Morningstar Advisor - Spring 2007 - (Page 53)

proved valuable to large, national mortgage lenders. The downside is the cyclical nature of First American’s business given its dependence on the volume of real estate transactions. First American must maintain production and closing facilities throughout the cycle, so margins come under heavy pressure during downturns. Fortunately, First American’s reliance on cyclical title revenue is shifting to information services, a higher-margin business. Jeffrey Ptak SA contrarian and believes the small-cap area is fertile ground to exploit market inefficiencies with his quantitative model. Two favorites over the past 24 months have been Asta Funding ASFI, a financial services firm, and K-Tron International KTII. The strategy’s largest holding at year-end 2006 was Cleveland-Cliffs CLF, the iron ore mining leader in North America. Steve Deutsch ZPR Fundamental Small Cap Value International S Novartis’ biggest challenge is one any big pharma firm would love to have: It must manage the rollout of a slew of new drugs that could receive regulatory approval in the U.S. and Europe in the next year. In the coming three to five years, Novartis has about 50 drugs in late-stage development that could reach the market. Not all of these products will receive approval, but the odds are stacked in Novartis’ favor that it will continue to generate exceptional returns. Jeffrey Ptak E The ZPR Fundamental Small Cap Value separate account is appealing for its long-term returns, which land in the top decile of the small-value category for the three-, five-, and 10-year periods. In 2006, the strategy recorded a 31.27% gross return, more than 12 percentage points above the category’s return. Its nimble $33 million asset base is another plus, as is its $100,000 retail minimum. But high reward comes with high risk, so investors must be ready to accept a 10-year standard deviation of 18%. In 2004, the portfolio’s 19.18% return landed it in the category’s bottom quartile. Advisors and their clients also should bear in mind the strategy’s relatively high 2% money manager fee for accounts under $1 million in value and typical annual turnover of 78%. Max Zavanelli has run the separate account for close to 20 years. He is a Novartis AG NVS SPDR MSCI All Country World Index ex-US CWI Novartis has become a leader in pharmaceuticals and generics through a series of acquisitions over the past decade. That trend has yet to fade, as the company continues to acquire companies in key areas, most recently strengthening its position in biotechnology and vaccines with the purchase of Chiron. The firm’s strong product portfolio is a testament to its ability to gain complementary assets from disparate businesses. Historically, the pharmaceutical and generics industries have been at odds, each trying to win a larger share of the profits from manufacturing drugs in a zero-sum game. But at Novartis, these two businesses not only coexist, they feed off each other. Its pharmaceutical business has the inside scoop on how to protect patents from generic challengers, and Sandoz has exceptional manufacturing expertise in difficult-to-make drugs. Although the ETF market has grown by leaps and bounds, investors seeking broadly diversified foreign exposure had only one ETF choice for years: iShares MSCI EAFE Index EFA, a fund that restricts its view to developing countries and excludes Canada. But investors’ options are expanding, as a few more diversified international ETFs have hit the market in recent months. SPDR MSCI All Country World Index ex-US, which debuted in January 2007, provides exposure to virtually the entire world except the United States, including both developed and emerging economies. That makes it a convenient one-stop diversifier to add on to a portfolio of domestic funds. Granted, this ETF courts more risk than funds that restrict themselves to the developed Separate Accounts NB All Cap Core SMA Growth of $10,000 $40K ZPR Fundamental Small Cap Value Growth of $10,000 $34K Vontobel Asset Mgmt Emerg Mkts Eq Growth of $10,000 $34K Galliard Capital Mgmt Stable Value Growth of $10,000 $13K 12 LB Aggregate 20 S&P 500 02 03 04 05 06 22 S&P 500 02 03 04 05 06 22 MSCI EAFE 11 02 03 04 05 06 02 03 04 05 06 Growth pick: Rests on large blend/growth border. Avoids major missteps while earning above-average returns. Low investment minimum. Value pick: Top decile returns in smallvalue category come with high risk numbers. Nimble asset base and low investment minimum add to appeal. International pick: Manager Rajiv Jain is a talented investor who looks for consistency and free cash flow. Very low minimum makes Jain accessible to most. Alternative pick: Experienced manager team accomplishes what it sets out to do: provide stable value of principal. MorningstarAdvisor.com 53 http://www.morningstaradvisor.com

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

Morningstar Advisor Spring 2007 Features Departments Letter from Joe Mansueto Get to Know Morningstar’s Fund Managers of the Year Is Your Client a Stock or a Bond? Less Alpha, More Beta Than Meets the Eye Your Mileage May Vary A Clear-Eyed Look at Hedge Funds Lower Risk, Higher Returns, What’s Not to Like? Without Cash and Clout, Advisors and Clients Get Short End of Stick Get the Strategy Minus the Headaches Analyzing Funds of Hedge Funds Not All Hedge Funds Are Created Equal A Fund with a (Long) View Laying Low and Prospering A Menu of Ideas to Fill Five Market Baskets Oil and Gas Gushing with Values Mutual Fund Analyst Picks Undervalued Stocks Most Popular Variable Annuities What’s New at Morningstar and on the Web You Can’t Always Get What You Want

Morningstar Advisor - Spring 2007

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