Morningstar Advisor - Fall 2007 - 62

Undiscovered Managers Protecting the Downside Calendar-Year Return % During 2000–02 Bear Market. 20 15 10 5 2002 20% 15 10 5 2000 sp500 core problend 2001 2002 sp500 10 5 0 -5 -10 -15 -20 10% 5 2000 core problend 2001 2002 10 5 0 -5 -10 -15 -20 Earlier this decade, the firm steered clear of Enron prior to its implosion. Gambill is an energy industry veteran. “I understood 80% of Enron, but the other 20% was a black box. I figured if I couldn’t understand it after 20 years in the energy business, it was too good to be true” he says. 10% 0 -5 -10 -15 -20 -25 Late in 2006, this cautious tack caused the 5 firm to go light on financials,world those especially 2000 2001 2002 with real-estate exposure. “There wasn’t enough transparency to accurately analyze things.” Magiera says. “But it was very easy to tell the water was too hot and that risk was not being priced into the sector.” Not surprisingly, Manning & Napier has held up well during the recent subprime debt mess. Limiting the downside is what first attracted Meyer, the advisor from Scottsdale, Ariz., to the firm. “I found Manning & Napier in 1999,” he says. “I was doing well but felt uncomfortable with an overvalued market. I went with Manning & Napier for downside protection but ended up making them a core investment. They’ve performed well with low risk.” msci Manning & Napier Pro-Blend Max Term EXHAX -25 Manning & Napier Core Equity—Unrestricted S&P 500 Manning & Napier World Opport A EXWAX -25 MSCI EAFE 20 15 10 5 0 -5 -10 -15 -20 -25 go it alone. They must find a partner among their peers or on the SRG for every pick. The world prospective partner runs new due diligence on the stock. If the partner signs on, each shares msci the wealth, or pain, generated by the pick once it enters a portfolio. sp500 The partnership is formalized in the compencore sation plan—one of the better ones we’ve encountered—as anproblend 80/20 split between the analyst and the partner. Picks are tracked and must make money over long time periods or nobody gets paid. The clock does not reset each year. If a stock is underwater, it carries forward on the analysts’ ledger. “If we are in the red with a particular stock,” Coons says, “our clients don’t get to reset their accounts to zero at the start of the next calendar year. So why would our compensation plan differ?” This system has two big benefits. It directly aligns analyst compensation with the client experience while promoting teamwork and the exchange of ideas. The firm’s 41 investment The firm is solid across the board. It runs about 20 strategies through separate accounts, collective investment trusts, and mutual funds. All have strong long-term risk/reward profiles, sp500 Sometimes, a fresh set of eyes is just the with returns landing in the upper reaches ticket. Brian Gambill, a member of the SRG, of their respective Morningstar categories in core recalls the time he passed on partnering with nearly all trailing periods. Low volatility is Protecting Its Downside Protecting Its Downside a member of his own analyst team on Tyco as a hallmark and the lineup has held up well in problend Calendar-year return % during 2000-02 bear market. Calendar-year return % during 2000-02 bear it was trying to emerge from controversy. “I bear markets relative to its category peers. couldn’t see it,” Gambill says. “But I didn’t kill Fund I 2002 2001 2000 with the idea. suggested the analyst work “Fund a2002smart group of bottomThey are really 2001 2000 Manning & Napier ProBlend saw Term investors whoNapier ProBlend19.15Term (EXHA Manning & never waver from their disci-18.31 -1.36 Max another member of the SRG. That person Max up (EXHAX) Manning & Napier Corethe analyst. Manning says. “I put -3.4 my short list things I didn’t and partnered with Equity--Unrestricted & -17.67 them on Equity--Unrestricted pline.” Meyer Napier Core 17.08 Tyco 500 to be -11.88 -9.11 of top managers with Longleaf -9.11 S&Pwent on-22.1a big winner.” S&P 500 -22.1 -11.88 Partners, First Eagle Funds, and Third Avenue Funds.” Avoiding Trouble Manning & Napier World Opport A (EXWAX) -10.78 -0.3 7.96Opport A (EXWAX) Manning & Napier World What the team doesn’t buy often helps. “We The folks in the MSCI EAFE -15.66 -21.21 -13.96 MSCI EAFE big city may want to look -13.96 -15.66 -21.21 up- professionals are partnered with each other in a quilt of stock picks bridging multiple world sectors and portfolios. The result is a crosspollination of ideas across industries by the msci analyst ranks and the research group. know what we don’t know,” says Michael Magiera, another SRG member, “and avoid stocks where we can’t understand 100% of the business and all its risks.” state and take a page from Manning & Napier’s play book. K Michael Breen is a senior mutual fund analyst with Morningstar. 62 Morningstar Advisor Fall 2007

Morningstar Advisor - Fall 2007

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