Morningstar Advisor - Summer 2007 - (Page 56)

Investments à la Carte we think we’re years away from a large-scale shift away from DVDs for a few reasons. First, a lack of digital-rights-management standards and the slow adoption of fiberoptic cable should confer the DVD business staying power. Second, movie studios are still dependent on DVD sales, which constitute a large portion of their profits. Third, although the DVD business is hampered by a war between two high-definition standards (HD DVD and Blu-Ray), it should recover once a single standard emerges. JP MF Although it carries substantial issue- and country-specific risk, the fund’s limited valuation risk and tendency to hold cash can help moderate volatility. KD E iShares S&P Global 100 Index IOO Longleaf Partners International LLINX This mutual fund hasn’t had the tailwind of a weakening dollar working for it because it hedges its foreign currency exposure. Rather than simply counting up the assets it has in foreign stocks and hedging that amount, it makes a calculation to determine the true economic exposure of its holdings to currency movements. The result is technically less than a 100% hedge, but in essence, it removes nearly all of the fund’s exposure to foreign currencies. Beyond its hedging strategy, the fund has other draws. Its managers practice a sound value-conscious strategy that isn’t handcuffed to the MSCI EAFE Index. They look for companies that trade at discounts of 40% or more to their intrinsic value estimates. The resulting portfolio pays scant attention to country and sector weightings and only holds 20 to 30 stocks at a time. This ETF’s benchmark includes 100 multinational companies from across the globe. As such, it’s loaded with financially solid industry leaders, half of which are headquartered abroad. And many of the foreign firms are household names in the United States, including the likes of BP BP and Nestlé NSRGY. Since many of these firms earn profits in multiple currencies, they’re less exposed to the gyrations of the U.S. dollar. Furthermore, the fund’s bias toward big blue chips means it stands to benefit if mega-caps mount a resurgence, a distinct possibility judging from our equity research. To wit, the fund was recently trading at a roughly 8% discount to its aggregate fair value based on our analysis. Thus, the fund not only can serve as the cornerstone of a long-term foreign allocation, but also looks like a bargain to boot. SM roster of peer groups in 2006. The list of funds is up to 51 and continues to grow. But we don’t think investors should simply pile in. Most of these funds tend to be on the pricey side and have untested strategies. Given the aggressive tools at the disposal of managers, the dangers can be significant. Strategies are available with varying degrees of risk-taking—from market-neutral funds that aim to avoid market risk to funds that have more than 100% exposure to the market. We highlight one of the better “130/30“ offerings and a solid market-neutral fund. MF UBS Equity Alpha BEAAX A relative newcomer, UBS Equity Alpha shows a great deal of promise. It keeps close to a 100% net long position by investing cash from its short positions, which amount to roughly 30% of the portfolio, into its long portfolio (hence, a 130/30 strategy). While its full market exposure makes it more aggressive than most rivals, the fund has a fundamentally sound and conservative strategy. And with an expense ratio of 1.5%, the fund looks reasonably priced among its rivals. KD MF Alternative Overview by Karen Dolan Hedge-fund-like vehicles continue to seep into the traditional open-end mutual fund universe. So much so that Morningstar created a new long-short mutual fund category to its Highbridge Statistical Market Neutral HSKAX Separate Accounts Thornburg Domestic Equity Composite Growth of $10,000 $17K Janus Opportunistic Alpha Growth of $10,000 $11K 12 S&P 500 S&P 500 02 03 04 05 06 07 Jan 07 Apr 07 Value pick: Bottom-up stock-picker William Fries’ search for consistent earners with dominant franchises has led him to load up on fallen-growth stocks. Growth pick: On a hot streak, but has staying power. Manager David Decker’s strategy is “contrarian growth,“ which recently has led to deep-value sectors. Unlike the UBS Equity Alpha, this fund cancels out market exposure by balancing its long and short positions to lock in a marketneutral profile. Though several funds claim market neutrality, they didn’t all show it during market plunges on Feb. 27 and March 13. This fund, too, was put to the test on those days, and it passed with flying colors, gaining money on both days. Besides its strong showing during those stress tests, the fund boasts an impressive hedge fund pedigree of managers. Basically, the team looks to profit from temporary, small price dislocations in a universe of domestic stocks roughly equivalent to the Russell 1000 Index. That can make the fund inefficient for taxable accounts, but the approach makes it a worthy contender for tax-sheltered investors. KD K 56 Morningstar Advisor Summer 2007

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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