Morningstar Advisor - April/May 2009 - 18

Advisor Profile Mark Rosenbaum, managing partner, and Jana Basden, certified financial planner, Rosenbaum Investments that struggled for a couple of years,” she says, “but that was because it wasn’t participating in the market bubbles. Now, it’s doing great.” But a manager change is enough to put her on immediate notice, because there’s no indication that the fund will continue to be managed as before. Another red flag is a fund that hews too closely to an index. There is no point in paying higher fees for indexing, she reasons. She’s also soured on exchange-traded funds. Advisors have increasingly gravitated toward ETFs, believing that they provide more transparency, liquidity, and lower cost than their open-end brethren. Though Basden likes the ETF structure in theory, in practice, she has had difficulty including them in her portfolios. “ETFs do have much lower expense ratios,” she says. “But they have the problem of trading at a premium to net asset value. That’s more true of some of the ETFs that deal with international markets.” That might be due to time-zone disparity, but it is worrisome enough that Basden has all but eschewed ETFs. She includes just four such offerings now. Her criterion is that they “must be the best option for the category.” For example, she uses ETFs for investing in the 30 stocks that make up the Dow Jones Industrial Average, as well as timber stocks and stocks of firms domiciled in Switzerland. Long-Term Perspective How they caught our eye: Basden manages funds of funds for the firm’s clients using research from Morningstar Direct, an institutional product. Career path: Rosenbaum began an insurance career in 1977 after attending Lewis and Clark College in Portland, Ore. He founded Rosenbaum Financial in 1982 with his father. Basden started her career in 1981 with Merrill Lynch and worked for Charles Schwab, Bidwell & Co., Banc of America, and Allstate. Personal: Mark Rosenbaum, 51, is married with two children, ages 21 and 24. Jana Basden, 46, has two children, ages 24 and 25. Favorite mutual funds: Oppenheimer Commodity Strategic Real Return QRAAX, Delaware Emerging Markets DEMAX, Meridian Growth MERDX Fund of Funds The portfolios consist mostly of closed-end and open-end mutual funds. Basden begins her search for funds with Morningstar Direct, a product that allows her to screen through Morningstar’s global investment database and analytics. It is most often used by institutional investors. Using Direct “may be fairly unusual for an independent advisor,” she says. Each of the positions makes up at most 8% or 9% of assets to ensure that risk is spread around and to optimize diversification. Basden has several criteria in mind as she’s composing the portfolio. For example, when she evaluates a fund’s performance, she wants to make sure that it reflects the record of the current manager, not a predecessor. She’s also a stickler for style purity because, with an average portfolio of 24 funds, she wants to be sure that the funds are performing well in concert with one another. “If you’re a large-cap manager and you’re doing well because you’re padding your fund with small-cap names, that’s going to mess me up because I’ve already got small caps elsewhere in my portfolio,” she says. And the returns must be in proportion of the amount of risk a manager takes, she says. “I will not invest in a fund with a great return if the manager is betting the farm for it.” But Basden doesn’t shy away from risk as long as her clients are rewarded for it. And she doesn’t write off low-rated funds. “For example, both of the commodity funds I have are 1-star funds,” she says. “But they invest very differently than the other funds in the category.” What Doesn’t Make the Cut By sticking with a classic asset-allocation model, Rosenbaum and Basden believe that they can create portfolios that are responsive to changing market conditions. But their focus is on the long term. Rosenbaum is quick to point out that the firm’s portfolios are only appropriate for clients with a long time horizon, especially considering the current crisis. “Any client that needs their money in the next seven to 10 years, we will not put them into the market,” he says. K Ilana Polyak is a freelance financial journalist. Basden also has strict criteria for dropping funds, though poor performance alone isn’t an automatic sell signal. “I had a mid-cap fund 18 Morningstar Advisor April/May 2009

Morningstar Advisor - April/May 2009

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