Morningstar Advisor - Spring 2008 - 70

Investments á la Carte Medtronic MDT $19K 16 S&P 500 13 03 04 05 06 07 08 S This wide-moat company’s vision is to establish a significant presence in chronic diseases, in addition to its stronghold in heart disease. Investments in neurological, diabetes, and spinal products from the middle to late 1990s have paid off in spades, offering new revenue streams and taking some pressure off of its heart products. Revenue from those three product areas inched up from 25% of total sales in fiscal 2000 to 37% in fiscal 2007. Medtronic’s diversified medical technology portfolio allows it to better weather glitches in the development or approval process for any particular new device, and weJan-07this think Jan-08 Jan-03 Jan-04 Jan-05 Jan-06 provides downside protection to prospective shareholders. And better yet, we’ve been Feb-03 Nov-03Jul-04 Mar-05 Dec-05 Sep-06 Jun-07Feb-08 Mar-03 Mar-04 Feb-05Oct-05Jun-06Feb-07Oct-07 Apr-03 Apr-04 Apr-05 Feb-06 May-03 May-04 Jun-03 Jul-03 Jun-04 Aug-03 Aug-04 Jun-05 Mar-06 Mar-07 Sep-03 Sep-04 Jul-05 Apr-06 Apr-07 Oct-04 Aug-05 May-06 May-07 Nov-04 Sep-05 Jul-06 Nov-05 Aug-06 Jul-07 Aug-07 impressed by the firm’s persistent ability Oct-03 Dec-03 Dec-04 Feb-04 May-05 Oct-06 Sep-07 Nov-06 Nov-07 Dec-06 Dec-07 to innovate and by how it’s often first to market with new products, which should provide significant tail winds for years to come. hard-pressed to find a firm standing head-andshoulders above the pack in commoditized industries like gold mining. By contrast, the health-care business has often been a fertile source of wide-moat firms given the benefits that intellectual property protection confers. Not too surprisingly, this ETF, which costs only 0.23% to own, teems with the stocks of blue-chip health-care giants like Johnson & Johnson JNJ, Pfizer PFE, and Merck MRK. All told, the fund invests nearly two thirds of its assets in wide-moat names. These businesses, which typically share traits like broad product portfolios and immense R&D war chests, have been steady growth engines over time. Yet, from our standpoint, the market is discounting these business as if they’ll experience nominal growth, the most commonly cited concern being thinning drug pipelines and generic encroachment. While we’re not expecting these drugmakers to spurt huge revenue gains in the coming years, we think the consensus view is too bearish. Thus, we’re seeing bargains galore in this portfolio, which was recently trading at a hefty 14% discount to what we think its holdings are worth in the aggregate. Primecap Odyssey Aggressive Growth POAGX $16K This makes it easier for the managers to own small- and mid-cap stocks, which make up 78% of this fund’s portfolio but only 42% of Capital Opportunity’s. The small-cap emphasis helped in 2006, but the situation has been reversed as investors have fled from small caps and anything smacking of risk. We’re not too worried about this short-term stumble given the managers’ track record; this remains an excellent mid-cap option, especially for investors who can’t get into its cheaper cousin. Health Care Select SPDR XLV $19K 14 S&P 500 12 16 S&P 500 05 13 06 Value To some portfolio managers, a strong valuation discipline is the pill that helps them sleep at night. By digging into a company’s assets, liabilities, and cash flows, value managers try to make money by purchasing securities for less than what they think they’re worth and waiting for the market to figure it out. A welcome side effect of such considerations is that stocks with low expectations attached that are undervalued to begin with also have less room to go down. When done right, a well-executed value strategy can offer investors peace of mind. Overview by Karen Dolan 07 08 03 04 05 06 07 08 13000 There are few better ways to protect one’s 12000 downside, we think, than investing in firms founded on durable competitive advantages. 11000 While businesses like these can certainly fall out of vogue over short periods of time, they 10000 tend to generate handsome profits and gobs of cash flow on a consistent basis, creating shareholder value in the process. Some industries boast more of these high-quality businesses than others. For example, you’d be E Jan-05 Dec-04 This fund was launched in late 2004 as an alternative to Vanguard Capital Opportunity VHCOX, which has been closed to most new investors since early 2004. (The latter fund recently reopened to those who have at least $1 million in other Vanguard funds.) The Primecap team and its low-turnover contrarian growth strategy has put together an outstanding record over the past decade with Capital Opportunity and for more than 20 years with Vanguard Primecap VPMCX. This fund’s $375 million asset base (as of late 2007) is a fraction of Capital Opportunity’s $10.5 billion. MF WHG LargeCap Value Instl WHGLX $13K 12 S&P 500 11 06 07 08 Jan-06 Jan-07 Jan-08 MF This fund has a relatively short history, but it’s backed by an experienced team and a proven strategy. It’s a replica of GAMCO Jul-07 Feb-05 Aug-05 Feb-06 Jul-06 Dec-06 May-07 Oct-07 Mar-05 Sep-05 Mar-06 Sep-06 Mar-07 Aug-07 Feb-08 Apr-05 Nov-05 Apr-06 Oct-06 Apr-07 Sep-07 May-05 Dec-05 May-06 Nov-06 Jun-07 Nov-07 Jun-05 Jun-06 Jul-05 Oct-05 Aug-06 Feb-07 Dec-07 Jan-03 70 Morningstar Advisor Spring 2008 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08

Morningstar Advisor - Spring 2008

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