Morningstar Advisor - April/May 2009 - 39

5. Also keep an eye out for currency derivatives. It would be unusual to find a U.S.-focused fund that deals in currency derivatives, but it’s possible. Most “core-plus” bond funds have the flexibility to take on as much as 10% in currency exposure, but they rarely go that high. If you find an exposure that high, reconcile it. If you see a short exposure to a non-dollar currency, it could be intended as a hedge against exposure from foreign-currency-denominated securities positions. Compare the notional amount of the short to the value of those securities. If they are roughly equal, it’s probably a hedge. A net long or net short exposure is likely a currency bet. If you find derivatives that provide long exposure to the U.S. dollar, check the portfolio for non-dollar securities. If the notional amount of the derivatives is close to the value of the non-dollar securities, it’s likely a hedge. If there are no non-dollar securities (or the amount is smaller than the notional value of the derivatives), it likely indicates a deliberate bet on the U.S. dollar. Roadblocks Sometimes, a list of credit default swaps does not show whether the protection was sold or bought. Instead, you might find descriptions of what the counterparties pay to each other. You should be able to see which way the protection is being transferred based on which party is required to deliver something in the case of a default. (The party that receives a consistent fee, and must deliver something in case of default, is the protection seller.) Single-name credit default swaps usually show the name of a company as the reference entity. If you see something that looks like CDX, ABX, or CMBX, with other notations behind it, they are typically index-basket default swaps covering a particular market segment. If you find something you can’t identify, call the fund manager. How to Find Internally Leveraged Securities Goal What It Is How to Gauge Exposure Gather and reconcile exposure data. A security that has inherent leverage risk built into its own structure. Understanding the degree to which securities are internally leveraged may be difficult. It all depends on the information provided in the portfolio. They are not found in taxable portfolios as often as they once were. Those that are present are usually mortgage-backed securities. Recently, they have been much more popular in municipal-bond portfolios, but a recent rule change by the Financial Accounting Standards Board put them on the balance sheet, so you don’t have worry about them. 1. Look for exposures to interest-only bonds, principal-only bonds, Z tranches, and inverse floating rate notes. 2. Add up the market values as a percentage of total investments and total net assets. If they are 5% to 10%, or more, you’ll want to find out whether the manager has a long history of successfully managing through extreme markets. If not, it’s a red flag. MorningstarAdvisor.com 39
http://www.MorningstarAdvisor.com

Morningstar Advisor - April/May 2009

Table of Contents for the Digital Edition of Morningstar Advisor - April/May 2009

Morningstar Advisor - April/May 2009
Contents
New on MorningstarAdvisor.com
Letter from the Editor
Contributors
Did Diversification Fail Investors?
Accounting for His Success
The Classics
Investment Briefs
A Multiple-Lens Approach to Analysis
Where Leverage Lurks
Guide to Finding Hidden Risks
How Leveraged ETFs Compound the Misery
Get Rid of the Dead Weight
Grounded Manager
Investors Should Mind Their Tails
Four Picks for the Present
The Future of Big Pharma
Yield Your Clients Can Use
Wide Moats, Good Stewardship: A Potent Bear-Market Combination
Mutual Fund Analyst Picks
50 Most Popular Equity ETFs
Undervalued Stocks
New at Morningstar
To Beat the Devil
Morningstar Advisor - April/May 2009 - Intro
Morningstar Advisor - April/May 2009 - Morningstar Advisor - April/May 2009
Morningstar Advisor - April/May 2009 - Cover2
Morningstar Advisor - April/May 2009 - 1
Morningstar Advisor - April/May 2009 - 2
Morningstar Advisor - April/May 2009 - Contents
Morningstar Advisor - April/May 2009 - 4
Morningstar Advisor - April/May 2009 - 5
Morningstar Advisor - April/May 2009 - New on MorningstarAdvisor.com
Morningstar Advisor - April/May 2009 - 7
Morningstar Advisor - April/May 2009 - 8
Morningstar Advisor - April/May 2009 - Letter from the Editor
Morningstar Advisor - April/May 2009 - Contributors
Morningstar Advisor - April/May 2009 - 11
Morningstar Advisor - April/May 2009 - Did Diversification Fail Investors?
Morningstar Advisor - April/May 2009 - 13
Morningstar Advisor - April/May 2009 - Accounting for His Success
Morningstar Advisor - April/May 2009 - 15
Morningstar Advisor - April/May 2009 - 16
Morningstar Advisor - April/May 2009 - The Classics
Morningstar Advisor - April/May 2009 - 18
Morningstar Advisor - April/May 2009 - 19
Morningstar Advisor - April/May 2009 - Investment Briefs
Morningstar Advisor - April/May 2009 - 21
Morningstar Advisor - April/May 2009 - 22
Morningstar Advisor - April/May 2009 - 23
Morningstar Advisor - April/May 2009 - 24
Morningstar Advisor - April/May 2009 - A Multiple-Lens Approach to Analysis
Morningstar Advisor - April/May 2009 - 26
Morningstar Advisor - April/May 2009 - 27
Morningstar Advisor - April/May 2009 - 28
Morningstar Advisor - April/May 2009 - 29
Morningstar Advisor - April/May 2009 - 30
Morningstar Advisor - April/May 2009 - 31
Morningstar Advisor - April/May 2009 - Where Leverage Lurks
Morningstar Advisor - April/May 2009 - 33
Morningstar Advisor - April/May 2009 - 34
Morningstar Advisor - April/May 2009 - 35
Morningstar Advisor - April/May 2009 - Guide to Finding Hidden Risks
Morningstar Advisor - April/May 2009 - 37
Morningstar Advisor - April/May 2009 - 38
Morningstar Advisor - April/May 2009 - 39
Morningstar Advisor - April/May 2009 - How Leveraged ETFs Compound the Misery
Morningstar Advisor - April/May 2009 - 41
Morningstar Advisor - April/May 2009 - Get Rid of the Dead Weight
Morningstar Advisor - April/May 2009 - 43
Morningstar Advisor - April/May 2009 - 44
Morningstar Advisor - April/May 2009 - 45
Morningstar Advisor - April/May 2009 - 46
Morningstar Advisor - April/May 2009 - 47
Morningstar Advisor - April/May 2009 - 48
Morningstar Advisor - April/May 2009 - 49
Morningstar Advisor - April/May 2009 - Grounded Manager
Morningstar Advisor - April/May 2009 - 51
Morningstar Advisor - April/May 2009 - 52
Morningstar Advisor - April/May 2009 - 53
Morningstar Advisor - April/May 2009 - Investors Should Mind Their Tails
Morningstar Advisor - April/May 2009 - 55
Morningstar Advisor - April/May 2009 - 56
Morningstar Advisor - April/May 2009 - 57
Morningstar Advisor - April/May 2009 - Four Picks for the Present
Morningstar Advisor - April/May 2009 - 59
Morningstar Advisor - April/May 2009 - 60
Morningstar Advisor - April/May 2009 - The Future of Big Pharma
Morningstar Advisor - April/May 2009 - 62
Morningstar Advisor - April/May 2009 - 63
Morningstar Advisor - April/May 2009 - Yield Your Clients Can Use
Morningstar Advisor - April/May 2009 - 65
Morningstar Advisor - April/May 2009 - Wide Moats, Good Stewardship: A Potent Bear-Market Combination
Morningstar Advisor - April/May 2009 - 67
Morningstar Advisor - April/May 2009 - Mutual Fund Analyst Picks
Morningstar Advisor - April/May 2009 - 69
Morningstar Advisor - April/May 2009 - 70
Morningstar Advisor - April/May 2009 - 71
Morningstar Advisor - April/May 2009 - 50 Most Popular Equity ETFs
Morningstar Advisor - April/May 2009 - 73
Morningstar Advisor - April/May 2009 - Undervalued Stocks
Morningstar Advisor - April/May 2009 - 75
Morningstar Advisor - April/May 2009 - 76
Morningstar Advisor - April/May 2009 - 77
Morningstar Advisor - April/May 2009 - 78
Morningstar Advisor - April/May 2009 - New at Morningstar
Morningstar Advisor - April/May 2009 - To Beat the Devil
Morningstar Advisor - April/May 2009 - Cover3
Morningstar Advisor - April/May 2009 - Cover4
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