Morningstar Advisor - Fall 2007 - 77

Our search produced 48 unique funds at the beginning of October. The group was well diversified in terms of investment style and asset class. Here are a few of our favorites. BlackRock Muni Insured MAMIX Lead manager Bob DiMella’s goal in this fund is to maximize yield while preserving its capital and minimizing risk. Though the prospectus requires only 80% of the fund to be in insured munis, DiMella keeps it 100% insured, thus eliminating nearly all credit risk. DiMella also avoids most interest-rate risk by keeping the fund’s duration close to that of its peers. Within these constraints, DiMella uses creative methods in an effort to pick up extra yield. For example, though high-yield bonds are off limits to him, he holds some bonds insured by smaller, lesser-known insurers such as XLCA and CIFG. These provide slightly higher yields than bonds insured by the better-known MBIA and AMBAC. The fund sports a higher yield than three fourths of its peers in the muni national long category, and its total return has ranked in the category’s top quartile five times since DiMella took the reins in early 2000. Dodge & Cox Income DODIX are stretching for the next percentage point of yield or returns, and hold on for the long term. Within the fund’s fixed-income portfolio, for example, they have kept the fund’s interestrate sensitivity very low and refrained from making purchases of high-yield bonds. Though either move would prop up the fund’s yield, they remain convinced that the compensation for taking such risks remains too slight. Over time, the managers’ approach has paid off for shareholders. The fund owns one of the best long-term records, in terms of risk-adjusted returns, in its category. Vanguard Asset Allocation VAAPX Seasoned managers Tom Loeb, Charles Jacklin, and Helen Potter make top-down calls to establish this fund’s allocations to bonds, stocks, and cash. They lean on the firm’s quantitative models to determine the expected returns for each asset, and position the fund accordingly. But active management ends there: The fixed-income and equity arms passively track the Lehman Brothers Long-Term Treasury Index and the S&P 500 Index, respectively. Thus, the fund’s chances of beating its rivals rely on its ability to predict the market’s movements accurately. This approach has worked over the long haul—the fund has outperformed its typical moderate-allocation rival and has been in line with the S&P 500 Index. Its low 0.41% expense ratio also gives the fund a leg up over its competitors. K This article is based on a screen created by senior mutual fund analyst Laura Pavlenko Lutton. Tips: It’s in the Name Have you ever wanted to find a fund with a focus that doesn’t fit neatly within one category and isn’t easy to find by other means? All may not be lost, if you think what you’re looking for may be indicated somewhere in the fund’s name. For example, for funds with the word “commodity” in the name: Principia: Fund name ~ commodity Advisor Workstation: Fund name contains commodity Too Many Share Classes? Are you sick of every search bringing up a pesky number of share classes? That’s no surprise, given that most load shops offer four or more share classes these days. You can add criteria to isolate either the particular share class you like to use, or to center in on the oldest share class. To isolate a particular share class, search by Share Class = To keep the oldest share class (known as distinct portfolios in Principia): Advisor Workstation: Oldest Share Class 5 Yes When rising subprime-mortgage defaults incited fear and loathing across the credit and equity markets in the third quarter, this fund did what anyone familiar with it would have expected it to do: It went shopping. The fund’s disclosure policies prevented its handlers from offering many specific details on the record, but given what we know about the managers’ value-oriented style, it’s safe to assume it didn’t retreat from its two largest sectors—agencybacked mortgages and corporate bonds— during the credit crisis and probably added in those areas. It wouldn’t be a surprise to see this fund’s stakes in those areas, and its duration and yield, creep up. Oakmark Equity & Income OAKBX Managers Clyde McGregor and Ed Studzinski focus on the right things: They buy companies after carefully arriving at defensible estimates of their valuations, stand firm when others Principia: Special Criteria 5 Distinct Portfolio Only Still Can’t Find What You’re Looking For? Are you racking your brain trying to figure out whether “12-month yield” is found under Operations, Performance, or Snapshot? To find what you’re looking for, you can switch over to an alphabetical listing of all criteria under each general topic. In Principia, click the Alphabetical button under Field List Option. In Workstation, click Alphabetically next to View Field Name. Share Your Best Ideas Send us a favorite fund screen that you use in your practice. We’ll consider printing it in this space for the benefit of other advisors. Submit it to magazine_editor@morningstar.com MorningstarAdvisor.com 77

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Morningstar Advisor - Fall 2007

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