Morningstar Advisor - Fall 2008 - (Page 60)

Undiscovered Managers MCD. Most investors doubted McDonald’s Jay Sekelsky Madison Mosaic Investors MINVX $20K S&P 500 16 12 03 04 05 06 07 08 Category 4 Large Blend Morningstar Rating QQQQ Minimum Investment $1,000 Data as of Sept. 30, 2008. Expense Ratio (%) 0.94 5-Yr Anl Total Rtn (%) 3.82 5-Yr Total Rtn % Rank Cat 71 could pull off a turnaround at the turn of the millennium. The fast-food giant was facing serious head winds on several fronts—a depressed economy, consumer interest in healthier options, and growing competition from the likes of Burger King, Wendy’s, and a variety of more-upscale chains. As the company posted quarter after quarter of disappointing earnings and its shares lost more than half their value, Sekelsky and his team bought more, arguing that the company had one of the world’s most recognizable brands, a vast portfolio of prime real estate assets, and had done a good job of returning cash to shareholders. McDonald’s traded at a mere $12 per share in early 2003; it traded at above $60 in August when Sekelsky took the fund’s winnings off the table. Providing Shelter from Storms mortgage insurer MGIC MTG in August 2007 and betting on financially sound insurance giants, such as Aflac AFL and Berkshire Hathaway BRK.B, which have held up well the past 12 months. The close attention that Sekelsky pays to firms’ balance sheet health and the desire for good downside protection may stem from his early days at Madison Investment Advisors (and time at Wellington), when he worked on fixed-income portfolios in addition to the equity side. A mind-set that considers the full range of a firm’s capital structure seems particularly important to navigating today’s marketplace. Finding Tomorrow’s Winning Stocks Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Feb-03Aug-03Feb-04Aug-04Feb-05Aug-05Feb-06Aug-06Feb-07Aug-07Feb-08Aug-08 Mar-03Sep-03Mar-04Sep-04Mar-05Sep-05Mar-06Sep-06Mar-07Sep-07Mar-08Sep-08 Apr-03Oct-03Apr-04Oct-04Apr-05Oct-05Apr-06Oct-06Apr-07Oct-07Apr-08 May-03Nov-03 Jun-04Dec-04Jun-05 May-06Nov-06 Jun-07Dec-07Jun-08 Jun-03Dec-03 Jul-04 May-05 Jul-03 May-04Nov-04 Jul-05 Jun-06Dec-06 Jul-07 May-08 Jul-06 May-07Nov-07 Jul-08 Nov-05 Dec-05 While Sekelsky’s unwavering focus on valuation and predictable cash flow has helped the fund sidestep trouble, this single-mindedness has not been rewarded at times (and sometimes for long periods). The fund’s returns land in the bottom half of the large-blend category over the trailing three- and five-year periods. The dearth of energy companies in the portfolio over the past several years goes a long way to explain the fund’s relative performance. That said, Sekelsky’s caution has provided good downside protection. For example, the team’s avoidance of richly valued tech companies with hard-to-predict cash flows held back returns in 1998 and 1999, but it helped bolster the fund during the 2000 to 2002 ensuing bear market, when the fund landed in the top third of its large-blend category each year. More recently, the fund has lost less than the typical large-blend fund in the past year, in part because of his long-term picks Johnson & Johnson, Target, and McDonald’s. Sekelsky and his team also avoided some of the financial sector woes that have plagued others by making an early exit out of troubled Beyond providing a measure of protection here, of course, Sekelsky is always on the lookout for the next McDonald’s. He thinks that Walgreen WAG has that potential. The drugstore giant has consistently generated high returns on invested capital, but its shares took a beating for disappointing sales in the latter half of 2007, Sekelsky says. Like McDonald’s, Walgreen has excellent balance sheets and a portfolio of valuable real-estate assets. In the end, while other managers will often look at many of the same factors that Sekelsky and his team do, the group here has shown good discipline in its approach. And that’s why Richard Thompson, a financial advisor at Morgan Stanley, recommends the fund to his clients, saying that “it is Sekelsky’s discipline and consistency” that keeps him coming back. Another important factor is the fund’s downside protection. “In a client portfolio of seven or eight funds, you don’t need every fund to be batting .300,” says Thompson. While the fund has shown periods of significant relative underperformance, the absolute losses have been modest, underscoring the team’s caution and desire to protect shareholder capital. K Wenli Tan is a mutual fund analyst with Morningstar. Contributing editor Lawrence Jones is an associate director of fund analysis with Morningstar. 60 Morningstar Advisor Fall 2008

Table of Contents Feed for the Digital Edition of Morningstar Advisor - Fall 2008

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

For optimal viewing of this digital publication, please enable JavaScript and then refresh the page. If you would like to try to load the digital publication without using Flash Player detection, please click here.