Morningstar Advisor - Fall 2007 - (Page 65)

19000 Value Borders Group BGP $19K S&P 500 16 Shakespeare wrote, “When the sea was calm 16000ships alike showed mastership in floating.” all He could have been writing about investing. An 13000 extended bull run in stocks and a benign global economy have conspired to make many money 10000 managers and operating firms look better than they truly are. Market turmoil midyear has been a mere head fake: The S&P 500 Index is still up 17.62% over the trailing year, and corporate profits are near historic peaks in many sectors. It seems only a big correction will remind many investors that losing less than everyone else in a downturn is critical to winning over the long haul. The fact that an investment in the blue-chip S&P 500 Index turned $100,000 into just $56,500 between 2000 and 2002 is lost on many. Below are some securities we think provide the best of both worlds: strong longterm performance and downside protection. We think it’s always a good time to think about downside protection. If you wait until there is blood in the streets, it’s too late. Overview by Michael Breen Van Kampen American Franchise VAFAX $14K 13 03 04 05 06 07 12 S&P 19000 500 06 16000 07 S Glass-half-empty sorts are likely to see manifold problems here. Borders’ previous strategy—using cash from its Waldenbooks stores to retool the firm’s domestic superstores and fund global expansion—foundered on the shoals. In response, management has embarked on a restructuring plan to shrink the firm’s global footprint, shutter many of its Waldenbooks stores, and refocus on its core superstores. Instant gratification this story ain’t, as turnaround could take some time to play out and cost Borders dearly in the process. Nevertheless, the plan’s central pillars— making the superstores the firm’s principal revenue source and rejiggering the sales mix to de-emphasize lower-margin items (music) in Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 favor of more-profitable products (stationary, foodSep-03Apr-04 Mar-05 Feb-06Sep-06Apr-07 Feb-03 andFeb-04 Mar-03 Nov-03 Jul-04Feb-05 Oct-05 Jun-06 Feb-07 Apr-03 Mar-04 May-03 beverages)—make sense. Oct-06 are Jun-03 May-04 Apr-05 Mar-06There Jun-07 Jul-03 Aug-03 Jun-04 May-05 Apr-06 Mar-07 Oct-03 Aug-04 Jun-05 May-06 Jul-05 Aug-05 Sep-05 Jul-06 May-07 Aug-06 Jul-07 Aug-07 risks—principally, that Borders will eat Barnes Dec-03 Sep-04 Nov-04 & Nobles’ BKS Oct-04 the restructuring falters dust if Dec-06 Dec-04 Nov-05 Dec-05 Nov-06 or management’s investments stress the firm’s balance sheet. But we see upside. Halting progress notwithstanding, investors also can take some comfort that they’ll get paid to wait, as the stock was recently sporting a 2.85% dividend yield. JP Ideally, they’ll hold stocks forever. Annual portfolio turnover has never topped 20%. Several top holdings, including White Mountain Insurance WTM, have been in the portfolio for more than a decade. This strategy is the firm’s flagship offering and has been in existence since 1975. As indicated by its downside capture ratio of just 48.3, it has held up better than nearly all separate account strategies in down markets. The strategy actually gained 28% in the bear market from 2000 through 2002—a period when the S&P 500 Index shed 43% of its value. MB Growth Growth investing with downside protection sounds like trying to mix oil with water, especially after the tough times of 2000 to 2002. That doesn’t have to be the case, however. True, pricey, fast-growing companies have further to fall, but firms with more bulletproof growth characteristics can hold up okay when the market takes a turn. Valuation is the big wild card, and that’s the factor that took growth funds on a wild rollercoaster ride during the last bull and bear markets. Here’s a collection of growth investment ideas that we think do better in rough times. Overview by Karen Dolan Jensen Fund JENSX $19K 16 S&P 500 13000 This fund hasn’t had a chance to exhibit what it’s capable of yet, but we think its 10000 absolute-minded approach will hold up well in tough times. Manager Hassan Elmasry has ably shown an ability to lock in consistently strong absolute returns at closed Van Kampen Global Franchise VGFAX. Cash-rich companies that boast recurring revenues, strong brands, and high and sustainable returns on employed capital grace its portfolio. And Elmasry’s keen attention to valuation and risk leads the fund away from speculative fare and to companies that have healthy free cash flows. KD MF Fenimore Asset Management Value Product $20K 03 04 05 06 07 15 S&P 500 03 04 05 06 07 SA This shop is a big believer in Benjamin Graham’s margin of safety. Its managers look for financially strong companies trading at big discounts to their estimates of intrinsic value. This growth fund only holds 25 stocks, but it has done a remarkable job weathering market storms. It lost 11% in 2002, but avoided losses in 2000 and 2001. Its bear market showing was not only better than practically every other growth fund, but it also bested the typical large-blend and large-value fund in 2002. That has more to do with the management team’s investment approach than the fund’s number of holdings or its growth style. The team looks MF Jan-06 MorningstarAdvisor.com Dec-05 65 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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