Morningstar Advisor - Spring 2008 - 20

Investment Briefs has best-in-class research, sales, and manufacturing capabilities. Western Union WU Declining construction employment, anti-immigrant sentiment in the U.S., and competition concerns have weighed on the stock. Through it all, Western Union generates abundant free cash flow and impressive growth. Legg Mason LM Poor performance in its equity mutual funds and exposure to asset-backed commercial paper in its money-market funds eroded the market’s confidence in Legg Mason in 2007. Morningstar analysts think the asset manager will survive these setbacks unscathed because of its admirable track record, diverse fund offerings, and nearly $1 trillion under management. Jeffrey Ptak, Morningstar’s director of exchange-trade securities analysis, applied Coffina’s idea to ETFs and found one. Rydex Russell Top 50 XLG The fund invests in the bluest of the blue chips: the 50 biggest names of the Russell 3000 Index. Nearly 75% of the fund’s assets are firms that have a wide moat, and they’re currently cheap, Ptak says. The fund was trading in March at a 17% discount to Morningstar’s aggregate fair value estimate. Many of the fund’s names have come under pressure amid questions about their future growth prospects. The fund also holds its share of financials. But Ptak says that he’s willing to bet on thoroughbred businesses like these for the next decade, especially when they’re trading at quarter-horse prices. associate director of fund analysis, isn’t getting many positive vibes from the high-yield bond market. He says that now might not be the best time to buy in that area of the bond market. In 2002, the last time yields of junk bonds were this high, the default rate was dropping and the economy was improving. We have just the opposite shaping up this year, Berry says. The default rate remains historically low, but Moody’s predicts that it will jump to 4.6% from 1.1% by the end of the year, as the economy fights to stave off inflation and companies look to refinance debt in a tight credit environment. It’s no wonder, Berry says, that spreads between junk-bond yields and Treasury yields have soared over the past year—investors are simply demanding more yield in return for more risk. But Berry wonders whether investors are demanding enough yield. He says that the average high-yield bond fund yielded a bit more than 8%, as of Feb. 28. If defaults knock the High Time for High Yield? Although junk bonds are offering yields in the 8% to 10% range, Scott Berry, Morningstar’s WHEN IT’S NOT YOUR INCOME. ® The study described herein was sponsored by Nationwide Financial, is the proprietary property of Ibbotson and may not be reproduced, in whole or in part, in any manner, without the written consent of Ibbotson. When evaluating the purchase of a variable annuity, your clients should be aware that variable annuities are long-term investment vehicles designed for retirement purposes and will ﬂuctuate in value; annuities have limitations; and investing involves market risk, including possible loss of principal. A guaranteed minimum withdrawal beneﬁt is an optional rider that is available on certain annuity contracts for an additional fee; all guarantees and protections are subject to the claims-paying ability of the issuing company. Income risk is comfortable only 20 Morningstar Advisor Spring 2008 M8375-1_16x4.5_Morningstar.indd 1 PUBLICATION: DO NOT PRIN

Morningstar Advisor - Spring 2008

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