Morningstar Advisor - Fall 2008 - (Page 56)

Undiscovered Managers Kevin O’Boyle Scores of consumer-oriented companies also meet his initial screens, but because he worries that reduced access to credit markets will hurt sales of pricier durable goods, he’s avoided names such as Home Depot HD and CarMax KMX. More controversially, he’s devoted a small slice of the portfolio to precious metals as insurance against a falling U.S. dollar. “The financial system is broken,” O’Boyle says, “and the means by which it will be repaired are likely to be inflationary” as the Fed attempts to prop up ailing institutions by injecting the economy with more cash. Thanks to Presidio’s svelte asset base, a key distinction from his peers is that O’Boyle enjoys much more flexibility to invest in small names. He benefited from such freedom for much of his time at Meridian Value, but a torrent of new money flooded the fund in 2001, leaving him hamstrung. (Assets grew from $285 million at the end of 2000 to $1.1 billion a year later.) O’Boyle invests across the market-capitalization spectrum at Presidio, but the fund’s size allows him to easily invest in small- and micro-cap stocks, which fueled his best years at Meridian Value. Opportunity Knocks Presidio Fund PRSDX $16K 1990s) and another assists him with administrative duties. But Presidio is largely a one-man show. While still doing some administrative duties himself, O’Boyle says that he spends more than 85% of his time researching stocks. And he’s the only one doing the research. (O’Boyle hired an analyst in early 2007, but he left at the end of the year for personal reasons). O’Boyle didn’t have any analysts during most of his tenure at Meridian, either. A bigger challenge could come from growth. Presidio hasn’t been inundated with assets, but that could change if performance remains strong. When Meridian Value swelled with new assets in 2001, O’Boyle struggled to put the money to work. Because the stock market was tanking in 2001, having a lot of cash didn’t hurt, but O’Boyle might not be so lucky next time around. O’Boyle says that he won’t hesitate to take action if money started coming in too quickly—something Meridian failed to do. As models, he cites Longleaf Partners and First Pacific Advisors— two extremely shareholder-friendly shops that have closed funds to new investments over the years. Presidio still has a lot to prove if it wants to be included in the same elite rank as those two firms. Still, with talented, proven management, Presidio is one of the small-cap world’s bright lights. K Christopher Davis is a mutual fund analyst with Morningstar. He is editor of Morningstar’s Fidelity Fund Family Report, a monthly newsletter that offers independent guidance on the fund family and helps investors find the best Fidelity funds. 14 12 S&P 500 05 06 07 08 Category 6 Small Blend Morningstar Rating Expense Ratio (%) 1.50 3-Yr Anl Total Rtn (%) 4.19 3-Yr Anl TR % Rank Cat 9 QQQQQ Minimum Investment $10,000 Data as of Sept. 30, 2008. Jun-05 Jun-06 Jun-07 Jun-08 Jul-05Oct-05 Feb-06 Jul-06Oct-06 Feb-07 Jul-07Oct-07 Feb-08 Jul-08 Aug-05 Dec-05 Sep-05 Jan-06 Nov-05 Aug-06 Dec-06 Apr-07 Aug-07 Dec-07 Apr-08 Aug-08 Sep-06 Jan-07 May-07 Sep-07 Jan-08 May-08 Sep-08 Nov-06 Mar-07 Nov-07 Mar-08 Apr-06 May-06 Mar-06 If there’s a time when investors should expect Presidio to struggle, O’Boyle says that this is it. With few earnings improvement stories to come by, he finds recessionary environments the toughest time to run his strategy. Yet his fund has held up much better than its rivals in the most recent downturn, just as Meridian Value did in the 2000-2002 bear market. The tough times also have given O’Boyle more buying opportunities. Nearly a thousand names now populate his list of companies that have disappointed at least three quarters in a row, a couple hundred more than usual. To be sure, investing with a tiny operation like Presidio comes with unique risks. O’Boyle hired one person to handle trading (he worked at Meridian in the late 1980s and early 56 Morningstar Advisor Fall 2008

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Morningstar Advisor - Fall 2008 Contents New on MorningstarAdvisor.com Letter from the Editor Contributors Inbox Are You Preparing for Higher Taxes? State of Financials Oracles of Alabama Investment Briefs Managers’ Investment Secrets Revealed Conformity Becomes a Growing Concern at American Gimme Shelter Location, Location, Location Rooted in Buffett, Going for Growth Keeping Little Company Away from the Numbers Consumer Confidence What about Natural Gas? TIPS to Beat Back Inflation Investing in Hidden Assets Funds That Have an Edge Come Tax Time Mutual Fund Analyst Picks 50 Most Popular Equity ETFs Undervalued Stocks Most Popular Variable Annuities New at Morningstar One for You, 19 for Me

Morningstar Advisor - Fall 2008

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