Morningstar Advisor - Summer 2007 - 11

4 5 investor returns while accounting for more than 65% of the category’s assets. Fund-family affiliation is not a great predictor of investor returns. For sure, there are shops, such as Vanguard and American Funds, that have consistently delivered solid investor returns, even in some of the toughest categories. But most often, apparent links with a fund family were better explained by the Morningstar category type. For example, many of the shops with strong investor returns, such as Dodge & Cox, have compact fund lineups that cover only core investment types. In nearly all categories with poor investor returns, the category’s new fund launches jumped at a rate greatly exceeding the industry average after a period of robust performance. In fact, there’s a solid correlation between categories with big trailing two-year returns and a big uptick in new fund issuance. It’s reasonable to foresee a bad experience awaiting some investors in real estate funds. The number of real estate share classes has nearly tripled in recent years. the second quarter. Five funds added to their existing positions in the most popular pick, cable giant Comcast CMCSA, which is now owned by seven of the 15 value funds Peters follows. The choice is a bit at odds with Morningstar’s current take on the stock: 3 stars and fairly valued. Stock Morningstar # of Funds Moat Rating Buying Rating in 1Q come up with an overall weighted batting average. For the second measure, they aggregate the performance of their picks in a broad asset class and compare them with an index. The analysts’ performance for the trailing three- and five-year periods ending the first quarter of 2007, reports Russel Kinnel, Morningstar’s director of mutual fund research, was pretty much in line with where it has been since Morningstar started reporting the figures last year. The three-year average was 70%, and the five-year average was 65%. That means that the analysts have picked winners about two thirds of the time over the past three- and five-year periods. Using the aggregate measure, the domestic-equity picks (excluding sector funds) returned 9.56% versus 7.76% for the Wilshire 5000 and 6.27% for the S&P 500. Those are good figures, but market-cap bias has a hand in that success, Kinnel says. The Wilshire 5000’s average market cap is about $28 billion, whereas the median domestic-equity analyst pick is about $14 billion. Because smaller-cap stocks have outperformed over the past five years, the picks have had a tailwind against the Wilshire. However, 38% of current analyst picks have an average market cap above the Wilshire’s, so it’s not a dramatic mismatch. By asset class, the weighted batting averages show the picks have been more successful in foreign stocks, municipal bonds, and taxable bonds and less so with domestic equity. For example, 98% of the analysts’ foreign largeblend picks have been winners over the past five years, while just 50% of the domestic large-blend picks have been winners. In bond land, the analysts have enjoyed a lot of success in core categories such as intermediate bond and muni national long, where their batting averages are more than 90%. In other areas, their preference for low-risk strategies has held them back. In high-yield taxable, they’re batting just 45% because taking on big credit risk has been rewarded over the past five years. Comcast CMCSA USG USG Dell DELL American Express AXP QQQ QQQQ QQQQ QQQQ 5 4 3 3 2 2 Wide Narrow Wide Wide Narrow Narrow None Narrow Narrow Wide — Narrow Narrow — Narrow American Int’l Group AIG QQQQ Citizens Comm. CZN QQ Constellation Brands STZ QQQQQ 2 Costco COST Countrywide Fin. CFC H&R Block HRB Mellon Financial* Pentair PNR Sealed Air SEE Spectra Energy SE Sprint Nextel S QQ 2 QQQQQ 2 QQQQ — QQQ QQQQ — QQQQ 2 2 2 2 2 2 Data as of 06-30-07 *Mellon Financial merged with Bank of New York BK Stock-Pickers Cable Guys Morningstar stock analyst Jaime Peters took a look at the holdings of 15 funds run by his favorite value managers to see what they’re buying. These are managers, Peters says, who follow the examples set by Ben Graham and Warren Buffett and search for stocks that trade below their estimates of intrinsic value and that provide a margin of safety. They include the likes of John Rogers, Bill Miller, Bill Nygren, Christopher Davis, Bruce Berkowitz, Mason Hawkins, Staley Cates, Marty Whitman, Wally Weitz, and Don Yacktman. Following is a list of the 15 stocks that at least two of the managers purchased during Box Score Analysts Slug .650 To measure performance of their Fund Analyst Picks, which are listed on page 68, Morningstar analysts use two tools: weighted batting averages and aggregate performance versus a benchmark. The weighted batting average essentially measures the analysts’ rate of success against a category average. First, they ask if the pick beat the category average for the time in which it was a pick. Then, they weight that success rate by the length of time that it was a pick. So, a fund that was a pick for five years counts for five times a fund that was a pick for one year. Then, they roll up all those figures to MorningstarAdvisor.com 11
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Morningstar Advisor - Summer 2007

Table of Contents for the Digital Edition of Morningstar Advisor - Summer 2007

Morningstar Advisor - Summer 2007
Contents
Letter from the Publisher
Get to Know the Bond “All-Stars”
Research Briefs
Our Stewardship Test Gets Tougher
Save It for Later
Too Many Oranges
Best of Both Worlds
No Two Clients Are Alike
When It Comes to VAs, It’s Seller Beware
Hands On: Finding the Suitable Fund Share Class for Your Client
Fund Style Can Drift Off Course
Sticking to Their Style, Through Thick and Thin
Marathon Man
Growth, With a Chaser
A Menu of Ideas to Fill Five Market Baskets
Funds: Finding Funds with Conviction
Stocks: So You Say You Want Income?
All Eyes on China
Mutual Fund Analyst Picks
Undervalued Stocks
Most Popular Variable Annuities
What’s New at Morningstar and on the Web
The Advisor’s Economic Moat
Morningstar Advisor - Summer 2007 - Intro
Morningstar Advisor - Summer 2007 - Morningstar Advisor - Summer 2007
Morningstar Advisor - Summer 2007 - Cover2
Morningstar Advisor - Summer 2007 - Contents
Morningstar Advisor - Summer 2007 - 2
Morningstar Advisor - Summer 2007 - 3
Morningstar Advisor - Summer 2007 - 4
Morningstar Advisor - Summer 2007 - Letter from the Publisher
Morningstar Advisor - Summer 2007 - 6
Morningstar Advisor - Summer 2007 - 7
Morningstar Advisor - Summer 2007 - Get to Know the Bond “All-Stars”
Morningstar Advisor - Summer 2007 - 9
Morningstar Advisor - Summer 2007 - Research Briefs
Morningstar Advisor - Summer 2007 - 11
Morningstar Advisor - Summer 2007 - Our Stewardship Test Gets Tougher
Morningstar Advisor - Summer 2007 - 13
Morningstar Advisor - Summer 2007 - Save It for Later
Morningstar Advisor - Summer 2007 - 15
Morningstar Advisor - Summer 2007 - Too Many Oranges
Morningstar Advisor - Summer 2007 - 17
Morningstar Advisor - Summer 2007 - Best of Both Worlds
Morningstar Advisor - Summer 2007 - 19
Morningstar Advisor - Summer 2007 - 20
Morningstar Advisor - Summer 2007 - No Two Clients Are Alike
Morningstar Advisor - Summer 2007 - When It Comes to VAs, It’s Seller Beware
Morningstar Advisor - Summer 2007 - 23
Morningstar Advisor - Summer 2007 - 24
Morningstar Advisor - Summer 2007 - 25
Morningstar Advisor - Summer 2007 - 26
Morningstar Advisor - Summer 2007 - 27
Morningstar Advisor - Summer 2007 - 28
Morningstar Advisor - Summer 2007 - Hands On: Finding the Suitable Fund Share Class for Your Client
Morningstar Advisor - Summer 2007 - 30
Morningstar Advisor - Summer 2007 - 31
Morningstar Advisor - Summer 2007 - 32
Morningstar Advisor - Summer 2007 - 33
Morningstar Advisor - Summer 2007 - Fund Style Can Drift Off Course
Morningstar Advisor - Summer 2007 - 35
Morningstar Advisor - Summer 2007 - 36
Morningstar Advisor - Summer 2007 - Sticking to Their Style, Through Thick and Thin
Morningstar Advisor - Summer 2007 - 38
Morningstar Advisor - Summer 2007 - 39
Morningstar Advisor - Summer 2007 - 40
Morningstar Advisor - Summer 2007 - 41
Morningstar Advisor - Summer 2007 - 42
Morningstar Advisor - Summer 2007 - Marathon Man
Morningstar Advisor - Summer 2007 - 44
Morningstar Advisor - Summer 2007 - 45
Morningstar Advisor - Summer 2007 - 46
Morningstar Advisor - Summer 2007 - 47
Morningstar Advisor - Summer 2007 - Growth, With a Chaser
Morningstar Advisor - Summer 2007 - 49
Morningstar Advisor - Summer 2007 - 50
Morningstar Advisor - Summer 2007 - 51
Morningstar Advisor - Summer 2007 - A Menu of Ideas to Fill Five Market Baskets
Morningstar Advisor - Summer 2007 - 53
Morningstar Advisor - Summer 2007 - 54
Morningstar Advisor - Summer 2007 - 55
Morningstar Advisor - Summer 2007 - 56
Morningstar Advisor - Summer 2007 - 57
Morningstar Advisor - Summer 2007 - Funds: Finding Funds with Conviction
Morningstar Advisor - Summer 2007 - 59
Morningstar Advisor - Summer 2007 - Stocks: So You Say You Want Income?
Morningstar Advisor - Summer 2007 - 61
Morningstar Advisor - Summer 2007 - 62
Morningstar Advisor - Summer 2007 - All Eyes on China
Morningstar Advisor - Summer 2007 - 64
Morningstar Advisor - Summer 2007 - 65
Morningstar Advisor - Summer 2007 - 66
Morningstar Advisor - Summer 2007 - 67
Morningstar Advisor - Summer 2007 - Mutual Fund Analyst Picks
Morningstar Advisor - Summer 2007 - 69
Morningstar Advisor - Summer 2007 - 70
Morningstar Advisor - Summer 2007 - 71
Morningstar Advisor - Summer 2007 - Undervalued Stocks
Morningstar Advisor - Summer 2007 - 73
Morningstar Advisor - Summer 2007 - Most Popular Variable Annuities
Morningstar Advisor - Summer 2007 - 75
Morningstar Advisor - Summer 2007 - What’s New at Morningstar and on the Web
Morningstar Advisor - Summer 2007 - 77
Morningstar Advisor - Summer 2007 - 78
Morningstar Advisor - Summer 2007 - 79
Morningstar Advisor - Summer 2007 - The Advisor’s Economic Moat
Morningstar Advisor - Summer 2007 - Cover3
Morningstar Advisor - Summer 2007 - Cover4
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