall of Bill Gross, entitled “The Bond King: How One Man Made a Market, Built an Empire, and Lost It All.”

She recalled one of most gobsmacked moments in Morningstar conference history, when Bill Gross, legendary founder of PIMCO and manager of the then gold-medaled PIMCO Total Return (PTTRX) and largest bond fund, appeared on stage in Men In Black sunglasses and compared himself to Justin Bieber. That was June of 2014; by November, Gross was gone from PIMCO. Childs expects the cautionary tale she penned to be made into a movie. Honestly, sitting through the conversation made me as uncomfortable as witnessing Gross that year. The lunch itself? Excellent.

No Pain, No Premium
Morningstar’s Ben Johnson started with the hard question first, paraphrasing: How do your investors stick with a strategy that is not performing well? Value was clobbered from 2018 through 2020, especially when COVID hit. AQR’s Cliff Asness explained that in a perfect world, you can stick with an underperforming strategy as long as you can understand why it is underperforming. But he acknowledges, the world is not perfect. While he remains firm in his belief that the best fund an investor can own is the one he or she can stick with, some of AQR’s strategies may be suitable to fewer investors. Or, at least, they must allocated appropriately in a diversified portfolio.

And value prospects now? He’s as excited as he’s allowed to be. While he expects the outsized growth-to-value spread bodes well for value in the next three years, similar to post dot-com bubble, he’s bracing for volatility in the near-term because “nothing is linear.” So, he believes “markets may not be perfect, but they are not usually totally insane.” Right now he sees historic spread and momentum supporting value. “Perfect combination,” he insisted. Then added, “but nothing is guaranteed.”

He does not believe a portfolio constrained by ESG will provide “free lunch,” getting paid to do good. “There is no world where imposing more constraints make you better off.”

Ben saved the easy question for last: If value factor were a superhero, which superhero would it be? “Spiderman is a value factor,” Cliff answered promptly, “because he always had problems. Superman is a growth factor.” In addition to recent value behavior helping reverse years of mediocre performance at AQR, the firm boasts nine alternatives with double-digit returns, as depicted in YTD table below through April. Over the 12 months, 91% of AQR’s 23 funds have beaten their peers. Much better than 55%, its 5-year record.

Pure Speculation
Morningstar recently published its first coverage report on crypto, entitled “2022 Cryptocurrency Landscape.” Not because it thinks crypto is a good investment or even views crypto as an investment period, but because crypto now represents the 4th largest asset class by market valuation at $1.7 trillion, after stocks, mutual funds, and bonds (as of 5 April 2022).

Here’s how senior Morningstar analyst Madeline Hume characterizes the space:

Cryptocurrencies warrant extreme caution. Today, cryptocurrencies lack academically substantiated valuation methodologies. Until more methods for valuing these securities become available, the absence of intrinsic valuations disqualifies cryptocurrencies as a fundamental investment. As high-octane securities with a spotty past, investors should treat any purchase of cryptocurrencies as sunk cost.

Baird’s Hybrid Approach
All ten Baird bond fund have beaten their peers since inception. Baird’s Mary Ellen Stanek, 2016 Morningstar Fixed-Income Manager of the Year, described their strategy as a hybrid: passive with regard to duration neutrality against the benchmark, but active when it comes to credit and portfolio construction.

Half of its funds have been around for 20 years, nominally. So, all have benefitted from the secular bond bull market. This year, however, while still early, its funds have suffered along with the benchmarks because of rising rates.

Could investors now face a reversal … a 40-year bond bear? She does not think so. For one thing, as rates rise, bonds become more attractive, which helps stabilize market sell-offs, especially as expectations get priced in.

The firm, which now manages over $100B, instituted a low-fee policy from the outset, most just 30bps. “The bigger the fee or the drag the bigger the hole you are digging for your investors.” It’s a privately held, employee-owned firm with investor-aligned priorities and long tenured employees. Hers was a refreshing perspective.

The Coverage
Morningstar’s coverage of the conference remains comprehensive and improves each year with new communication technologies, from access to money managers and Morningstar analysts, session videos and briefings. If you’re an avid investor or an advisor, MICUS should be an annual pilgrimage. Here’s a link to more of this year’s conference, which remains in Chicago, Morningstar’s headquarters.

In the press room, veteran financial journalist Chuck Jaffe, always bigger than life, remains a constant presence, interviewing fund managers and analysts, generously sharing his experiences and views. He took the opportunity this year to get an update on our own David Snowball, along with several fund managers attending the conference, including Seafarer’s Andrew Foster. Here’s a link to his Money Life podcast: “Investors are entering the market’s ‘most interesting, terrifying exciting period’.”

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About Charles Boccadoro

Charles Boccadoro, BS (MIT), Post Graduate Diploma (von Karman Institute, BELGIUM). Associate editor, data wizard. Described by Popular Science as “enthusiastic, voluble and nattily-dressed,” Charles describes himself as “a recently retired aerospace engineer.” He doesn’t brag about a 30 year career that included managing Northrop Grumman’s Quiet Supersonic Platform and Future Strike Systems projects, working with NASA and receiving a host of industry accolades. Charles is renowned for thoughtful, data-rich analyses and is the driving force behind the Observer’s fund ratings and fund screeners.