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Value and Bond Funds Steal Show At Morningstar Conference


CHICAGO - Christine Benz, a senior mutual fund analyst with Morningstar, summed up the change in the fund industry since last year's Morningstar Conference nicely when she noted that value funds and the Chicago Cubs, perennial losers just a year ago, are hot once again.

Indeed, the buzz around this year's conference focused on both value and bond funds. "We've been called dinosaurs," said David Dreman, founder and chairman of Dreman Value Management LLC, discussing his disciplined approach to picking stocks of companies with low price/earnings ratios and a general wariness of tech and internet stocks. "You get Jim Cramer after you, but if you stick to discipline, it works."

A general sense of vindication seemed to be the underlying tone at the session, "Good and Cheap," which featured a panel of value managers including, Dreman, Michael Sandler, manager of the Clipper Fund, and James Barrow, manager of the Vanguard Windsor II Fund.

Perhaps an indication of just how far technology and growth stocks have fallen, some of the stocks that were popular with aggressive growth managers are beginning to appear in some value fund portfolios. Dreman, who manages the Scudder-Dreman High Return Equity Fund and the Scudder-Dreman Financial Services Fund, said he is gradually taking small positions in some fallen blue chips like Lucent and Nortel, but those types of stocks will never make up more than 5% to 6% of his portfolio.

Sandler is even more cautious. "We've looked," said Sandler. "But we haven't done anything." Most of the stocks that he was interested in are not selling at a discount of what they are worth, Sandler said.

All three managers hold large positions in Phillip Morris, a stock that puts them at odds with social investors, but one that is nonetheless ideal in a value portfolio because it is consistently undervalued.

Because of his disciplined value approach to investing, Barrow would never consider screening a stock simply because it sold tobacco, he said. "What makes this approach work is discipline," he said. "We don't buy for reasons other than low price/earnings ratios and low price to book," he said.

Bill Gross, CEO of bond shop PIMCO was a keynote speaker at the conference. Gross spelled out a bleak outlook for both stocks and bonds in which growth this year would top out at about 5%.