Lipper Research Senior Analyst Don Cassidy on "Business for Breakfast" 1060 KRCN - 2006 Outlook

Tuesday, January 10, 2006

A. Sure. We released our review and forecast last Thursday on ourLipperWeb.com Web site, so let me condense it into a couple of minutes.

Q. Great! Okay, first, bond funds versus equity funds?

A. We see long bond rates flat to moderately higher, so the outlook for allbut short-term and TIPS funds is neutral to modestly negative.

The currency picture is very cloudy, but if the dollar falls, world bondfunds would be a plus choice.

We are late enough in the economic cycle that we can't be enthusiasticabout high-yield funds.

Q. Okay, and how about stock funds?

A. Big picture: we can't make a case for either an upside runaway or a bigdownside market. Our base forecast is for the S&P 500 funds to be upbetween 3% and 9%. That would mean a fourth straight up year, which isfairly unusual!

Q. What about major shock events like avian flu or some sort of domesticterrorism attack?

A. Well, you always need to put in a caveat about such, but if we seeneither, then our forecast holds.

Q. Okay, back to the big picture?

A. We think large-cap will outperform small-cap in 2006 as it started to doin Q4/05. Small has led for a long while, and we think the market needs newleadership for the bull market to extend.

Q. What about the value versus growth styles?

A. Again, we think there will be and needs to be a move toward growth.Growth slightly won for 2005, but the net decision came in the fourthquarter.

Q. What kinds of funds would do well in your scenario?

A. Well, we need to start by saying that people should be diversified andnot put a lot of eggs in sector or region baskets, even though we have somefavorites.

Above Average:

• Science & Technology
• Healthcare & Biotechnology
• Utility (if rates don't rise too much)

About Average:

• Natural Resources
• Gold-Oriented
• Financial Services (mixed +/- influences insidethose)

Below Average but Still Okay:

• Real Estate (already up six years, and valuation is no longer as compelling; value may not keep leading)

Q. How about overseas investing?

A. We think if the domestic market and economy are up as we believe willhappen, world funds will do better than domestic ones again. We are neutralon our dollar assumption.

Q. Are some parts of the world better than others?

A. Yes, as always in an up-market scenario:

Least Bullish:

• Europe - mature, and major countries have individualheadwinds

Most Attractive:

• Emerging markets, but with shifting leadership
• China - has been resting for two years in relativeterms
• Japan - the economic turn does seem real, and thereis abundant liquidity

Maybe Losing Steam (since they were already very strong forsome while):

• Latin America - especially if energy prices go flat
• India - has had a huge rise already
• Russia - the energy factor again, and Mr. Putin is a source of concern for outsiders

Q. What would upset your forecast's applecart?

A. An excellent point, since any market position should come withassumptions and also acknowledge possible errors:

• Major unpredictable external events
• Inflation gets notably stronger
• Fed does not cool the rate rises soon
• Energy prices keep rising sharply
• Recession (pretty unlikely)

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Don Cassidy is a Senior Research Analyst at Lipper specializing in fund flows, exchange-traded funds, (ETFs), closed-end funds, equity fund performance, and author of Trading on Volume (McGraw-HIll).