CHRISTINE BENZ AND RUSSEL KINNEL TRANSCRIPT

June 6, 2014

On this week’s Consuelo Mack WealthTrack: major changes in the mutual fund industry- investors are deserting actively managed funds for passive ones and fleeing bond funds for other sources of income. In their first joint television appearance, two Morningstar veterans Christine Benz, Director of Personal Finance and Russel Kinnel, Director of Mutual Fund Research tell us what it all means for investors and their funds.

CONSUELO MACK: This week on WealthTrack: Big shakeups in the mutual fund industry. Two veteran Morningstar analysts Christine Benz and Russ Kinnel discuss the massive outflows from bond funds into other investments and from actively managed funds into passive ones. What do these shifts mean for portfolio returns? Morningstar’s dynamic duo is next on Consuelo Mack WealthTrack.

Hello and welcome to this edition of WealthTrack, I’m Consuelo Mack. There are mighty forces shaking up the mutual fund industry. The question is: are they temporary or are they revolutionary and depending on the answer how are they transforming the way we invest? No headline captured the changes more perfectly than the recent dethroning of PIMCO’s Total Return Fund as the world’s largest mutual fund, a position it has held since 2008, and its replacement by the Vanguard Total Stock Market Index Fund. Bond king Bill Gross, has become an investment legend largely because of his outstanding management of PIMCO’s flagship Total Return Fund which has beaten most of its bond competition over the years and has even delivered stock market like returns in various periods. The ascendance of Vanguard’s Total Stock Market Index Fund to the largest-fund throne symbolizes a new world order on two fronts.

Investors are now fleeing bonds after their nearly 30-year bull market and moving into stocks, which are now in the fifth year of a bull market. And perhaps even more earthshaking they are deserting actively managed funds in favor of mostly lower cost passive index funds. Vanguard of course is where index funds were created by its founder, John Bogle, in the early 1970’s. The Vanguard Total Stock Market Index Fund is a low cost way to mimic the performance of the entire U.S. stock market.

This week’s WealthTrack guests have been following the mutual fund industry to the benefit of investors for two decades. They are Morningstar veterans who are making their first joint television appearance with us. Christine Benz is the Director of Personal Finance and Senior Columnist for the firm, where she has held many other prominent positions in her 20-year tenure there including Director of Mutual Fund Analysis and Editor of several of its newsletters. She is also the author of 30-Minute Money Solutions: A Step-By-Step Guide to Managing Your Finances, which is a WealthTrack bookshelf pick. Russel Kinnel is Director of Mutual Fund Research and Editor of “Morningstar FundInvestor”, a monthly print newsletter for individual investors. He also oversees Morningstar’s fund analyst ratings, writes the “Fund Spy” column and a monthly mutual funds column for Kiplinger’s Personal Finance magazine. I began the interview by asking them to name the biggest unintended consequences of the huge shift from actively managed to passive funds.

CHRISTINE BENZ: As we’ve seen flows come out of active funds into passive products, what that has necessitated is that some fund managers are having to sell stuff to meet the shareholder redemptions, and that can cause them to have to realize capital gains to sell securities that they might otherwise want to hang onto, and so what we’re kind of bracing ourselves for, because we have had a five-year equity market rally as well is that we could see funds making bigger than average distributions this year because (a) they’re meeting these redemptions and, (b), because they simply have big capital gains on their books.

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