For the true investment advisor, the Morningstar conference is a gem: a highly focused gathering of fund managers speaking about what they do best - manage money. Although the conference also offered non-investment sessions on using Morningstar products to full advantage, from the point of view of this advisor, the conference is an investment conference - not a practice management conference. And for investment professionals using funds, it easily is one of the most important conferences of the year.

Most attendees apparently shared this view. Each investment session this writer sat in on was packed. The conference featured a bit of everything in the fund world, from John Bogle of the Vanguard Group discussing the economics of the fund industry (based on views set forth forty years ago in his senior thesis at Princeton) to relative newcomer Ryan Jacob discussing valuations of Internet stocks.

Bogle's delightful and informative "chat" with Morningstar's Don Phillips about the fund industry notably brought an industry legend in front of an admiring crowd and included an insightful discussion of fund industry economics. Watch for Phillips to be being interviewed in much the same way - as an industry giant with pragmatic wisdom about the mutual fund world - thirty years in the future.

Bogle proved an amiable, entertaining and engaging gentleman with logical and enduring ideas and points of view on investing in general and the fund industry in particular.

He made an interesting point about Bank of America's purchase of Marsico Capital Management for close to $1 billion dollars, which had been announced that morning. The purchaser, he pointed out, makes its return on investment by means of the management fees it charges to fund shareholders. With a $1 billion price tag, the shareholders of the Marsico funds should not anticipate a reduction in fund expenses any time soon. (Bogle's analysis did not factor in returns on additional assets under management that might come from Bank of America's added distribution and cross-selling capabilities.)

Yet, the session's best line was an ad-lib. While discussing founding Vanguard Bogle inadvertently started a sentence by saying, "When I founded Janus...". To the delight of the audience, Bogle caught himself and continued, "Had I founded Janus . . . I'd certainly be a lot richer!"

Later that afternoon, small cap growth managers Garrett van Wagoner and Jim Callinan discussed markets in general and small cap stocks in particular. Van Wagoner attributed the recent 30% decline in the NASDAQ to excessive retail margin calls combined with excessive capital gains tax payments due on April 15th that led to excessive selling during a six week period in March and April. He did not believe the drop could be attributed to business fundamentals.

Callinan attributed the decline to an increase in interest rates, a "panic"-driven move by investors to "positive EPS" companies, a realization by the markets that the NASDAQ had never had seven consecutive positive quarters and an abundance of expiring IPO deal lockups that flooded the market.

Where do both of these aggressive small cap growth managers see opportunity? Try Wireless communications, a sector that has come under some recent pricing pressure. Callinan, in particular, informed the audience that he was "heavy in paging and wireless," including positions in Research in Motion and Weblink.

The next morning's general session moved from small cap growth to large and mid-cap value, with a panel consisting of Chris Davis (Selected American), Bill Miller (Legg Mason Value) and Bill Nygren (Oakmark and Oakmark Select). Don Phillips was the moderator. This session was terrific, full of insight and humor.

Responding to the question of how to define value, all three managers said that there essentially is no difference between "growth" and "value" investing -- it simply is a matter of how you go about finding the best values in the market at any given time.

Miller stated it most effectively, advising the crowd of the finance truism that the definition of any item's value is the net present value of all future cash flows generated by that item. The difficulty is that in calculating an item's net present value, a small change in your assumptions can lead to enormous changes in the value of the investment. As a result, people begin to use "other stuff," such as P/E ratios, earnings growth rates, etc. As such, the issue is not one of definition, but of application in the quest for finding value.

Nygren brought a bit of political correctness to the discussion when he concurred with Miller, adding that value investing does not simply mean buying "structurally disadvantaged" companies at low P/E ratios. Nygren - a dyed in the wool buy-at-40%-off-of-intrinsic-value investor - actually admitted to using the "G" word when evaluating an investment - looking for "g"rowth in earnings.

In one of the most insightful and practical commentaries of the conference, Nygren, in response to a question from Phillips about turnover ratios, disabused the audience of its notions about using what he called the "misnomer" of turnover ratio as an analytical tool. Nygren reminded the audience of his own discipline of purchasing stocks trading at 60% of their intrinsic worth and selling them when they reach 90% of intrinsic worth.

Given that approach, Nygren said that a good value manager should have a high turnover ratio as the cheap companies appreciate and hit sell targets. This is contrary to what many advisors and investors consider to be a hallmark trait of so-called value funds - i.e., low turnover. By contrast, he said, many momentum managers, who typically are associated with astronomical turnover ratios, and who use price drops as a sell discipline, will not have to sell much in a good momentum environment, leading to comparatively low turnover ratios.

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