Morningstar Advisor - Summer 2008 - (Page 55)

historical lows. There’s potential in media, too, but traditional media has some structural issues. In financials, we’ve gone very slow, but I’m convinced there’s opportunity in banks in Europe and America; we’re just not quite there yet with the valuations. KK: To what degree do you look at currencies? RG: We do not hedge currencies at the currency level. All currency is done at the stock level; it’s incorporated in our view of a company. For example, the Japanese yen was at 122 to the dollar, it got to 98, and it’s now at 104. My view is that it went too far and it’s going to back up a little bit, maybe back to 108 or 110. Maybe I’m right, maybe I’m wrong. But the key is how would that affect exporters? Well, the exporters—like a Toyota or Nikon, which we happen to own—would benefit. It has less effect on a domestic company, like a retailer. Not to scare off potential investors, but this is among the hardest times in my entire career; it’s the most confusing time as to what to do. Robert Gensler because inflation’s no longer coming down. It’s stabilized and perhaps going up. Real interest rates won’t be able to come down. The currency has rallied hard. So this beautiful thing we call Brazil is still good, but directionally, not as good. As for China, 6% to 6.5% of the strategy was in China in September. We took it down to 1.5% in October and November. Every sale we made was wrong until February, because that market just kept going up. In hindsight, those sales were fine. We’ve started to rebuild our positions in China. We’re actually back to about 4.5% to 5%. We own China Shenhua, which is a coal company. We own Industrial and Commerce Bank of China. We own GOME, which is a consumer electronics company. All different, stock-specific kinds of things. India’s been a very difficult market recently. We know that the underlying economy’s sound, but the inflation’s picked up and the government’s trying to control it. We own Bharti Airtel and State Bank of India. If you notice, we have about 9% of the strategy in emerging-markets banks. That’s come down a little and could come down more, because with inflation rising and interest rates rising, you want to stay ahead of things within banks. KK: What are you finding in developed markets? RG: The dilemma right now in Europe, America, I don’t think it’s wise in an equity portfolio to do a lot of currency hedging. Take the Turkish lire. We’re quite concerned about it for a lot of reasons right now—the foreign direct investment, the risk premiums, etc. If the lire has a problem and the Turkish Central Bank wants to protect the lire, they’re going to have to raise interest rates, and that macro factor of currency will leak into the micro of the fundamentals of a company. So we analyze all currency at the micro level. KK: How do you define growth investing? RG: I have a growth orientation but a very and Japan is that there are a lot of great companies, but there are a lot of head winds and issues, particularly domestically in Japan, where the demographics are so poor. Where I’m spending time right now, and where I’m convinced there’s great opportunity in Europe and America is in consumer discretionary. We’re being very careful and slow, but so many companies have been beaten up. The retailers are down at, not just at 52-week lows, but broad definition of what growth is. I like an industry structure that’s conducive to profitability and getting better over the next few years. I like companies that are gaining stature and share. I’ll play gross cyclicals. I’ll buy regular growth. It doesn’t matter. KK: I noticed in the portfolios that you had positions in both Sprint Nextel S and AlcatelLucent ALU, which would seem to go against what you just said [laughter]. MorningstarAdvisor.com 55 http://MorningstarAdvisor.com

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

Morningstar Advisor - Summer 2008 Contents Letter from the Editor Contributors Inbox College Planning: Solutions and Concerns ETFs: The Next Chapter Engineering Financial Advice Investment Briefs Flexible vs. Style-Pure Managers: The Evidence Forging a New Commodity Index Work Your Way Through College Planning Sizing Up the Options Best and Worst 529 College-Savings Plans A 529 Travel Guide 10 Tax-Smart Tips for College-Savings Planning Global Dialogue How Sequoia Cranks Out Good Returns Year After Year The Many Layers of David Winters Living on the Edge Stocks to Buy Once a Decade With Munis Feeling the Pain, Some Opportunities Arise Health Care Provides Shelter from Economic Storm Help Your Clients Get More Out of Their Bond Portfolios Mutual Fund Analyst Picks 50 Most Popular Equity ETFs Undervalued Stocks Most Popular Variable Annuities New at Morningstar New on MorningstarAdvisor.com Closer to Fine

Morningstar Advisor - Summer 2008

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