5 Topics for Pros Who Handle Your Money

Morningstar (MORN), the Chicago-based mutual fund data company, kicks off its annual conference Wednesday. It’s one of the biggest investment confabs of the year, three days of speeches, sessions and hobnobbing with some of the investing world’s top managers and financial advisors. But this year’s conference isn’t likely to be the upbeat affair of past years. The backdrop today: a brutal bear market, a shrinking global economy and worries about the Obama administration taking over everything from the auto industry to health care.

That said, the conference comes at an interesting crossroads for many investors. One need only look at unemployment figures, the housing and real estate sectors and the prospect of inflation on the horizon to know that troubled times aren’t exactly behind us. Indeed, over the last year many fund managers had their hands full just trying to convince investors to stay in the game.

However, the Dow Jones Industrial Average has increased almost 30% since bottoming out in early March. And some investors are moving billions of dollars out of money-market funds and into more aggressive offerings like emerging markets, a sign they are comfortable taking on more risk. Of course, that also raises the question if this is the true beginnings of a bull market or just a classic bear market rally.

We anticipate many panel discussions and speeches debating whether the current rally actually has legs. Also, the prospects for the financial sector, the implementation of TARP and what managers are buying now will also be closely followed subjects, too. Below are five areas we think will set the tone, whether you have a front seat to this year’s gathering or are following our real-time coverage of key speeches and panel discussions and video interviews with influential investors.

Talk about a dismal science. Officials at the Federal Reserve recently said they anticipate only a “gradual” recovery in the second half of the year — a worse forecast than just a few months ago — and its members predicted that unemployment would rise above 9% and stay there through 2010. William Strauss, an economist at the Federal Reserve Bank of Chicago, will give his take on the economy during a lunchtime speech at the Advisor User Forum Wednesday morning. His words will likely shape the debate on this subject during the main conference, too.

Last week Standard & Poor’s warned the United Kingdom was at risk of losing its triple-A credit rating as the economic downturn hit that country hard. The news caused stocks here to fall and the S&P 500 to slip under the 900 level. Pimco’s Bill Gross, the influential fixed-income investor, said some of the selling was due to the specter of the U.S. facing a similar scenario because the federal government was spending so much to get the financial system back on track. It was a thought that hadn’t been spoken publicly before by such a prominent personality — and one he will probably bring up again during his keynote speech Thursday afternoon. Look for the stock market to react to his words.

The country’s big banks and Wall Street firms got us into this mess and we won’t get out without their help. That, of course, is the reason Washington has been throwing billions at the banks, along with everyone from car makers to insurance companies. But is there opportunity in all this? Some pros think so. GMO’s Jeremy Grantham, for one, who has been bearish on the markets for years, recently wrote that stocks and other securities are trading at attractive prices. (Read our story on why he had a change of heart here.) He’ll give his forecast for the next seven years at a session Thursday morning. Bond managers will be talking TARP at a session on Friday and we anticipate financial stocks will be hotly debated the entire time.

For the first time since the early 1990s, it looks like Washington is serious about health-care reform; Obama has made it a linchpin of his administration and recently won a pledge by the industry to cut costs by some $2 trillion over the next decade. So far it’s only a pledge, of course. But changes of this magnitute are expected to create big winners and losers, from drug companies to hospitals, insurers and tech firms. Expect it to be a hot topic at Thursday’s panel discussion on value stocks, a niche where health care figures prominently.

Washington also should figure prominently at the conference for other reasons. Congress is currently looking at everything from shorting stocks to 401(k) plan fees and target date mutual funds. The uptick rule is being reconsidered and there is much discussion about the future of money-market funds. And don’t forget taxes, which are almost certain to rise.

“We are all for transparency,” says Michael Frederick, director of business development at TFS Capital, home of the TFS Market Neutral fund (TFSMX). But, he adds, some of the regulations passed last year around short selling, a key component of TFS’s strategy, “were hard to navigate.”

It’s the trillion-dollar question: Will the recent rally last, or will it fizzle and ultimately bring the market to new lows? Just about every fund manager will be giving his or her take. Growth managers like Eric Fischman of MFS and Glenn Fogle of American Century will discuss whether stocks are now the “deal of the century” Thursday. Foreign markets have long been pitched as a way to profit off faster-growing economies abroad. However, after a disastrous 2008 that thinking is going through an overhaul. Veteran foreign stock pickers, including Third Avenue’s Amit Wadhwaney, will make the case for investing in these markets on Friday. The conference will conclude with one of the most hotly debated sectors these days: small caps. Chuck Royce, the founder of Royce funds, and Ariel’s John Rogers, will give their insights into a niche that has shown signs of breaking out in 2009.

Ultimately, though, any sustainable rally will hinge on corporate earnings results actually meeting investor expectations. “There is trillions of dollars sitting on the sidelines and it’s making no return,” says Sean O’Hara, president of the RevenueShares ETF family. “Once some of that money starts to leak back into the market it could drive stock prices through the roof.”