Morningstar Advisor - Winter 2008 - 72

Investments á la Carte Allied chooses to be taxed as a regulated investment company, it is not taxed on income it distributes to shareholders on a timely basis. Therefore, Allied pays out the majority of income as dividends within two years of the date it is earned. Be aware, though, that the portion of the dividend attributed to Allied’s interest income is subject to the normal income tax rate and not the 15% dividend rate. JF Templeton Income TINCX $14K 13 12 S&P 500 03 06 07 Templeton has long had a contrarian bent, and stock manager Lisa Myers has been able to pick up stocks fairly cheaply because large, high-quality stocks that tend to pay dividends have been out of investors’ favor. More generally, overseas firms tend to have higher dividend yields; in fact, the stock portion of this portfolio (about a third of which consists of financials) has a higher allocation to foreign stocks than Templeton’s other large-cap global-stock offerings. On the bond side, Michael Hasenstab doesn’t take much credit or interest-rate risk, but some of his other moves—investing in emerging markets and non-dollar bonds—introduce risks that many Aug-05 world-allocation funds do not. UnfortuAug-06 Aug-07 other nately, the fund’s relatively high expense ratio Sep-05 Jan-06 Oct-05 Feb-06 Nov-05 Mar-06 Dec-05 Sep-06 Jan-07 May-07 Sep-07 Oct-06 Feb-07 Jun-07 Oct-07 Nov-06 Mar-07 Dec-06 Apr-07 Nov-07 chips away Apr-06healthy yield. KD Jul-07 at itsJul-06 May-06 Jun-06 MF eye-catching in itself, but we think that the fund’s allure extends beyond its dividend payout. For instance, this is one of the highest-quality portfolios that we cover: Our analysts have awarded wide economic moat ratings to 26 of the fund’s 93 holdings, with those names accounting for nearly 60% of assets. These stocks run the gamut of the financials world, ranging from retail-banking heavyweight Bank of America BAC to bond insurer Aflac AFL to asset manager Franklin Resources, the common thread being that each firm boasts a defensible competitive advantage of some kind. Best of all, it’s cheap: The fund was recently trading at a steep 22% discount to our fair value estimate, reflecting the rampant (and, we think, overdone) fear that has swept the financials sector. Thus, investors can scoop up a fat yield and a great bargain in one fell 19000 swoop with this offering. JP 16000 13000 Value Property-casualty insurer Old Republic ORI recently stepped up to the plate and took a home-run swing at a large amount of common stock in two mortgage insurers that we think are vastly undervalued. We give the firm a standing ovation and believe that an investment in Old Republic now represents an effective “double-dip” for owners. Essentially, prospective buyers can now buy both the operations of a good insurance company below book value as well as getting the stocks in its investment portfolio well below book value as well, given that Old Republic now owns positions of 15% of the PMI Group PMI and 11% of MGIC MTG, which are both high undervalued. JF E Weitz Value WVALX $19K 16 S&P 500 13 While all investing is essentially value investing, people labeled as value investors tend to have a highly contrarian bent to their investment practice. Berkshire Hathaway chairman Warren Buffett—perhaps the most successful “value investor” ever—illustrated this view perfectly with this investing axiom, “Be fearful when others are greedy, and greedy only when others are fearful.” And now, the area of the market where people are most fearful is in the financial sector, where worries have pummeled the shares of some companies that we think have relatively good long-term prospects. As value investors and contrarians, we think this is the best area of the market to find MF When Wally Weitz thinks a firm’s stock price offers a good multiyear value, he’ll buy it—even if he thinks it might fall further. The obvious question is: Why not wait? He considers that market-timing, which to do well you must buy at the right time and sell at the right time. In his view it’s easier to buy at a low price and sell at a high price. Plus, if a holding’s price drops, he can buy more—and he certainly does. 10000 03 04 05 06 07 This Jan-03 is pertinent now because Weitz’s Jan-04 Jan-05 Jan-06 Jan-07 Dec-05 Feb-06 Dec-06 Financials Select Sector SPDR XLF $19K some very compelling long-term opportunities. Overview by Justin Fuller S&P 500 Feb-03 Oct-03 Jun-04 Feb-05that Mar-06Nov-06 Jul-07 Mar-03Nov-03 Jul-04 Mar-05Nov-05 Jul-06Feb-07 Oct-07 Apr-03Dec-03Aug-04Apr-05 housing-related Nov-07 May-03 Feb-04 Oct-04 Jun-05 May-06 Apr-07 Jun-03 Mar-04Nov-04 Jul-05 Jul-03 Apr-04Dec-04Aug-05 Jun-06 May-07 Aug-03 May-04 him Sep-05 Aug-06 Jun-07 Sep-03 Oct-05 Sep-06 Aug-07 Oct-06 Sep-07 contrarianismSep-04May-05 Apr-06 Mar-07 tells 16 Old Republic ORI $20K 20000 17500 15000 12500 10000 13 03 04 05 06 07 15 S&P 500 fare is offering good long-term values. The fund holds troubled financial-services provider Countrywide Financial CFC, which has been taking a beating because of its mortgage origination business, but the fund also owns firms that are in better shape, such as Berkshire Hathaway BRK.B and Wal-Mart WMT. KD This ETF was recently yielding about a percentage point more than the S&P. That’s E 03 04 05 06 07 72 Morningstar Advisor Winter 2008
Morningstar Advisor - Winter 2008

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