Morningstar Advisor - Summer 2007 - 58

Screens Finding Funds with Conviction by Karen Dolan Thompson Plumb Growth THPGX This classic growth fund doesn’t get carried away with momentum factors. Instead, manager John Thompson favors stocks with histories of healthy cash flow, strong balance sheets, and attractive returns on equity. He pays attention to price, too. He hasn’t had any trouble finding ideas in the current environment because several high-quality steady growers are trading at attractive prices. Yacktman YACKX If you value a consistent showing, you may want to skip over Yacktman Fund. This value hound tends to hold up—and even thrive— when markets tumble and lag its peers during rallies. Lately, it has been deserting traditional value fare for consumer-products firms that benefit from disposable products, repeatable sales, and strong brand names. DFA U.S. Small Cap Value II DFAVX DFA understands trading costs better than anybody and that knowledge is a key component of its passive strategy. Though this fund is small, DFA manages a lot of money in small-cap value. In a twist unique to DFA, size works in the fund’s favor because it gives DFA the power to negotiate better prices for stocks in exchange for taking unwanted blocks of shares off other investors’ hands. K A Morningstar study published in the April edition of Morningstar FundInvestor found that concentrated mutual funds with low turnover are less volatile than their category peers in subsequent periods. We’ve taken that idea and added some criteria to come up with a short list of investing ideas for you that pack some punch, but don’t keep you awake at night. You can perform this screen in Morningstar Advisor Workstation and Principia Mutual Funds. First, we want to find equity funds that have the characteristics that proved beneficial in the study. So, we looked for those that have compact portfolios and trade little: stock-specific bets. Beyond that, we’ll narrow down the list further to avoid expensive funds and those that may be bloated. We’ll define nimble here as asset bases that are less than $1 billion and inexpensive as expense ratios less than 1.25 percent. Manager Tenure (Longest) and and Net Assets $MM Audited Exp. Ratio 10 1,000 1.25 Finally, we need to single out funds that are open to new investors and take a look at the oldest share class (or if you have a particular share class that you prefer, you can search by that instead): Karen Dolan, CFA, is a mutual fund analyst with Morningstar. Total # of Holdings and or and Morningstar Category Morningstar Category Turnover Ratio % 50 Dom. Stock Intl. Stock 50 and Special Criteria Purchase Constraints Distinct Portfolio Closed to New Invts. Next, we’ll single out managers who have been around over a full market cycle. After all, experience matters, and it is especially critical for funds that are making sizeable Our search yielded 48 funds. You can revise our criteria to narrow your own searches to get a smaller number of results. But of the 48 results, here are three that our mutual fund analysts particularly like: Share Your Best Ideas Send us a favorite fund screen that you use in your practice. We’ll consider printing it in this space for the benefit of other advisors. And we’ll acknowledge your contribution. Submit it to magazine_editor@morningstar.com 58 Morningstar Advisor Summer 2007

Morningstar Advisor - Summer 2007

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