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May 28, 2009, 5:23 p.m. EDT

With nod to grim past, fund managers look ahead

Historic declines can't derail investment strategies; hitting the 'reset' button

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By Sam Mamudi, MarketWatch

CHICAGO (MarketWatch) -- Mutual-fund managers addressing the Morningstar Investment Conference are grappling with the recent market chaos and trying to plot a path ahead. And while they acknowledge the struggles of late last year, many are hopeful -- even bullish -- about the opportunities they see.

"The reset button was hit in September," said Tom Marsico of Marsico Capital Management, speaking of the dramatic fall in stock prices following the bankruptcy of Lehman Brothers Holdings in September. "Valuations, especially in financials, are as compelling as I've ever seen."

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Even managers who question the strength of the recovery are sniffing out bargains.

Jeff Mortimer, chief investment officer at Charles Schwab Investment Management, said that as early as March 13, his team changed its approach to stocks. He added that March 9 was a bottom which may be retested, but should hold. In Schwab Balanced Fund /zigman2/quotes/201062720/realtime SWOBX -1.26% the percentage of stocks has increased since March, he added.

"The market is clearly saying the worst may be behind us," Mortimer said, "though that doesn't mean good times are ahead."

"You just keep going, keep doing the [investment research] work, and when the math is compelling you've got to buy [a stock]," said David Winters, manager of Wintergreen Fund , speaking at a panel session.

The participants of a panel of value-focused managers, including Marty Whitman of Third Avenue Funds, were defiant about their heavy losses last year. Whitman's Third Avenue Value Fund /zigman2/quotes/207225650/realtime TAVFX -4.30% was down 45.6% in 2008.

"It was a market fleeing from the asset class, and not correcting or rebalancing at all," said Bill Nygren, manager of Oakmark Fund /zigman2/quotes/203815081/realtime OAKMX -2.62% . "[Value managers] don't add value in that market."

More than one manager called last year's crash "irrational," caused by forced-selling, particularly among hedge funds and quantitative managers, and overstated fears. The value managers said that they haven't changed how they approach their stock-picking strategies, despite last year's heavy losses.

Different times

One question frequently asked among the financial advisers and investment professionals at the Morningstar conference is whether the crash will push funds to make wholesale changes.

Yet many managers see business as usual once the recovery gets underway, either later this year or in early 2010, but some did see potentially different times ahead.

"If [the downturn] lasts another year or two, you could see the fear of debt and aversion to stocks that we saw after the 1930s," said Wally Weitz, of the Weitz Funds. "But I think that it's more likely [the market recovers sooner and] consumers will be back to over-borrowing and over-spending."

One change that may be lasting is the extent -- and impact -- of government involvement in the markets, said Bill Gross, co-chief investment officer of bond mutual-fund giant Pimco and manager of Pimco Total Return Fund /zigman2/quotes/210424051/realtime PTTAX -0.35% .

This new economic climate should prompt investors to question many previously held assumptions -- especially about whether stocks will outperform bonds, and what this means for their portfolios. Figures show that over certain time cycles, bonds have outperformed stocks. See related story.

In a world of more regulation, private-sector deleveraging and less consumption, "it's hard for [Pimco] to imagine" the Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA -1.62% climbing back to 14000 or home prices returning to 2006 levels, Gross said.

"Growth will be stunted," he said. "It will be a different type of world and we have to get used to that." See full story on Gross' speech.

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