Morningstar Advisor - August/September 2010 - 9

Letter From the Editor

In Good Shape
Whatever your opinion of the health-care reform bill (judging from the comments in our On Topic section on Page 10, I’m assuming a lot of you don’t have a favorable view), here’s one aspect of it you are sure to like: Reform has helped create an excellent investing opportunity for health-care stocks, according to Morningstar’s team of health-care analysts. From the day the bill became law on March 23 through July 13, the Morningstar Health-Care Index declined by 9.7%, while the S&P 500 fell by only 5.5%. Investors, meanwhile, battered leading names of the sector, including Abbott Labs (negative 9.9%) Baxter (negative 26.2%), Covidien (negative 19.7%), Pfizer (negative 12.9%), and Sanofi-Aventis (negative 15.9%)—all names that Morningstar considers to have narrow or wide moats (sizable competitive advantages over the competition). In this issue’s Spotlight section (“Health Care Gets Back to Business,” Page 27), we make the case that investors are overreacting to the ramifications of reform and ignoring the long-term strengths of the industry. Our health-care team, led by equities strategist Damien Conover, focuses on two sectors— pharmaceuticals and diagnostic services—to demonstrate this point. Companies in each of these sectors, our analysts say, can benefit from the reform bill and are finding fruitful opportunities in new niches and areas around the world. Many of them can be purchased at prices under Morningstar’s fair value estimates. In the Morningstar Conversation (“Health-Care Investing Alive and Well,” Page 41), Conover talks with two investors who each have a decade of experience managing health-care mutual funds: Andy Acker, of Janus Global Life Sciences JAGLX, and Kris Jenner, of T. Rowe Price Health Sciences PRHSX. Acker and Jenner discuss how they’re repositioning their portfolios after reform, the market for mergers and acquisitions, and which scientific fields have the most-promising innovations. A new section debuts in this issue. In Practice is a look at how the investment team at Morningstar Investment Services assembles a portfolio that addresses a particular need— in this case a bond portfolio that offers some protection against inflation (“How to Make Your Bond Portfolio Inflation-Resistant,” Page 54). Using a combination of TIPS, bank loans, high-yield bonds, and other instruments, investment manager Marta Norton, who helps run Morningstar’s managed portfolios, shows how investors who must rely on fixed income can have more than a fighting chance against inflation. In Gray Matters, mutual fund analyst Christopher Davis takes a hard look at Fidelity Advisor Funds (“Advisors Can’t Rely on Fidelity Alone,” Page 22) and says that although the family has some funds led by talented managers, Fidelity’s lack of depth in its manager ranks hurts the appeal of many of the offerings. Mediocrity is something that advisor Iris Mack Dayoub doesn’t accept for herself or her clients. Dayoub is the subject of editorial director Laura Pavlenko Lutton’s Advisor Profile (“Eye on the Prize,” Page 19). At age 73, Dayoub is a triathlete who enters Ironman competitions. She also uses her energy to help clients make good decisions, ensuring “their heads, hearts, and actions are in a straight line,” she tells Lutton. After all, that’s the best way to finish a race.

Jerry Kerns

Correction

In a Screens article last issue (“On the Prowl for Smooth Operators,” Page 68), we got some operators wrong. Audited Expense Ratio should be less than or equal to 1.50; % Rank Cat 3 Yr should be less than or equal to 33; Tot Ret Annlzed 10 Yr should greater than or equal to 2; and Manager Tenure should be greater than or equal to 10.

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Morningstar Advisor - August/September 2010

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