Morningstar Advisor - Fall 2007 - (Page 61)

A House Built on Trust Bill Manning and Bill Napier founded their firm in 1970 as an investment advisor. The duo was decades ahead of the asset-allocation and lifecycle-fund curves, creating and adjusting blended portfolios for their clients. They focused on avoiding risk and compounding capital over the long haul while delivering topnotch client service. The partners dodged the Nifty-50 and oil 20000 bubbles of the early 1970s and built a strong track record. They didn’t market15000 themselves, but word quickly got out. More high-net-worth and retirement clients wanted in than the two 10000 and their small staff could handle. The partners built out, and by the early 1980s,5000 team had their grown to 34 employees. The two partners put an equity plan in place in the early 1990s, expanding ownership to a group of key employees and setting the stage for further growth. Napier retired, passing away shortly thereafter. Manning remained the majority shareholder, but stepped back from day-to-day responsibilities. Today, the firm has 250 employees and runs $18 billion in assets. About 80% of that is in separate accounts and collective investment trusts, with remainder in mutual funds. The firm remains 100% employee owned. The Team Approach Coons quipped. “The airlines don’t think anyone important wants to come here.” I think he was kidding. It’s also clear that collaboration is a constant theme at the firm. Bill Manning and Bill Napier set the tone from day one: They promoted a team concept based on the logical premise that several minds are better than one. This simple but elegant idea lives on. For example, the firm doesn’t even have a CEO. A five-person executive group runs the show. And all investment products are run by the senior research group. The SRG, as it’s called internally, comprises eight seasoned professionals with an average tenure of 15 years at the firm. The sense of partnership extends through the analyst ranks. Coons says the firm now hires only junior analysts straight out of graduate school. The firm had limited luck hiring veteran Wall Street analysts. “It’s hard to teach old dogs new tricks,” Coons says. The house style is eclectic. The firm’s 27 equity analysts are organized by sector and have a global, all-cap purview. Their bottom-up research looks at growth, cyclical, and deepvalue plays. They favor stocks trading at more than a 25% discount to their estimates of intrinsic value and adjust their models by industry. The firm is risk averse, so the analysts look at numerous downside scenarios. Picks get final vetting by the SRG before entering a portfolio. The team excels at buying top-notch firms at reasonable prices. Cisco Systems CSCO typifies this measured approach. The dominant player in corporate networking hit the firm’s radar screens in early 2005 when its price multiples fell in line with the S&P 500’s. “We were able to buy a market-leading firm generating double-digit growth at a market multiple,” Coons says. Cisco has more than doubled since the firm bought it. Buddy System Manning & Napier Pro-Blend Moderate Term EXBAX $20K Dow Jones Moderate Portfolio 15 03 04 05 06 07 Category Moderate Allocation Morningstar Rating QQQQ Minimum Investment $2,000 Expense Ratio (%) 1.16 5-Yr Anl Total Rtn (%) 11.89 5-Yr Anl Investor Rtn (%)* 11.52 Investor Rtn Rank Category 43 Stewardship Grade — *Dollar-weighted return that measures how the typical investor in the fund fared. Data as of Sept. 30, 2007. The first thing that strikes a visitor to 30000 Manning & Napier is the lack of egos. The 25000 firm’s accommodations in a low-rise office building are professional, not grandiose. 20000 There are no shrines to the company itself or 15000 its founders. 10000 5000 Manning & Napier Non-U.S. Equity (Separate Account) $30K 20 MSCI EAFE TR Arriving, I was greeted by Jeffrey Coons, a 21-year veteran of the firm and co-director of research and a principal shareholder. At firms that have top dogs, he’d be one. But the down-to-earth Coons’ first concern was getting me coffee, which he served himself. When I apologized for my late arrival because of flight cancellations, a wry smile surfaced on Coons’ face. “Don’t worry. Flights to the Rochester area get cancelled all the time,” Jan-03 03 Jan-04 04 Jan-05 05 Jan-06 06 Jan-07 07 Feb-03 Jul-03 Feb-04 Aug-04 Feb-05 Jul-05 Feb-06 Jul-06 Dec-06May-07 Mar-03Aug-03 Apr-04 Apr-03Sep-03 May-04 May-03 Jun-03 Jun-04 Apr-05Sep-05 Mar-06Aug-06 Feb-07 Jul-07 May-05 May-06Oct-06 Jun-07 CategoryOct-03Mar-04 Sep-04 Mar-05Aug-05 (%)*Jun-06Nov-06Apr-07 Fees Apr-06Sep-06 Mar-07Aug-07 Foreign Large Blend Nov-03 Dec-03 1.16 Nov-04 Jun-05 Oct-05 Jul-04 Dec-04 Morningstar Rating QQQ Oct-04 Minimum Investment $500,000 Nov-05 Dec-05 5-Yr Anl Total Rtn (%) 20.51 Return Rank Category 10.46 In an interesting twist, the analysts don’t *For accounts up to $2 million; $2 million to $50 million accounts pay 0.75%. Data as of June 30, 2007 MorningstarAdvisor.com 61 http://MorningstarAdvisor.com

Table of Contents Feed for the Digital Edition of Morningstar Advisor - Fall 2007

Morningstar Advisor Fall 2007 Features Departments Letter from the Editor Inbox 10 Years After: Developing Markets Make Progress Research Briefs Investors Should Adjust Their Home Bias Few Mutual Funds Exhibit Serial Correlation Valuating ETFs, the Equity Analyst's Way It’s All About Location See the World (Differently) The Return of the Global Flexible Investor Map of International Value Sound as a Loonie? Fair Exchange In Their Own Worlds A Good Read Putting Their Heads Together Buying Protection Scoping Out Easy-to-Use Funds Finding Good Stewards Consumer Firms Go Global Mutual Fund Analyst Picks Undervalued Stocks Most Popular Variable Annuities New at Morningstar The Whole Wide World

Morningstar Advisor - Fall 2007

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