Morningstar Advisor - Summer 2007 - 39

blue in the face, and I think it’s good to make models. But you’ve got to remember that even though they’re nice, neat columns and printed out on a laser printer that makes it look like the answer must be real, one bad number somewhere in that spreadsheet’s going to give you a very bad answer, so to be aware of where the weak links are in the reasoning. JR: It’s like what my old basketball coach at Princeton, Pete Carril, used to say, “There’s certain things I can’t teach you when you get here at age 18. If you don’t have the vision, if you don’t have the ability to be creative, I can’t change that in you.” The creative parts of the business are extraordinarily hard to teach. People will buy in, I think, until crunch time. Then, when the market’s down 20% like it was in 1987, or there’s the horrific events of 9/11, most people will have the inability to be real contrarians at that point. They’re going to want to wait until the dust settles, read some more, think some more, and then act. And as you know, the ability to act when everyone’s uncomfortable is so critically important. The other place I see this is with clients. We’ve all gone through periods where we’ve underperformed, and all the pension fund consultants say, “You know, we’re going to give more money to the manager while they’re out of favor and take money away from the hot manager.” But when crunch time comes, they never do it. WW: I’ve always thought that the value an active manager brings to the process is going where stocks are cheap, even if they’re not in the—we won’t use the words “style box” in this conversation—but managers tend to be categorized in certain ways, and sometimes the values are elsewhere and we like to feel free to go there. I find that a lot of advisors and consultants say, “Oh, we agree with you 100%, but unfortunately, we’ve convinced our clients that they want to use these categories and diversify that way. So we’re now prisoners of the things we’ve created.” JR: You know Don Phillips has been one of the more elegant, clear thinkers about the dangers of people just blindly following the style boxes. He’s talked about some of the great investors over time, people like yourself and John Neff and Peter Lynch, who were willing to go where the value was and not get too tightly stuck in one box. WW: When I talk to the people from Morningstar, I think they do despair that their original good idea has been carried by others way too far. JR: I think it’s really dangerous. At the height of the bubble, when the S&P 500 was doing really well, everyone bought big technology stocks, because they were the big weights in the index. Well, I think the same thing’s going to happen with these various parts of the style box. You’ll have certain stocks that become big positions in the midcap value universe, and everyone feels that they have to buy them to keep the consultants happy. Eventually, it’s going to have the same kind of bad ending. And it’s going to be the contrarian manager who was willing to buy the stocks that were not the big weights in those respective boxes who will show the best overall performance. WW: Right. We have one fund that’s able to sell short. So in spite of the fact that some people pigeonhole us as a small/mid-cap manager, I’m short the Russell 2000 in that fund, sort of as an anti-index move. I did short the Nasdaq three years early, so it was a little expensive waiting for 2000, so I may have two more years to go with the Russell. JR: When you mention shorting, I can’t help but think about this explosion in hedge funds. It reminds me of the explosion in the Internet. Everybody you know is opening up a hedge fund. All the endowments are hiring hedge fund managers, and they look at us stock-pickers as dinosaurs. How do you think that plays out? Cut From the Same Cloth by Todd Trubey Wally Weitz and John Rogers both count themselves as followers of Warren Buffett’s investment philosophy. That means they use cash flows to derive intrinsic valuations for businesses and purchase stocks that trade at a discount to their estimate. It also means that they focus on a limited number of holdings and create portfolios that often defy Morningstar’s style box categorization system. Rogers founded Ariel Capital in 1983, and his firm runs just three mutual funds—all using the same basic approach. Weitz also founded his own firm, Wallace R. Weitz & Co., in 1983. It runs eight mutual funds, including three bond funds; the equity funds all ply similar strategies. Both investors continue to run their firms and engage in substantial philanthropic ventures. Their investment styles are similar, but there are a few notable differences. All told, we see Weitz as the more aggressive investor. John Rogers: Keeps holdings within a fairly narrow market-cap range and avoids giant firms. Insists upon high-quality businesses with little debt. Diversifies his funds by sector more than Weitz does. Wally Weitz: Creates all-cap portfolios spanning from giant firms to micro-caps. Dabbles in dicier firms and doesn’t mind the use of financial leverage. Has stronger contrarian streak. • • • • • • Todd Trubey is a senior mutual fund analyst with Morningstar. MorningstarAdvisor.com 39
http://www.MorningstarAdvisor.com

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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