The Buzz Among Fund Managers

LAST WEEK WE attended the 20th annual Morningstar Investment Conference, one of the biggest gatherings in the mutual fund world. This three-day event featured speeches and panel discussions with some of the industry's key personalities. It's a great way to get a read on how the investing community is thinking about the stock market and pick up a few good ideas along the way. For those who didn't have a chance to attend, we've summarized a few of the presentations and posted links to the video interviews conducted on-site with respected fund managers. Admittedly, these are short synopses. But stay tuned. We'll be visiting with these folks throughout the next few months.

While El-Erian didn't exactly produce any startling revelations, he did deliver a riff on one of his favorite themes: emerging markets. He thinks these countries will continue to drive the global growth story, especially as U.S. consumers deal with the fallout of lower home prices, higher food costs and $4-plus gas.

As for the implications for your portfolio, Morningstar summed up El-Erian's speech with these don'ts: Don't treat the past year as a one-off situation; don't think we are going back to business as usual; don't forget that crises present opportunities; don't be fooled by the trap of narrowly framing asset class choices, since all investment portfolios will have to live through a bumpy transformation in the years ahead.

"We are seeing signs of the light at the end of the tunnel but there are still some landmines that have yet to be exploded," Langerman said.

The panel pegged financials as the sector posing the biggest opportunities — and pitfalls. "[Financials] are the most misunderstood," said Pohl. Pohl talked about Wachovia (WB), a big holding of Dodge & Cox Stock (DODGX), while Torray discussed his interest in fixer-uppers such as American Express (AXP), Bank of America (BAC), Citigroup (C), and AIG (AIG). Pohl mentioned that he sold beleaguered bond insurer MBIA (MBI) in May 2007 at around $60 a share. (It now trades at $4 a share.) "At this point I am glad we are out of it," he said.

What are they avoiding? Well, newspapers still make excellent liners for bird cages. "The competitive threats are real," says Langerman. "Pure play newspaper companies are fighting an uphill battle." He also says electric utilities have limited growth opportunities. Torray is skeptical of the run-up in infrastructure, steel, farming and fertilizer names. "I'm suspicious," he said. "If something goes wrong they will drop like rocks."

Byrne, whose company is based in Dallas, is a longtime energy investor. She likes Apache (APA) and XTO (XTO). The latter she considers a proxy for the higher natural gas prices she thinks are on the horizon. However, she did sound some caution about the record price levels scaled by some commodities. "We are stress testing," she said. Byrne is concerned about how high oil could go and how quickly it could come back down. But "the balance sheets of these companies are strong," she said.

Both managers were cautious about financials. "They are tempting," said Byrne. Berkowitz wasn't so sure. "It's difficult to know what they own and who they own," he said. He warned against "premature accumulation" of financial shares as well as those of home builders.

One sector they disagreed on was health care. These stocks have been beaten down by class action lawsuits, patent expirations and concerns about reforms a new president might launch. Byrne owns some health-care names but said she's waiting for a catalyst before jumping in with both feet. Berkowitz, though, likes the cash flows some of these companies kick off and is willing to get in early. He's currently looking at HMOs and implied that he is tinkering with his Bristol Myers-Squibb (BMY) position.

Berkowitz also laid out his rationale for holding on to Sears (SHLD). First, he likes the brand. But he also praised the company's revenue base, its free cash flow and its undervalued real estate. In fact, he said, the company's real estate alone almost justifies the current share price. Investors would get "everything else for free," he said.

To see an interview in which Byrne discusses three of her favorite stock picks, click here.