Morningstar Advisor - Fall 2008 - (Page 66)

Investments á la Carte PowerShares Dynamic Large Cap Value PWV This ETF has placed itself squarely in the 16000large-cap bucket by tracking the 50 most S Veolia Environment VE $16K actively traded emerging-markets ADRs. $45K 14000 14 Though size doesn’t automatically translate to 35 12000 12 quality, large-cap firms more often tend to S&P 500 TR 25 boast key attributes like scale, brand equity, or 10000 10 high barriers to entry. Nearly 75% of the fund is S&P 500 TR 8000 05 06 07 08 in giant caps. Firms domiciled in Brazil, South 03 04 05 06 07 08 Korea, and China are most common, while the Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Though decidedly in the large-cap value space, telecom, industrial, financial, and energy Veolia, based in France, is the second-largest sectorsMar-04 Feb-05 Feb-06 are Jun-07Mar-08 dominate.Jun-05Mar-06 Feb-07Nov-07Aug-08 this compact ETF tracks a quasi-actively Since Apr-06 Mar-07 Feb-08 ADRs Apr-07 Apr-08 widely May-08 Feb-03Nov-03 Sep-04 Jul-05 May-06 May-07 Jun-08 Mar-03Dec-03 Oct-04 Aug-05 Jun-06 Apr-03 Feb-04Nov-04 Sep-05 Jul-06 Jul-07 Jul-08 May-03 Apr-04 Mar-05 Jun-03 Jun-04 Apr-05 Jul-03 Jul-04 May-05 Aug-03 Aug-04 Sep-03 Oct-03 Aug-06 Aug-07 Sep-06 Sep-07 Oct-06 Oct-07 May-04 Dec-04 Oct-05 Nov-06 Dec-07 Nov-05 Dec-06 Dec-05 water-treatment and waste-treatment company managed index that sifts through large, cheap available to U.S. investors, this fund has not in the world. Its main business is running water stocks for 50 names with the best upside opened any previously inaccessible doors with systems for governments in many parts of the potential. PowerShares divvies stocks into the its strategy. However, its 0.30% expense ratio world, both developed and emerging. As growth and value camps based on traits like when compared with most other funds likely emerging countries develop, they have an earnings growth, price/book multiples, and trumps the trading costs that investors would increased desire for clean drinking water, which dividend yield. The resulting portfolio sports incur if they tried to replicate this portfolio. provides long-term growth for this business. purer large-cap exposure than the Russell 1000 Apr-05 Apr-06 Apr-07 Apr-08 There is an ongoing $1.5 trillion clean water Value Index. Though Morningstar’s bottom-up Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 project under way worldwide. The demand for approachFeb-06 Aug-06 Feb-07Jul-07different Aug-08 valuing stocks is Jan-08 Non-Market Correlated Overview May-05 Nov-05 May-06 Nov-06 May-07 Nov-07 Jun-08 Jun-05 Dec-05 Jul-06Dec-06 Jun-07 Dec-07 Jul-08 Jul-05 Jan-06 Aug-05 toward Sep-06 Mar-07 Sep-07 Mar-08 Sep-05 Oct-05 Oct-06 Jan-07 Aug-07 Feb-08 Oct-07 Mar-06 Jun-06 May-08 environmental Mar-05Dec-05 Oct-06 Jul-07 May-08 from the indexes’, we are currently coming up Feb-03Nov-03 Sep-04Jun-05 Apr-06 Mar-07 Feb-08 Mar-03Dec-03 Oct-04 Jul-05 May-06 waste, energy, Apr-03 Mar-04 Feb-05Nov-05 Sep-06Jun-07Mar-08 May-03 Apr-04 services—water, Apr-07 Apr-08 Jun-03 May-04 Apr-05 Feb-06Nov-06 Sep-07Jun-08 Jul-03 Jun-04 May-05 Jun-06 May-07 Aug-03 Jul-04 Aug-05 Jul-06 Aug-07 Jul-08 Sep-03 Aug-04 Sep-05 Aug-06 Oct-03 Nov-04 Oct-05 Dec-06 Oct-07 Aug-08 Call them what you will—dynamic Feb-04 Dec-04 Mar-06 Feb-07Nov-07 and transportation—will always exist.Dec-07 In fact, with similar results—we think this collective or quantitative-active—but when we believe that demand will increase as basket of stocks is considerably undervalued. exchange-traded fund providers municipal governments face financial deficits. We cover every holding in the fund, so we have began rolling out their alpha-seeking Thus, they will look to operators like Veolia for a fairly high degree of confidence in this pick. factor-based models over three years business. Case in point: Management recently Though the fund reconstitutes quarterly, it has announced that it would exceed its 2008 10% remained tax-efficient and has not distributed ago, market-watchers dismissed organic revenue growth target, which helps capital gains since it launched. Assets are them as a passing fad with dim support our revenue growth assumptions. We spread relatively uniformly, as the top 10 prospects. Though some will believe that the market is overly pessimistic on holdings soak up only 35% of assets and the undoubtedly fail, others finally have Veolia’s prospects. For example, re-engineering median position size is roughly 1.5%. While been around long enough to post our model to today’s market price implies Veolia cheap compared with several mutual funds, its will earn a 6% midcycle operating margin. expense ratio of 0.63% makes it relatively measurable performance records— Undoubtedly, operating margins will suffer this expensive compared with plain-vanilla ETFs. K and some have performed well year, due to both the strengthening euro and enough to earn our 5-star ratings. sky-high fuel costs. However, we think the 6% ETF consumer stocks have provided plenty of opportunity in recent years. The fund’s top holdings include Signet, a U.K.-based jewelry retailer whose shares have cratered on fears that a recession will decimate demand. But the 56000 firm remains profitable and trades at a fraction of the market’s valuation. Unicharm is a leading 44000 Japanese personal-health product company, 32000 with top diaper and feminine hygiene brands. It is also benefitting from regional expansion. A 20000 record of strong stock-picking makes us 8000 confident that management will hit the mark with its picks. margin is a very pessimistic forecast, given that Veolia has delivered average operating margins of 7.5% over the past three years. ETF $56K 44 32 20 03 04 05 06 BLDRS Emerg. Mark. 50 ADR Idx ADRE Since some of these sport reasonable fees and are well-defined enough to avoid style drift, perhaps it’s no longer absurd to consider these offerings as a way to add diversification without getting battered by hedge fund-like fees. Overview by Paul Justice MSCI EAFE TR 07 08 66 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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