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Keep Non-Core Bond Investments In Their Place

Morningstar Investment Research

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June 29, 2012 - Keep Non-Core Bond Investments in Their Place - by Morningstar Investment Research

The take has been staggering. Emerging-markets, high-yield, world-bond, and multisector-bond funds have taken in less than intermediate-term bond funds have during the past year, but the new inflows represent a significant share of the assets in these groups. About 8% of the assets in high-yield and world-bond funds have flowed in during the past year, whereas nearly a third of the assets in emerging-markets bond funds have come in over during that time frame. Although performance on intermediate-term bond funds has been solid during the past three years, the gains in high-yield bond funds, emerging-markets bond funds, and multisector offerings have been even better. At the same time, the magnitude and velocity of inflows into risky bond types makes Morningstar director of personal finance Christine Benz worry that some investors could be overdoing these categories as a percentage of their fixed-income portfolios. That's a particularly big concern for retirees who are looking to their portfolios to fund near-term living expenses and might not have an adequately long time horizon to recover from outsized losses in what should be the safe portion of their portfolios.

Step Into the Fair Value Time Machine

I find Morningstar's fair value estimates for equities to be a useful tool in determining whether a stock's price is too high, too low, or just about right. But is there any way to see how a stock's fair value estimate has changed over time?

Morningstar assistant site editor Adam Zoll answered this question stating Morningstar's current fair value estimates are easy enough to find but are available only to Premium users. Just type any public company name or ticker symbol in the Quote box at the top of any page on Morningstar.com and press the Quote button. You'll then be delivered to a page that, in the Morningstar's Take section, includes Morningstar's fair value esti mate for the stock, along with Consider Buying and Consider Selling prices and other ratings. Sure enough there is a way to find historical information on previous fair value estimates for each stock Morningstar covers. In fact, there are a few ways, all of which are available to Premium members.

Among the other topics we addressed this week:

Supreme Court Ruling Has Minimal Valuation Impact We've incorporated the anticipated effects of the ACA in all of our projections, and as a result, the effect of the ruling on our valuations and recommendations across the health-care sector is immaterial.

5 Questions on What Lies Ahead. Morningstar market strategist Erik Kobayashi-Solomon offers his outlook for corporate profitability, Europe, the U.S. economy, oil, and financials.

Food for Thought. Reflections from the 2012 Morningstar Investment Conference.

Fairholme Sells AIA, Raises Cash Position. Plus, Franklin Resources fills void left by a manager's death, Vanguard's Sauter retires, and more.

Our 5 Favorite ETFs Launched in the Past Year. Each of these funds offers access to a useful asset class or strategy, is unique, and has a relatively inexpensive price tag.

4 Overlooked Funds That Institutions Love. These funds haven't found a following among individual investors, but the big guys are beating down their doors.

Chances Are These Stocks Are Undervalued. There's little question that these names are a buy.

Want Foreign-Equity Exposure Without the Euro Bank Stress? This fund trades near 10-year lows and has heavier weightings in firms with strong global operations.

Buyer Beware With European Bank Stocks. Deep discounts are hard to ignore, but investors should steer clear.

Steady Payout From Paychex. This wide-moat firm provides a high-quality opportunity for investors.

In the Emerging-Markets Popularity Contest, Stock Funds Beat Bond Funds. But emerging-markets bond funds don't deserve to take a backseat to their equity cousins.

Progressive Will Continue to Achieve Strong Returns. But growth prospects are more muted, and we believe the shares are fairly valued.

Huntington Asset Advisors Launches Eco-Friendly, Actively Managed ETF. State Street debuts two corporate bond ETFs, and First Trust rolls out an MLP ETF. Plus, the week's best and worst performing ETFs.

Fed's Lowered Projections Not a Surprise. A lower inflation forecast may provide room for further monetary accommodation or quantitative easing, but the amount of room the Fed has to maneuver is still limited.

What's Your Financial Backup Plan? Readers share their strategies, and many worry they haven't done enough.

5 Worries From the 2012 Morningstar Investment Conference. Many conc erns, such as those regarding Treasuries and Europe, dominated the conversation at this year's event.

The Fed Keeps Its Powder Dry for Now. Given the already-low rates on long-term securities, it's doubtful the extended Twist program will have much more than a symbolic effect on rates.

Vanguard CIO Sauter to Retire at Year End. A veteran Vanguard executive with no fund-management experience will take his place, but lots of investment expertise remains at the firm.

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