EDITOR S NOTE: Want to know where the investment pros are putting their money these days? For insight into that question, SmartMoney is reporting this week from the annual conference for professional managers and advisors held by Morningstar. We ll continue to update this conference blog with the latest news.

June 25, 2010, 4:32 p.m., EST -- The bears may have kicked off the Morningstar conference, but it ended with three bulls, whose convictions were only strengthened by the pessimism voiced during the conference. I think I should switch from bullish to very bullish, said Legg Mason Value Trust manager Bill Miller.

With the S&P 500 close to 12-year lows, and some investors fixated on gloomy macroeconomic prospects, Miller and his co-panelists, Legg Mason ClearBridge s Richie Freeman and Southeastern Asset Management s Staley Cates, said bullishness seemed the right way to go. The free cash flow yield on stocks sat at 7%, higher than bonds. But the economy was still growing and companies boasted strong balance sheets. In the last three weeks, clients have been calling with more panic than in the last nine months, said Freeman, who thinks the market s downside is 3 to 4% while its potential upside is closer to 25 to 30%.

Despite their uniform bullishness, the panelists portfolios differ widely. Miller, for example, doesn t own much energy, save utility AES (AES), but Freeman has a stake in Anadarko (APC), which he said could come out OK if BP (BP) is found negligible in its operation of the Gulf well. Cates defended his ownership of Chesapeake Energy (CHK), despite a recent brouhaha over the chief executive s apparently large compensation and the board s decision to buy his antique map collection for $12 million.

The trio also differed on financials. Miller owns several large banks, including Citibank (C), Goldman Sachs (GS), Wells Fargo (WFC) and Bank of America (BAC) . He said he thinks the financial reform that was hammered out yesterday will ultimately help multiples on such stocks move higher. But Freeman said he can find better opportunities in other sectors, namely biotechs which are trading near 10 times earnings, buying back stock and spending 25% on research and development to replace products in their pipelines.

Cates has never liked banks much. People say not to own what you don t understand and I don t think you can understand financials, he said, referring to the lack of transparency on their loans and derivatives.

When it comes to stocks they will still be holding in five years, Freeman cited Forest Lab (FRX), which he has owned since the 1980s, highlighting its research and development spending and pipeline. Cates highlighted Mexico s Cemex (CX) . Despite its shorter-term issues, Cates says the company boasts plenty of free cash flow and is beginning to correct its self-inflicted issues.

Miller s pick: IBM (IBM) . You can put money in a money market account and double your money in 500 years or in IBM and double it in five years. He said he thinks the stock is worth 30 to 50% more than what it is trading at currently. Miller also continues to like biotech and pharmaceutical names, adding that they have little room to fall lower and boast great balance sheets..

-- Reshma Kapadia

T. Rowe Price Portfolio Manager Rob Gensler Defines 'Growth Stocks'

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Rob Gensler, vice president and portfolio manager at T. Rowe Price, discusses his criteria for seeking out growth stocks and the outlook for consumer-oriented firms in emerging markets.

Where Two Stars Managers See Opportunities Now

June 25, 2010, 10:49 a.m., EST -- Finding investments that can withstand economic shocks and prosper over the long run is not easy especially in today s volatile markets. So where are some star managers seeing opportunity these days?

Charles de Vaulx, a former manager at First Eagle who now runs his own firm, International Value Advisers, said on a panel this morning that he likes certain emerging-market countries. Unlike Europe and the U.S., these countries have strong government balance sheets and low levels of household debt, and their populations are young and increasingly affluent. He s recently been buying short-term bonds issued by Singapore and Hong Kong. The yields are puny, he said, but you attempt to get returns out of the currency. In the U.S., he s also been buying tech stocks such as Dell (DELL) and eBay (EBAY) . And he said he s been shopping around in the oil and natural gas sectors.

Hassan ElMasry, a former manager at JPMorgan (JPM) who now runs a firm called Independent Franchise Partners, talked about value traps: stocks that look cheap but go nowhere. Eastman Kodak (EK) was one such stock, he said. Though the stock looked extremely inexpensive, long-term he couldn t get comfortable with its growth prospects. (ElMasry s firm invests for institutional clients and doesn t currently offer a mutual fund).

Similarly, he sees Microsoft (MSFT) as a problem stock. Sure, it looks reasonably priced and should have a few solid quarters thanks to the PC upgrade cycle now underway. But the company failed to capitalize on a beach-head in servers and games, he said, and it s far behind in the mobile area. We re not entirely convinced that everyone will have desktop computers in 10 years, he added, or that Microsoft can continue to convince consumers to pay higher prices for Office software. We have real concerns about the 10 years ahead, he said.

Stocks ElMasry likes have strong brands and franchises, which can withstand economic shocks and continue generating cash, he said. After the markets crashed, he picked up shares in Ebay, Estee Lauder (EL), Starbucks (SBUX) and McGraw-Hill (MHP) . These companies earn lots of cash, which they can use for dividends or buying back stock, and that should give them an organic edge to compound wealth, he said. His top holding now: British American Tobacco (BTI) . The stock is trading near liquidation prices, he said, but the company is profiting off rising sales in emerging markets, where consumers are increasingly trading up to premium cigarettes.

-- Daren Fonda

Putnam CEO Bob Reynolds on Absolute Return Funds

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Putnam chief executive Bob Reynolds on why the firm's new offerings are attracting investors and his outlook for exchange-traded funds.

Clearbridge CIO Hersh Cohen on High-Yield Dividend Stocks

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Clearbridge chief investment officer Hersh Cohen does some stock picking to pinpoint firms that should offer generous payouts over the long term.

Vanguard CEO Bill McNabb on the Fund Industry

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Vanguard chief executive Bill McNabb discusses how his firm working to overcome investor skittishness; the rapid expansion of exchange-traded funds; and his outlook for the fund industry.

Stock Picks for a Touchy Global Market

June 24, 2010, 5:05 p.m., EST Many investors are looking abroad for growth these days. But foreign markets have their perils too, and even China could be in for a rough landing, according to three foreign fund managers on a panel this morning.

The key now is to be maniacally disciplined about valuations, said Rob Gensler, manager of the T. Rowe Price Global Stock Fund (PRGSX) . Gensler said he s looking for companies that are taking market share from competitors and that can grind out an advantage in a slow growth environment. But its critical to have valuation discipline, he said.

One stock he likes is Rolls-Royce, which may be known for ferrying around British royalty but is really a play on the global aircraft industry. Rolls provides engines and power systems to commercial aircraft, competing with General Electric (GE), and it s growing market share, Gensler says, from around a third of the industry to a little more than 40%. The stock got crushed last year, with its price-earnings ratio falling to around 7, but Roll s revenues held up thanks to its recurring maintenance revenues, and while it s still a slow growth business, it s become more competitive with the decline in the British pound. It s a misunderstood business, he says.

An Irish firm, Experian, could also be a big winner, according to Daniel O Keefe, manager of the Artisan Global Value Fund (ARTGX) . The company provides consumer credit reports, competing with Equifax (EFX), and its stock fell sharply last year as consumer spending and credit dried up. But the company pivoted to providing more credit monitoring and analytical services, he said, and it managed to grow revenues during the recession. It also has high operating margins and is expanding rapidly in Asia and Latin America.

One contrarian stock that could fare well is A.P. Moeller Maersk, the world s largest container shipping company, said Philippe Brugere-Trelat, manager of Mutual Global Discovery Fund (TEDIX) . Revenues for the Danish company plunged during the recession as global shipping volume fell. But the company brought in a new chief executive in 2007 who has been restructuring the business, lifting profitability. And although the stock has moved up sharply off its lows, there s still upside at these levels, said Brugere-Trelat.

More broadly, Brugere-Trelat said the euro s plunge has been a godsend for European industrial firms. The currency's decline this year has made European goods more competitive in foreign markets. Europe s sovereign debt crisis has tarnished the whole market but it s painted everyone with the same brush, and it s left European industrial stocks looking cheap, he added.

As for China and other emerging markets, O Keefe said investors should be cautious. Investors are flocking to these markets as an escape valve from slow-growth Europe and the U.S., but this idea of rushing to the developing world to escape the misery of the developed world is a false sense of hope, he said. Sure consumption in China is likely to keep growing and the economy is expanding at a 10% clip, but that may not offset export declines to the U.S. and Europe.

-- Daren Fonda

Without Magic Tricks, Financial Wizards Say "Diversify!"

June 24, 2010, 2:46 p.m., EST Certified financial planners at a Morningstar panel on income strategies for retirees didn't have any supernatural solutions for advisors whose clients hadn't saved enough. "It's about the total return portfolio and living within it or working another two to three years, said Frank Armstrong, certified planner at AIFA Investor Solutions. I'm not magic."

Although Armstrong has major issues with annuities, his two co-panelists, fellow financial planner Christine Fahlund of T. Rowe Price and Ibbotson Chief Investment Officer Tom Idzorek, said they saw an increasing role for annuities for those seeking income. Fahlund said T. Rowe was looking to see how annuities could work for companies offering 401(k) plans, as well.

Armstrong and Fahlund also stressed true diversification to make a portfolio last. They suggested investors hold small value stocks, small foreign stocks, real estate, as well as the S&P 500 in the stock bucket and high-yield assets and TIPs in the bond portfolio. They also recommended investors diversify on the basis of taxes and not put all their money in tax-deferred accounts.

Retirees looking for a 4% withdrawal should have 40% of their assets in short-term fixed income -- in funds that invest in foreign and domestic bonds of durations of two years or less. The rest should be in a broad mix of stocks, Armstrong said. If times are bad, they should sell the short-term bonds for the income and once conditions improve take from what has done best. Fahulnd also recommended investors put their more aggressive investments, such as those in emerging markets, in a Roth IRA and allow it to grow, tapping it last. "It's your ace in the whole and when you take it out it will be tax-free," she said.

One adviser in the audience was unhappy with the dearth of more concrete strategies to generate income for retirees from the panel. That critique may go back to the fact that there aren't any "magic" fixes for those who don't have enough stashed away.

-- Reshma Kapadia

Talking Dividends: Panelists Point to History, Inside Ownership

June 24, 2010, 9:50 a.m., EST -- Don Kilbride, who runs the Vanguard Dividend Growth Fund (VDIGX), told advisers that dividend payers come in all shapes and sizes. They aren t just big slow-growing companies, he said.

Kilbride said he looks for firms with a long history of dividend growth, as well as high inside ownership because those executives are motivated to keep payments up.

For now, Kilbride and Clearbridge chief investment officer Hersh Cohen are steering clear of banks. Banks are still reliquefying, balance sheets are opaque and how much commercial real estate is going to be written down remains to be seen, they said. "You have to have a big leap of faith to invest in banks," Cohen said.

The duo said they favor property and casualty insurers. Kilbride pointed to Ace (ACE) and Marsh & McLennan (MMC) . Cohen highlighted Chubb (CB) and Travelers (TRV) .

"I don't know how to get a growing stream of income into your 50s and 70s in any other way than these great companies," Cohen said, citing stocks like Johnson & Johnson (JNJ) and Procter & Gamble (PG) .

A few more stock picks from the dividend panel: Oracle (ORCL), Home Depot (HD), Wal-Mart (WMT) and McDonalds (MCD) .

-- Reshma Kapadia

What's Chicago Without the Bears?

June 23, 2010, 7:25 p.m., EST -- FPA Crescent's Steve Romick (above right) and Artio Global Investor's Rudolph-Riad Younes offered up an outlook that was gloomier than the stormy weather outside the conference.

Romick said he expects economic growth to "muddle along" but added that it's difficult to get a handle on the health of the economy. "It's so jacked up on drugs you don't really know what is going on," he said.

Younes was not much more optimistic. He said the economy faces structural issues, including a burgeoning trade deficit and companies more concerned about their short-term results than their long-term futures. He added that many governments were hoping for a dream scenario rather than making tough policy changes to come out of their "debt trap."

"If we continue like this, in 10 years we will become an emerging market," he said.

Although Younes said he thinks Europe will be the best-performing equity market in five years, over the next 12 to 18 months, he projected it could be the worst. Until there is more clarity in what European governments will do about their troubled banks and the euro, for example, he said he isn't keen on putting his clients' money at risk.

So what's an investor supposed to do? Buy farm land. Although Romick's fund is not set up to do that, he said farm land offers a hedge against dollar weakness and benefits from the growing world population and its food needs. Of course, most investors don't know of a Midwestern farmer looking to sell, but Romick says FPA is looking into structuring a fund to do this.

Within his existing fund, Romick said he still favors energy companies and has been buying deeply discounted residential mortgages from Citibank (C) and ResCap, effectively becoming a lender and either modifying the loan or short selling the home. "These are clearly problematic mortgages and we are getting them for 35% to 40% of a very discounted appraisal on the home."

Younes has used gold as a way to cushion the losses for investors if his view of the global economy comes true. He's also looking for trends that can withstand blows to the global economy over the long run, namely emerging market consumers and the supermarkets and pharmaceutical firms that cater to them.

-- Reshma Kapadia

Gundlach: Brace for a Tax Hike; Bonds Sound for Now

June 23, 2010, 5:51 p.m., EST Three years ago at this conference, Jeffrey Gundlach predicted the subprime mortgage meltdown. On Wednesday, he said the issues the nation faces today namely those tied to its debt are bigger and of greater consequence than those of 2007.

Gundlach, the chief executive and chief investment officer of DoubleLine Capital and lead manager of DoubleLine Total Return Bond (DBLTX), says the country s debt burden needs to be addressed at the government level and foresees a tax hike in 2011.

In his keynote address, Gundlach said American debt could be traced back to television in the 1950s, which produced a consumer with aspirational goals and created a movement to achieve them through credit.

Perhaps not surprisingly, Gundlach touted long-term government bonds as the nation s best performing investment, citing the steep yield curve.

He said he's also fond of municipal bonds because he thinks taxes are going to increase. He added that the current spreads look attractive. Under the assumption that taxes are going higher, they become almost too tempting to stay away from, he said.

Gundlach s advice for investors: If the world starts to behave differently vis-a-vis its attitude of government bonds in America, because of inflation risk and default risk, you need to sell immediately. he said. I suggest all of us watch the way the markets behave to bad news regarding risk. As long as Treasurys benefit like they did today, and as long as the dollar benefits like it did today, you stay in the trade. If it changes, you have to sell very, very quickly.

-- Chris Snyder

A Challenging Year for Funds

June 22, 2010, 12:25 p.m. EST -- A year ago, mutual fund managers were licking their wounds after the market s beating and defending their strategies. Pimco s Bill Gross was talking about a new normal and other managers talked up the gems they had scored, often in bonds.

A lot has changed. The market s dizzying year aside, the industry now faces a new regulatory environment, a radically different foreign landscape and a jittery class of soon-to-be retirees.

This week, some of the industry s biggest hitters have gathered here at the annual Morningstar Investment confab in Chicago to hash out some of their most pressing issues.

Among the topics that will likely get some play will be whether the market s recent weakness is a sign a looming second dip or just a pause before markets advance again. Former TCW bond manager Jeffrey Gundlach is expected to start the conference with a talk about opportunities and potential pitfalls lurking in bonds. (In 2007, he had warned of the potential disaster looming in the mortgage market). Veteran money managers like Legg Mason s Bill Miller and FPA Crescent s Steve Romick should offer up stock picks.

Panel discussions are scheduled to feature the types of products the industry is focusing on to woo investors off the sidelines, including income-generating strategies like annuities and hedge-fund strategies wrapped up like mutual funds.

And like any industry confab, there will likely be talk of the challenges ahead, with Vanguard Chief Executive Bill McNabb expected to talk about regulation and winning back investors trust.

Bookmark this page and check in throughout the week for live updates and video interviews.

-- Reshma Kapadia