Morningstar Advisor - Summer 2007 - 44

Undiscovered Managers Osterweis OSTFX Growth of $10,000 Fund Mid-Cap Blend $20K 16 12 03 05 07 S&P 500 Category 10-Year Total Return % Mid-Cap Blend Minimum Investment ($) 15.62 10-Year Investor Rtrn %* 5,000/1,500 IRA Expense Ratio (%) 14.30 Investor Rtrn % Rank Cat 1.26 Stewardship 19 much older and larger cross-town contemporary, they don’t mind living in the shadows. The firm will not grow for growth sake. It shunned the big no-transaction-fee mutual fund supermarkets operated by Charles Schwab and other brokers, and declined at least one purchase offer from a larger mutual fund family. The price of shelf space at the mutual fund supermarkets is too high, and a larger firm might focus too much on short-term returns and asset gathering. Both routes threatened to bring in too much money, too fast, from the wrong kind of investor, Osterweis says. “There are some diseconomies of scale to getting $3 billion in a short time. I don’t know that we would be able to do that and perform.” Size alone doesn’t distinguish Osterweis Capital, though. There are a lot of small money management boutiques out there. What sets Osterweis apart is the eclectic style of its manager. John Osterweis, 64, still tall, trim, and confident, is a high conviction investor who runs a fairly concentrated portfolio of about 40 stocks from all corners of the Morningstar style box. In fact, he barely conceals his disdain for style boxes and modern portfolio theory. Both seem illogical to an inveterate, omnivorous stock-picker like Osterweis. “A lot of modern portfolio theory makes sense at the portfolio level, but doesn’t make sense at the stock level,” he says. Indeed, Osterweis tries to control risk by buying right and holding tight. He and his team of four co-managers and analysts are not trueblue value investors who look for stocks traded at a prescribed discount to intrinsic value, nor are they growth investors willing to pay any price for companies boasting double-digit earnings growth. It would be wrong, however, to cast the Osterweis crew with the more moderate growth-at-a-reasonable-price crowd. What is Osterweis, then? Call his style valuewith-a-reasonable-amount-of-growth. Osterweis looks for beaten-down, overlooked, or out-of-favor stocks with strong cash flow and one or two unappreciated growth opportunities. The ideal holding for the firm is a stock that once bought morphs from downtrodden value fare to growth darling over the years. Osterweis and his team like to say they buy assets and sell earnings. They have a lot of leeway in researching stocks and assessing valuations, but they all focus intently on companies’ cash flow, largely because it’s hard to manipulate and is a good indicator of a businesses ability to reinvest and grow even during rough times. “Free cash flow is the elixir that’s going to drive investment returns,” co-manager Matthew Berler says. One Stock at a Time — * Data as of May 31, 2007 Dollar-weighted return that measures how the typical investor in the fund fared. family fortune to manage. They hammered out the details while pounding the pavement and running hilly trails around San Francisco Bay. “We had three or four hours to talk about it,” Hellman recalls. The Run Begins Thus Osterweis Capital Management, a firm whose investment style and evolution as a business can be likened to that of a disciplined distance runner, was born. Since then, Osterweis Capital has grown at a measured pace from $30 million in assets to $3.5 billion mostly in long-only equity accounts. There also is a fixed-income fund, Osterweis Strategic Income OSTIX, and two closed hedge funds. For most of its history, though, Osterweis has remained hidden in plain sight. The firm’s equity accounts and the stock mutual fund, Osterweis OSTFX, which opened in 1993, have put up impressive absolute and relative returns over the years. Yet, they have not received the attention and assets showered on another San Francisco firm with a contrarian streak and impressive long-term record: Dodge & Cox. While it’s clear John Osterweis and his staff admire, envy, and even seek to emulate their An Osterweis stock can come in many guises. One that has worked for the fund recently is Crown Holdings CCK, a maker of beverage cans. The fund first bought the stock in 2004 when its shares were trading below $9 and investors were worried about the manufacturer’s ability to pass on commodity cost increases to customers and potential asbestos litigation. Osterweis’ squad, however, saw a leading company in a consolidating industry that soon would have more pricing power. They also saw a company that was shedding unattractive assets, so it could focus on its metal can business and shore up its balance sheet. As for the asbestos claims, they emanated from a subsidiary Crown owned for merely a matter of months, so the liability risk looked minimal. Since then, Crown has reached the mid-$20s, but the Osterweis team has no plans to sell it. The company is no longer unappreciated, “but there is still a bit of growth left yet,” co-manager and analyst Sasha Kovriga says. The company is moving into the developing world and continues to generate cash flow, he says. A less obvious example of an Osterweis pick is Internet software firm VeriSign VRSN. The company receives 80% of its profits from acting as the registrar for Web site addresses ending in .com and .net, but it also is well positioned to serve the growing demand for 44 Morningstar Advisor Summer 2007

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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