Morningstar Advisor - Fall 2008 - 63

Contributors MF ETF S SA Mutual Funds, Michael Breen ETFs, Paul Justice, CFA Stocks, Paul Justice, CFA Separate Accounts, Michael Breen Growth Overview 000 000 000 00 This fund tracks the MSCI U.S. Prime Market Growth Index, which sifts through the 750 Overview by Michael Breen largest U.S. stocks for the fastest-growing companies. MSCI defines growth using an S Apple, Inc. AAPL eight-factor model, and it further enhances its quality by employing buffer zones to limit $300K the migration of stocks between the growth 241 Value Overview and value camps. These traits help limit 182 turnover and make the ETF a better representaIt’s not surprising that those who 123 Feb-04 Feb-05 Feb-06 Feb-07 Feb-08 tion of the growth stock universe. Another make a habit of buying straw 64 S&P 500 TR main Mar-04Oct-04 Jun-05Jan-06Aug-06 its Jul-07 expense Apr-04 attraction Nov-05 fund Jan-07Aug-07 Apr-08 May-04 Mar-05Oct-05 Jun-06is May-07 Mar-08 Jun-04 Apr-05 of this Jul-06 Jul-04 May-05 Mar-06Oct-06 Jun-07 May-08 Aug-04 Sep-04 Jul-05 Apr-06 Dec-06paltry Aug-05 May-06 Sep-05 Dec-05 Sep-06 Nov-06 Sep-07 Jun-08 Oct-07 Jul-08 Nov-07 Aug-08 Dec-07 hats in winter are finding attractive Dec-04 Mar-07 Apr-07 both 03 04 05 06 07 08 ratio Nov-04 making it dirt-cheap onJan-08 ofJan-05 0.11%, stocks in the consumer sectors. absolute and relative levels compared with A housing crisis, recessionary fears, Most people associate Apple with the iconic both mutual and exchange-traded funds. If that iPod, but the real growth opportunities lie in the were not enough, we think its stock holdings and the specter of inflation have the Back in the day, consumer stocks were a staple of growth investors. It seemed there was always a new retail or dining concept capturing the public’s imagination and attracting flocks of momentum investors. Those days are a fading memory. Traditional value areas like energy and materials have posted big gains over the past five years, catching the fancy of the momentum crowd. Meanwhile, consumer-related stocks have struggled, gaining fans in the value camp but reducing their presence in growth investors’ portfolios. Still, a little digging reveals plenty of consumer plays with profiles to cheer the most ardent growth investor. company’s Macintosh and iPhone businesses. The Macintosh business has averaged 30% annual growth since 2003, and we expect that growth to continue. The advent of the Internet as the means by which people gain access to their information means that users are less tied to desktop operating systems like Microsoft Windows. Moreover, the transition from desktops to notebooks places a premium 26000 on design. When you pull out your notebook at the local Starbucks, you want something that 20000 looks good, and no other computer maker does industrial design like Apple. The second growth 14000 driver, the iPhone, could end up as Apple’s biggest business a decade from now. Think 8000 about all the mobile devices people carry: cell phone, music player, GPS device, digital camera, and more. One major trend will be the convergence of all that functionality onto one device. The iPhone is Apple’s play to own the digital screen that you carry around. Much like Windows came to dominate the PC market, we think one software platform will dominate the converged-device market. ETF $15K S&P 500 TR 13 are also cheap. Our equity analysts cover 98% of the fund’s holdings, which allows us to peg a fair value estimate on the ETF itself. As of this writing, the fund is trading at a decent discount to our Consider Buying price, and the collection of companies held in the fund exhibit healthy competitive advantages over their peers. SA $26K Baron Small to Mid-Cap Equity 20 S&P 500 TR 14 03 04 05 06 07 08 Vanguard Growth VUG 11 04 05 06 07 08 Manager Ron Baron’s eponymous firm has built a stellar record focusing on firms with dominant market positions and sustainable growth prospects. He has long eschewed commodity and high-tech firms because the former have low barriers to entry while the latter run the risk of obsolescence. But consumer plays are right in his wheelhouse. Baron’s funds Jan-03 separate accounts typically keep close to and Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 one third of their assets in consumer-related fare. May-04 aMay-05 Apr-06 May-07 May-08 has Jul-05 Jul-06 Jul-07 Jun-08 record with Aug-08 Feb-03 Baron Sep-04Jun-05Mar-06 Feb-07Nov-07 Mar-03 Feb-04Nov-04 Sep-05Jun-06 Apr-07 Mar-08 Apr-03 Mar-04 Feb-05 Feb-06 May-03 Apr-04 Mar-05 trackSep-06Jun-07 Apr-08 Jun-03 Jul-03 Jul-04 Apr-05 May-06 Aug-03 Aug-04 good Oct-04 Aug-06 Aug-07 Jul-08 Sep-07 Oct-07 Sep-03Jun-04 and retail plays. Mar-07Dec-07 Oct-03 Nov-03 Dec-04 Oct-05 Oct-06 it’s no Dec-03 Aug-05 Nov-05 Nov-06 Dec-05 Dec-06 gaming, dining, So, Feb-08 surprise that this portfolio has been a big holder of such names as casino operators Wynn Resorts WYNN and Ameristar Casinos ASCA, restaurateurs Panera Bread PNRA, California Pizza Kitchen CPKI, and Cheesecake Factory CAKE, as well as specialty retailers like Dick’s Sporting Goods DKS and J. Crew JCG. Baron’s strong long-term track record with such consumer stocks makes us confident in this separate account’s prospects. MorningstarAdvisor.com 63

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Morningstar Advisor - Fall 2008

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