Morningstar Advisor - December/January 2012 - (Page 62)

Undiscovered Manager David Rolfe it has held from 17 to 22 stocks. Its cash stake approached 10% of the portfolio in March 2007, but the managers don’t usually make asset-allocation calls and have kept the account close to fully invested most of the time. As of Sept. 30, the account invested about half of its money in financial and health-care stocks, with another 30% in technology companies. It held nothing in materials, consumer, real estate, utilities, or communications stocks. These sector biases, as well as the manager’s tendency to load roughly 60% of its assets in its top 10 holdings, court risk, yet Rolfe contends that it’s controlled by careful security selection, valuation sensitivity, and an absolute rather than a relative return mind-set. “People talk about risk. You want to know what risk is?” Rolfe asks. “Risk is sitting in front of the Widow Jones in late 2008 and telling her why her portfolio is down 50%.” The portfolio’s holdings tend to be the kind of high-quality fare that holds up well in downturns. Every one of them has some sort of moat, or competitive advantage, according to Morningstar’s equity analysts. Indeed, the weighted average moat rating of the RiverPark/ Wedgewood Fund, which is a clone of the Wedgewood separate account, is higher than 90% of other large-cap funds. The Wedgewood portfolio also has higher average cash flow and earnings yields and a lighter average debt load than the typical Russell 1000 Growth constituent. Focusing on larger, more-profitable companies has helped Wedgewood do better than its large-growth peers in past bear markets, such as those in 2002 and 2008. Like other growth managers, Rolfe, Webb, and Quigley perk up when they see fast revenue and sales growth and high returns on equity, capital, and cash flow, but they are not wedded to such screens. They want market leaders who can grow faster than expected and will look inside and outside growth managers’ typical hunting grounds for them. RiverPark/Wedgewood RWGFX $13K S&P 500 TR 12 10/ 10 01/ 11 04/ 11 07/ 11 10/ 11 You’d be hard-pressed to find a large-cap growth manager who doesn’t own Apple AAPL, for example, but Rolfe contends that it’s still underappreciated. Cofounder and prime mover Steve Jobs, who died in October, is irreplaceable, Rolfe says. But the company has solid senior leadership, expanding beachheads in phones and tablets, fanatically loyal customers, and exciting designs for cloud computing and other products. Rolfe thinks Apple can earn about $10 more per share in 2012 than the current consensus forecast of about $33 per share. “These guys are in a whole different lane going faster than anyone else and not even breaking a sweat,” Rolfe says. Rolfe considers Berkshire Hathaway BRK.A a growth stock primarily because the businesses that Buffett has assembled have the potential to fuel book value growth for years to come. He thinks the conglomerate can exceed the growth of the S&P 500 by several hundred basis points. “How many CEOs can you say have built a business that is a permanent cash-generating compounding machine?” Rolfe asks. Wedgewood’s investment team reviews ideas weekly but rarely makes precipitous changes because any fresh idea has to be better than the portfolio’s worst idea. “This is where new and exciting ideas go to die,” Rolfe says. “New ideas have to be better than marginally better. Otherwise you’re just adding turnover.” The firm’s track record is gaining attention. Guerrerio and Rolfe have listened to buyout offers but do not intend to sell. They would rather grow at their own pace and even close the strategy if asset growth ever threatened to become an impediment. “You can’t build a big firm doing this,” Rolfe says. With no outside owners, Wedgewood has only one constituency to please: its clients. “I know if I take care of them, everything will work out in the long run,” Guerrerio says. K Dan Culloton is an associate director of fund analysis with Morningstar. Category Large Growth Dec-10 Fee Level Above Average Jun-11 Morningstar RatingFeb-11 Nov-10 Mar-11 — Minimum Investment $1,000 Data as of Oct. 31, 2011 6-Mo Anl Total Rtn (%) Aug-11 Nov-11 –0.61 May-11 Sep-11 6-Mo Anl TR % Rank Cat 1 Not that Rolfe, who owns about 45% of Jun-11 Oct-10 Oct-11 Feb-11 Aug-11 Wedgewood, is likely Apr-11 to leave. Snyder isn’t Nov-11 Nov-10 Mar-11 May-11 Jul-11 Jan-11 Sep-11 worried. Wedgewood remains on Fortigent’s recommended list for advisors, regional banks, and trust departments looking for concentrated managers to complement passive large-cap holdings, and Snyder says it can also serve as a portfolio linchpin for the right investor. “[Wedgewood’s] focus on valuation and their market cap would make them acceptable to be held as core holding,” he says. “But the big caveat is that, given their concentration, investors have to know that there could be some substantial deviation from the Russell 1000 Growth from time to time.” Growth-Focused Dec-10 The portfolio may not look or act like its index, but it has been reliably growth-oriented and -focused. Since its September 1992 inception, the Wedgewood separate account has rarely strayed outside of the large-cap growth area of the Morningstar Style Box, and 62 Morningstar Advisor December/January 2012

Table of Contents for the Digital Edition of Morningstar Advisor - December/January 2012

Morningstar Advisor - December/January 2012
Contents
Contributors
Letter From the Editor
Seduced by Complexity
Is China Exposure Important for a Portfolio?
A Niche Built on Trust
How to Find Your Client’s Investment Style
Taking the Long View
Consensus on Europe Elusive
Four Picks for the Present
Investment Briefs
Is Perception Reality for Active Managers?
Be Alert for Basic-Materials Bargains
Investment Boom Unsustainable
Digging Moats in China
Where China’s Domestic Companies Stand to Benefit
Arising Opportunities
China Strong Long Term
From Currency Manipulation to International Acceptance
The Keys to China’s Fortune
Wedgewood’s Lessons Pay Off
Reading the Evidence on Indexing
Scouting for Investments Abroad
Yield, Please (Hold the Europe)
Mutual Fund Analyst Picks
50 Most Popular ETFs
Undervalued Stocks With Wide Moats
China Fund Managers Eat Elsewhere

Morningstar Advisor - December/January 2012