Morningstar Advisor - Summer 2007 - (Page 11)

4 5 investor returns while accounting for more than 65% of the category’s assets. Fund-family affiliation is not a great predictor of investor returns. For sure, there are shops, such as Vanguard and American Funds, that have consistently delivered solid investor returns, even in some of the toughest categories. But most often, apparent links with a fund family were better explained by the Morningstar category type. For example, many of the shops with strong investor returns, such as Dodge & Cox, have compact fund lineups that cover only core investment types. In nearly all categories with poor investor returns, the category’s new fund launches jumped at a rate greatly exceeding the industry average after a period of robust performance. In fact, there’s a solid correlation between categories with big trailing two-year returns and a big uptick in new fund issuance. It’s reasonable to foresee a bad experience awaiting some investors in real estate funds. The number of real estate share classes has nearly tripled in recent years. the second quarter. Five funds added to their existing positions in the most popular pick, cable giant Comcast CMCSA, which is now owned by seven of the 15 value funds Peters follows. The choice is a bit at odds with Morningstar’s current take on the stock: 3 stars and fairly valued. Stock Morningstar # of Funds Moat Rating Buying Rating in 1Q come up with an overall weighted batting average. For the second measure, they aggregate the performance of their picks in a broad asset class and compare them with an index. The analysts’ performance for the trailing three- and five-year periods ending the first quarter of 2007, reports Russel Kinnel, Morningstar’s director of mutual fund research, was pretty much in line with where it has been since Morningstar started reporting the figures last year. The three-year average was 70%, and the five-year average was 65%. That means that the analysts have picked winners about two thirds of the time over the past three- and five-year periods. Using the aggregate measure, the domestic-equity picks (excluding sector funds) returned 9.56% versus 7.76% for the Wilshire 5000 and 6.27% for the S&P 500. Those are good figures, but market-cap bias has a hand in that success, Kinnel says. The Wilshire 5000’s average market cap is about $28 billion, whereas the median domestic-equity analyst pick is about $14 billion. Because smaller-cap stocks have outperformed over the past five years, the picks have had a tailwind against the Wilshire. However, 38% of current analyst picks have an average market cap above the Wilshire’s, so it’s not a dramatic mismatch. By asset class, the weighted batting averages show the picks have been more successful in foreign stocks, municipal bonds, and taxable bonds and less so with domestic equity. For example, 98% of the analysts’ foreign largeblend picks have been winners over the past five years, while just 50% of the domestic large-blend picks have been winners. In bond land, the analysts have enjoyed a lot of success in core categories such as intermediate bond and muni national long, where their batting averages are more than 90%. In other areas, their preference for low-risk strategies has held them back. In high-yield taxable, they’re batting just 45% because taking on big credit risk has been rewarded over the past five years. Comcast CMCSA USG USG Dell DELL American Express AXP QQQ QQQQ QQQQ QQQQ 5 4 3 3 2 2 Wide Narrow Wide Wide Narrow Narrow None Narrow Narrow Wide — Narrow Narrow — Narrow American Int’l Group AIG QQQQ Citizens Comm. CZN QQ Constellation Brands STZ QQQQQ 2 Costco COST Countrywide Fin. CFC H&R Block HRB Mellon Financial* Pentair PNR Sealed Air SEE Spectra Energy SE Sprint Nextel S QQ 2 QQQQQ 2 QQQQ — QQQ QQQQ — QQQQ 2 2 2 2 2 2 Data as of 06-30-07 *Mellon Financial merged with Bank of New York BK Stock-Pickers Cable Guys Morningstar stock analyst Jaime Peters took a look at the holdings of 15 funds run by his favorite value managers to see what they’re buying. These are managers, Peters says, who follow the examples set by Ben Graham and Warren Buffett and search for stocks that trade below their estimates of intrinsic value and that provide a margin of safety. They include the likes of John Rogers, Bill Miller, Bill Nygren, Christopher Davis, Bruce Berkowitz, Mason Hawkins, Staley Cates, Marty Whitman, Wally Weitz, and Don Yacktman. Following is a list of the 15 stocks that at least two of the managers purchased during Box Score Analysts Slug .650 To measure performance of their Fund Analyst Picks, which are listed on page 68, Morningstar analysts use two tools: weighted batting averages and aggregate performance versus a benchmark. The weighted batting average essentially measures the analysts’ rate of success against a category average. First, they ask if the pick beat the category average for the time in which it was a pick. Then, they weight that success rate by the length of time that it was a pick. So, a fund that was a pick for five years counts for five times a fund that was a pick for one year. Then, they roll up all those figures to MorningstarAdvisor.com 11 http://www.morningstaradvisor.com

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

Morningstar Advisor - Summer 2007 Contents Letter from the Publisher Get to Know the Bond “All-Stars” Research Briefs Our Stewardship Test Gets Tougher Save It for Later Too Many Oranges Best of Both Worlds No Two Clients Are Alike When It Comes to VAs, It’s Seller Beware Hands On: Finding the Suitable Fund Share Class for Your Client Fund Style Can Drift Off Course Sticking to Their Style, Through Thick and Thin Marathon Man Growth, With a Chaser A Menu of Ideas to Fill Five Market Baskets Funds: Finding Funds with Conviction Stocks: So You Say You Want Income? All Eyes on China Mutual Fund Analyst Picks Undervalued Stocks Most Popular Variable Annuities What’s New at Morningstar and on the Web The Advisor’s Economic Moat

Morningstar Advisor - Summer 2007

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