Morningstar Advisor - August/September 2009 - 9

Letter from the Editor Researching Is No Small Task You might have seen headlines in the media, including The Wall Street Journal, suggesting that small-cap value stocks outperform other categories when the economy recovers from recessions. The information is based on research by Russell Investments, and it immediately raised a red flag to Bradley Kay, a Morningstar analyst. Russell’s research only used data from recent recessions, Kay noticed, and it included an unusual period of huge small-cap value returns. (The 2001 recession occurred after the dot-com bubble burst and led to a rally in value and small-cap stocks.) Kay dug deeper into the data and looked backed at all the recessions since the Great Depression. What he found led him to take to task the Russell study in this issue’s Spotlight article on small caps, “Recession Rallies’ Sweet Spot” (page 36). His analysis shows a large size effect: Coming out of recessions, the returns of small caps have significantly outperformed larger stocks. Kay, however, found no evidence of Russell’s value effect. He also uncovered another angle: Timing is everything. The time to invest to capture the outperformance of small caps is not at the official end of a recession, when the economy begins growing again. The best time is much earlier, at the recession’s “inflection point,” as Kay calls it, when the economy is still declining, but the worst is over. It usually occurs about halfway through the recession. Kay writes, “Clearly, the stock market does not obey the traditional economic cycle of peak and trough. Instead, it cares about the second derivative, the turnaround times when declines start to slow.” The bad news is that Kay believes that this recession’s inflection point occurred in March, but based on the historical record, he says that investors still might be able to earn a few more percentage points of premium returns by buying small caps. To gain insight into why small caps outperform coming out of recessions, and whether this pattern might continue, Kay also moderated a discussion with two experts on global small caps (“What Makes Small Caps Tick,” page 42). MSCI Barra’s Frank Nielsen and iShares’ Dina Ting talk about small caps’ unique geographic exposures, sector makeup, and capital structures. Nielsen and Ting give an instructive talk that highlights the importance of having small caps in a diversified portfolio, whether or not they will earn better returns than large caps. To round out our small-cap coverage, senior analyst Bridget Hughes hosted veteran small-cap managers Chuck Royce and Irene Hoover for a Morningstar Conversation (“The Trick to Small Caps,” page 46), and analyst John Coumarianos profiles mutual fund manager Steven Scruggs, who runs a tiny, and successful, small-value fund in North Carolina (“Value Hound,” page 53). New Markets & Economy Blog Jerry Kerns To better keep on top of the economy, we’ve assembled an expert team of contributors to blog daily on all things financial at MorningstarAdvisor.com. It’s also a place where readers can comment. Our team includes Michele Gambera, an economist with Ibbotson; Bill Bergman, a Morningstar equity analyst; Bob Johnson, an economic analyst with Morningstar; and Janet Briaud, senior advisor and CEO of Briaud Financial Planning. You can also follow me on Twitter: @jerrykerns. MorningstarAdvisor.com 9
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Morningstar Advisor - August/September 2009

Table of Contents for the Digital Edition of Morningstar Advisor - August/September 2009

Morningstar Advisor - August/September 2009
New on MorninstarAdvisor.com
Letter from the Editor
Contributors
Are We at the Beginning of a New Small-Cap Era?
At Home Around the World
Staying Nimble
Investment Briefs
Asia's Way Forward
MPT Put Through the Wringer
Recession Rallies' Sweet Spot
What Makes Small Caps Tick
The Trick to Small Caps
Value Hound
Four Picks for the Present
Signs of Stabilization in the Housing Industry
The Not-Ready-for-High-Yield Players
Moats Around Small Castles
Mutual Fund Analyst Picks
50 Most Popular Equity ETFs
Undervalued Stocks
Most Popular Variable Annuities
New at Morningstar
The No in Innovation
Morningstar Advisor - August/September 2009 - Morningstar Advisor - August/September 2009
Morningstar Advisor - August/September 2009 - Cover2
Morningstar Advisor - August/September 2009 - 1
Morningstar Advisor - August/September 2009 - 2
Morningstar Advisor - August/September 2009 - 3
Morningstar Advisor - August/September 2009 - 4
Morningstar Advisor - August/September 2009 - 5
Morningstar Advisor - August/September 2009 - New on MorninstarAdvisor.com
Morningstar Advisor - August/September 2009 - 7
Morningstar Advisor - August/September 2009 - 8
Morningstar Advisor - August/September 2009 - Letter from the Editor
Morningstar Advisor - August/September 2009 - Contributors
Morningstar Advisor - August/September 2009 - 11
Morningstar Advisor - August/September 2009 - Are We at the Beginning of a New Small-Cap Era?
Morningstar Advisor - August/September 2009 - 13
Morningstar Advisor - August/September 2009 - At Home Around the World
Morningstar Advisor - August/September 2009 - 15
Morningstar Advisor - August/September 2009 - 16
Morningstar Advisor - August/September 2009 - Staying Nimble
Morningstar Advisor - August/September 2009 - 18
Morningstar Advisor - August/September 2009 - 19
Morningstar Advisor - August/September 2009 - Investment Briefs
Morningstar Advisor - August/September 2009 - 21
Morningstar Advisor - August/September 2009 - 22
Morningstar Advisor - August/September 2009 - 23
Morningstar Advisor - August/September 2009 - Asia's Way Forward
Morningstar Advisor - August/September 2009 - 25
Morningstar Advisor - August/September 2009 - 26
Morningstar Advisor - August/September 2009 - 27
Morningstar Advisor - August/September 2009 - 28
Morningstar Advisor - August/September 2009 - MPT Put Through the Wringer
Morningstar Advisor - August/September 2009 - 30
Morningstar Advisor - August/September 2009 - 31
Morningstar Advisor - August/September 2009 - 32
Morningstar Advisor - August/September 2009 - 33
Morningstar Advisor - August/September 2009 - 34
Morningstar Advisor - August/September 2009 - 35
Morningstar Advisor - August/September 2009 - Recession Rallies' Sweet Spot
Morningstar Advisor - August/September 2009 - 37
Morningstar Advisor - August/September 2009 - 38
Morningstar Advisor - August/September 2009 - 39
Morningstar Advisor - August/September 2009 - 40
Morningstar Advisor - August/September 2009 - 41
Morningstar Advisor - August/September 2009 - What Makes Small Caps Tick
Morningstar Advisor - August/September 2009 - 43
Morningstar Advisor - August/September 2009 - 44
Morningstar Advisor - August/September 2009 - 45
Morningstar Advisor - August/September 2009 - The Trick to Small Caps
Morningstar Advisor - August/September 2009 - 47
Morningstar Advisor - August/September 2009 - 48
Morningstar Advisor - August/September 2009 - 49
Morningstar Advisor - August/September 2009 - 50
Morningstar Advisor - August/September 2009 - 51
Morningstar Advisor - August/September 2009 - 52
Morningstar Advisor - August/September 2009 - Value Hound
Morningstar Advisor - August/September 2009 - 54
Morningstar Advisor - August/September 2009 - 55
Morningstar Advisor - August/September 2009 - Four Picks for the Present
Morningstar Advisor - August/September 2009 - 57
Morningstar Advisor - August/September 2009 - Signs of Stabilization in the Housing Industry
Morningstar Advisor - August/September 2009 - 59
Morningstar Advisor - August/September 2009 - 60
Morningstar Advisor - August/September 2009 - 61
Morningstar Advisor - August/September 2009 - The Not-Ready-for-High-Yield Players
Morningstar Advisor - August/September 2009 - 63
Morningstar Advisor - August/September 2009 - Moats Around Small Castles
Morningstar Advisor - August/September 2009 - 65
Morningstar Advisor - August/September 2009 - Mutual Fund Analyst Picks
Morningstar Advisor - August/September 2009 - 67
Morningstar Advisor - August/September 2009 - 68
Morningstar Advisor - August/September 2009 - 69
Morningstar Advisor - August/September 2009 - 50 Most Popular Equity ETFs
Morningstar Advisor - August/September 2009 - 71
Morningstar Advisor - August/September 2009 - Undervalued Stocks
Morningstar Advisor - August/September 2009 - 73
Morningstar Advisor - August/September 2009 - 74
Morningstar Advisor - August/September 2009 - 75
Morningstar Advisor - August/September 2009 - Most Popular Variable Annuities
Morningstar Advisor - August/September 2009 - 77
Morningstar Advisor - August/September 2009 - 78
Morningstar Advisor - August/September 2009 - New at Morningstar
Morningstar Advisor - August/September 2009 - The No in Innovation
Morningstar Advisor - August/September 2009 - Cover3
Morningstar Advisor - August/September 2009 - Cover4
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