Morningstar Advisor - December/January 2010 - 56

Investments á la Carte Four Picks for the Present Exchange-Traded Fund: SPDR DB Int’l Gov’t Infl-Protected Bond WIP $11K BarCap Aggregate Bond 9 affected by rates rising due to inflation, real rates are 14000 to go up as global growth likely resumes and could cause this fund (along with 12000 U.S. TIPS)10000 in value. Bradley Kay to fall Separate Account: Chase Investment Counsel Tax-Exempt Large-Cap Growth 6000 8000 Stock: Covidien COV $14K 10 S&P 500 TR 6 07 08 09 08 09 $14K 12 10 8 05 06 07 08 09 S&P 500 TR 12000 10000 For investors in government bonds, inflation has always presented one of the few 8000 major risks to maintaining purchasing power. 6000 This has driven a large market in U.S. Treasury Inflation-Protected Securities, which are now available in countless mutual funds and ETFs for investors concerned about maintaining their real wealth. Other countries have also begun issuing similar inflationprotected securities for their local investors and pension funds, but U.S. bondholders could benefit from the currency diversification as well as further insurance against potential widespread inflation. Apr-08 Apr-09 This ETF invests in the broad variety of inflation-protected government bonds issued May-08 Aug-08 Nov-08 Jun-08 Sep-08 Jul-08 Oct-08 Jan-09 May-09 Aug-09 Jun-09 Sep-09 Jul-09 Oct-09 Dec-08 largest Feb-09 outside the U.S. The twoMar-09 currencies Nov-09 represented by the portfolio are the British pound and the euro, but it also holds approximately 5% stakes in higher-yielding bonds such as those from Canada, Brazil, Mexico, and Sweden. The portfolio as a whole no longer yields more than U.S. TIPS, but the currency and issuer diversification should still help improve the risk-adjusted returns for investors who own mostly U.S. bonds. This fund still carries some strong risks— diversification cuts both ways. If the dollar appreciates, this fund will underperform U.S. bonds. Also, most inflation-protected bonds tend to be long-term, which gives this fund a hefty 10-year duration. Although it will not be This separate account is a great core holding. Managers David Scott and Derwood Chase practice a prudent style of growth investing. They steadfastly buy high-quality firms with solid earnings growth but won’t overpay for them. The portfolio’s return on equity, net margin, Morningstar Profitability grade, debt/ Our fair value estimate is $65 per share. We capital ratio, and free cash-flow yield are all forecast overall revenue will grow in excess of Jul-08 better than the S&P 500 Index’s. Yet its P/E is in Jul-07 annually through 2013, driven largely 6% Jul-09 line with the benchmark’s. Early in 2009 the by rapid growth in the medical-device segment. managers were adding to such industry leaders Our model assumes steady margin expansion Aug-08Dec-08 Sep-08 Jan-09 Oct-08 Feb-09 Nov-08Mar-09 Aug-09 Sep-09 Oct-09 Nov-09 Aug-07Dec-07 Sep-07 Feb-08 Oct-07 Nov-07 as Cisco Systems CSCO, Oracle ORCL, Walt from now on,Apr-08 by improvedApr-09 product May-09 Jun-09 Jan-08driven Mar-08 May-08 Jun-08 Disney DIS, and Brazilian energy firm Petroleum mix and leverage on the operating line. We Brasileiro PBR. This top-quality portfolio project the gross margin will expand as has performed as expected lately. It lost 33.4% high-margin surgical instruments become a Jan-05 in 2008’s brutal market, but that was much greater part of the overall revenue. We project Jan-06 Jan-07 Jan-08 Jan-09 less than the S&P 500 and nearly all its increasing investment in R&D through large-growthJul-06 Apr-07 May-08 May-09 rivals. Jul-07 with Sep-08 Aug-09 Feb-05 Oct-05 Jun-06 Feb-07 Oct-07 Jun-08 Feb-09 Oct-09 Mar-05 Feb-06 Oct-06 Jun-07 Apr-08 Mar-09Nov-09 2013, until this expense reaches 5% of sales, Apr-05 May-05 Apr-06Dec-06Aug-07 low-quality Jul-09 Jun-05 May-06 May-07 Jul-05 Aug-05 Aug-06 And Nov-07 Jul-08 Sep-05 Sep-06 Nov-06 Sep-07 Aug-08 Jun-09 Oct-08 stocks Nov-08 Sep-09 Nov-05 Dec-05 Mar-06 Mar-07 Dec-07 Feb-08 kept Mar-08 leading 2009’s rally, the fund hasn’tDec-08 typical to most device makers. Haywood Kelly pace with racier rivals. That’s fine. The Apr-09 same Mutual Fund: Matrix Advisors Value MAVFX thing has happened in prior markets where 15000 the sort of speculative fare the separate $15K account eschews did best, such as 2003. S&P 500 TR The fund lagged 93% of its peers that year but 10000 still delivered a solid 21.2% return for the 10 year. That’s the sort of risk most investors can handle. Over time, this separate account 5000 has generated one of the best risk/reward 05 06 07 08 09 profiles in its group. Michael Breen After a few years of investing in research and development, bolstering its salesforce, and pruning its product lineup, Covidien has returned to prominence in the medical-device arena. The company’s strong product pipeline, a management team dedicated to maximizing returns on investment, and the favorable secular trends bode well for its prospects. We think the company represents an appealing long-term investment opportunity despite the uncertainty surrounding the health-care reform. 56 Morningstar Advisor December/January 2010

Morningstar Advisor - December/January 2010

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