Morningstar Advisor - Summer 2007 - (Page 53)

MF Vanguard Windsor II VWNFX Expenses impose a direct hit on yields, but not in the case of Vanguard Windsor II. By virtue of its dirt cheap 0.33% levy, the fund has been able to pass along more of its holdings’ dividend payouts to shareholders. Consequently, the fund has maintained healthy yield levels over time. Over the past 10 calendar years, the percentage of the fund’s total return that came from dividends hovered between a low of 2% in 2001 to a high of 3.1% in 1996. Low expenses aren’t the only story here. Five advisors split the portfolio with roughly 60% of assets going to Barrow, Hanley, Mewhinney & Strauss. The Barrow crew especially likes companies that pay dividends and that also look cheap; recent favorites include Bank of America BAC and Pfizer, both of which are currently yielding around 4%. KD E Citigroup C, Pfizer PFE, and Chevron CVX because the model indicated that these companies may not be able to increase their payouts as time goes on. The fund’s model was developed by Vanguard quantitative equity group, which has demonstrated its ability to run and develop successful quantitative strategies. Finally, this ETF has an attractive price ratio of 0.28%, which should also work in its favor over time. SM prices have mostly languished since. This stagnation in prices has compressed valuations, and many fallen-growth stocks now trade at a discount. As a result, many of these still-dominant, albeit slower-growing, firms look like good values. Below are several investments fitting a fallen-growth theme. S Motorola MOT Value Overview by Michael Breen One of the most interesting trends in recent years has been the rotation of certain stocks from growth to value managers. A glance at the current top holdings of such respected value hounds as Wally Weitz, Bill Nygren, Mason Hawkins, and Chris Davis reveals a bevy of names that were the toast of the growth crowd back in their heyday. Value managers are now big holders of such former highfliers as Microsoft MSFT, Dell DELL, Comcast CMCSK, American International Group AIG, Medtronic MDT, Time Warner TWX, and Wal-Mart Stores WMT. Interestingly, nearly all of these names were big holdings of the era’s prototypical growth fund—Janus Fund JANSX—in 1999, when the fund sported a P/E ratio of 50. But these stocks plunged in 2000, and their share Vanguard Dividend Appreciation ETF VIG This ETF keeps an eye on its benchmark, Mergent Dividend Achievers Select Index, a market-cap-weighted index of firms that have increased their dividends in each of the past 10 years. But this isn’t just an index tracker. Management goes a step further by applying quantitative screens to the index to identify those companies that are most likely to continue to grow dividends over time. For example, recently it tossed out names like Add Motorola to the list of growth names that the value crowd is taking a shine to. According to our data, the managers of Dodge & Cox Stock DODGX, Legg Mason Value LMVTX, and Mutual Shares TESIX— bargain-hunters, all—have piled into the stock in recent months. They’re onto something, as we also see good value in this erstwhile growth darling. Management has refocused the firm on its complementary handset and telecom infrastructure businesses while shedding non-core units. Even after paring back the business in this manner, Motorola continues to boast impressive scale, a vital quality given the importance of supply-chain management, procurement, and distribution in the cutthroat wireless handset market. Meanwhile, the firm’s distribution heft makes it possible to profitably expand into fastgrowing developing markets. Of course, Motorola would be spinning its wheels if it didn’t have good product to sell. But here, too, Motorola has shown marked improve- Stocks Washington Mutual Growth of $10,000 $17K Motorola Growth of $10,000 $19K 15 S&P 500 S&P 500 Fuel Tech Growth of $10,000 $50K Thomson ADR Growth of $10,000 $16K S&P 500 13 7 S&P 500 02 03 04 05 06 07 13 32 9 02 03 04 05 06 07 02 03 04 05 06 07 02 03 04 05 06 07 Income pick: Major player in mortgage industry hampered by fears of a slowdown. But market is overlooking its innovative retail banking franchise. Value pick: Former growth darling falls to earth. Firm refocused on handset and telecom infrastructure businesses and still creates great products. Growth pick: Solved the expensive problem of “slag“ in coal-fired power plants. New plant builds should pave way for 30%-plus annual growth. International pick: Provider for entertainment and media businesses. Market’s concerns that digital downloading will harm firm’s DVD business are overblown. MorningstarAdvisor.com 53 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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