ETF fans, bulls versus bears, and booth people

Speakers at the Morningstar Investment Conference included Mellody Hobson of Ariel Investments

Jun 12, 2018 @ 4:44 pm

By John Waggoner

InvestmentNews senior reporter John Waggoner has been covering the annual Morningstar Investment Conference this week in Chicago. Here are some highlights from the conference.

Mellody Hobson, the president of Ariel Investments, touched on fees and ETFs when she spoke Wednesday at the Morningstar Investment Conference. Ms. Hobson, who will become vice chair of Starbucks' board later this month, had this to say during a conversation with Laura Pavlenko Lutton, director of manager research practice at Morningstar:

• "The conversation about fees has become an oversimplification. Cheap is not always better. Excellence is always identifiable." And, Ms. Hobson said, boutique firms have an edge against the giant passive complexes, as long as they are excellent.

• "Information is no longer an advantage. Today it's all about ideas — how do you connect the information?"

• "The average holding period for ETFs is 18 months. This is crazy. Real money is made over time."

And about attending the Morningstar conference: "I used to be a booth person," Ms. Hobson said. "I've unpacked the boxes. I've set up the booths. I've gone to booth school to learn how to set them up as they became more complicated. I feel the pain of the booth people out there."

ETF Fans

Who are the biggest fans of exchange-traded funds? Millennials, according to a new study from Charles Schwab & Co.

ETFs are the investment vehicles of choice for 91% of investors from ages 25 through 37, according to Schwab's 2018 ETF Investor study.

"Millennials have grown up with ETFs since their first days investing," said Kari Droller, vice president at Schwab.

Another reason millennials are so fond of ETFs: The rise of robo-advisers.

"Millennials are more likely to be using those platforms, and robos almost exclusively use ETFS," Ms. Droller said.

Nearly 80% of millennials see ETFs as their investment choice in the future, and 74% expect to increase their ETF holdings in the future.

Millennials also love the low cost of ETFs, and for 31% of those surveyed, commission-free trading was the most important factor. "They would change brokerage platforms if they had to pay commissions," Ms. Droller said.

Other findings:

• Male and female investors were extremely similar in their use of ETFs, with men saying that 34% of their portfolio was invested in ETFs, versus 33% for women. (But 36% of male millennials said they were experienced investors, versus 26% of female investors.)

• Fifty-one percent of millennials said they chose their ETFs themselves, while 26% used an adviser and 6% used a robo-adviser.

• Ninety-five percent of millennials said that ETFs provide the flexibility to react to short-term market swings.

The Schwab survey included 1,500 investors between the ages of 25 and 75 with at least $25,000 in investible assets who have purchased ETFs in the past two years.

Bears versus Bulls

Jeremy Grantham, chief investment strategist at Grantham Mayo & Van Otterloo, will be closing out the Morningstar conference in Chicago — and if his past pronouncements are any guide, he's going to have a bearish outlook. (His company's seven-year forecast is for an average annual loss of 4.2% in U.S. stocks.)

But Bob Browne, executive vice president and chief investment officer for Northern Trust and co-portfolio manager of the Northern Global Tactical Asset Allocation Fund, disagrees.

"We see a 5.5% to 6.5% annual gain in developed markets over the next five years," Mr. Browne said. "We've downgraded growth expectations for the U.S. and the rest of the world, but that's down from optimistic but not unreasonable expectations.

"Our view is that the boost we're getting to growth from tax reform this year has helped, but it isn't creating this virtuous cycle of above-trend growth," he added. "What it probably does is elongate the expansion, but it didn't set off a new level of growth."

Why are some so pessimistic? "Investors who slavishly followed a singular approach, especially one that's empirically driven with a value orientation, were left chasing this market and trying to explain why they missed a doubling of U.S. equities," Mr. Browne said.

Was that all due to ultralow interest rates?

"We don't buy the argument that low interest rates distorted everything," Mr. Browne said. "How can you say that's not important? We're in the business of discounting future cash flows. When rates are low, these cash flows are worth more. People with bottom-up approaches are uncomfortable with that and do not pay attention to top-down factors."

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