Morningstar Advisor - Spring 2007 - 52

Investments à la Carte wide economic moat that will protect its excellent returns for years to come. Western Union is one of the world’s most recognized and trusted brands. In a business where trust is paramount, having a strong brand is a tremendous advantage. Western Union’s network of 285,000 agents is almost three times larger than the closest rival’s and is a second competitive advantage. The size of the network creates economies of scale for the company and makes its services more convenient for customers. The firm’s advantage grows each year as it adds locations. This should pave the way to a healthy growth rate. Jeffrey Ptak SA The separate account consistently rests on the large-cap growth/blend border and is currently in the large-blend category, where its downside capture ratio favorably lags the average. Relative to the S&P 500, the management team has been steadily decreasing the strategy’s R-squared, while boosting alpha. The strategy has high or above-average returns; average or below-average Morningstar risk; positive, steady Sharpe ratios; and Treynor ratios that outperform the category. The account’s investment minimum is $100,000, low for separate accounts. Steve Deutsch S Outflows—stemming from the fund’s lackluster relative showing—have since shrunk it down to $600 million. We think investors have been jumping ship at precisely the wrong time. The reasons behind the fund’s relative weakness make the case for it stronger, not weaker. Manager Charlie Dreifus has a higher-quality bias and is stricter about valuations than many of his peers. Recently, the market simply hasn’t rewarded such characteristics. But Dreifus’ discipline has paid off over the long run, especially in tougher environments. Karen Dolan First American FAF NB All Cap Core SMA Value MF Although 2006 was not its best year, NB All Cap Core SMA has been adept at avoiding major missteps, leading to solid long-term returns relative to its large-cap competitors, whether separate accounts or mutual funds. A team of Kaminksys—Gerald, Gary, and Michael—are largely responsible for running the strategy. They say they concentrate on companies and sectors with a solid “growth dynamic” and a moat around their competitive positions and their financials. This strategy also invests a portion of assets in securities that the managers believe have superior income potential, such as master limited partnerships, real estate investment trusts, and special situations. Royce Special Equity Inv RYSEX Small-cap value stocks don’t look like screaming buys today. The typical small-value fund has outpaced the S&P 500 Index by a substantial margin in each of the past six calendar years. A potential cool down, however, doesn’t mean that investors should shy away from this corner of the market altogether. The pickings are slim, though: Many of our favorite small-cap value managers aren’t taking assets from new investors. Others have heavy asset bases. That’s why we were quick to highlight Royce Special Equity soon after it re-opened to new investors in 2006. The fund closed in 2004 when assets neared $1 billion. First American is the top holding in Morningstar StockInvestor’s Tortoise portfolio, which is a collection of large, low-risk companies with economic moats. And for good reason: Although the near-term outlook for housing is ugly, equity strategist Paul Larson believes that ugliness is already priced into the stock, which remains among the cheapest in the Tortoise portfolio. Thirty years ago, First American was a network of fragmented title insurance offices and agencies, but it has evolved to become the largest provider of title insurance and closing services. In addition, it markets mortgage and property information, as well as specialty insurance, and peddles risk mitigation and business solutions. Taken together, this suite of services has Stocks Municipal Mortgage & Equity Growth of $10,000 $18K S&P 500 Western Union Growth of $10,000 $14K First American Growth of $10,000 $23K Novartis AG Growth of $10,000 $18K S&P 500 S&P 500 14 14 12 S&P 500 17 03 04 05 06 07 03 04 05 06 07 03 04 05 06 07 03 04 05 06 07 Income pick: Housing lender and tax credit syndicator has an eye-popping 7% dividend, about 75% of which is tax-free. Growth pick: A cash cow with 30% operating margins and low reinvestment needs. Wide moat, brand recognition guard against increased competition. Value pick: Well-entrenched provider of title insurance and closing services. Susceptible to housing cycle, but ugliness is already priced into the stock. International pick: Seamlessly operates both pharmaceutical and generic drug businesses. Has slew of new drugs that could soon could receive approval. 52 Morningstar Advisor Spring 2007

Morningstar Advisor - Spring 2007

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