"Investors are asking about stocks, corporate debt and so-called hybrid investment," Michael Herbst said Thursday morning. "But with volatility, yield and equity returns being what they are, those decisions have been turned on their heads."
Herbst, Morningstar's associate director of fund analysis, hosted a panel of high-profile fund managers for the general session at the company's annual conference in Chicago.
Featuring PIMCO's Mark Kiesel, Invesco's Meggan Walsh and Don Yacktman of Yacktman Asset Management, the panel touched on each manager's investment philosophy and how they identify potential red flags, especially when investing across capital structures.
Herbst began by asking the panel what they look for "across the capital structure fence?"
Yacktman, an equity manager, said he "tends to look at equities in the same way we look at bonds. If we are to hold on to them for a long time, what type of risk and return would we have? It's almost like holding a bond to maturity."
Walsh added that Invesco focuses on the potential for capital appreciation, and that she "spends a lot of time on figuring out the potential downside," which, given that she's a portfolio manager, was reassuring for the audience to hear.
Kiesel said PIMCO managers take a top-down approach, beginning by asking themselves what areas of the world they feel will perform best.
"Currently, we feel it's the United States and Asia," he said, partly agreeing (Asia) and disagreeing (United States) with Franklin Templeton's Michael Hasenstab from Wednesday. "We then consider a particular company's enterprise value and where on the risk/reward spectrum we will then perform best. It's really very simple; it's the best part of the globe, the best sector in that part of the globe and then where we should invest in the capital structure."
Herbst then asked about the managers' red flags.
"We favor businesses with a high return on real assets, so we look to the left side of the balance sheet," Yacktman said. "We look to avoid low return, low turnover of assets and companies with off-balance sheet issues like pensions. We feel pensions are the wrong way to fund retirement."
