Morningstar Advisor - Summer 2008 - 66

Investments á la Carte only be worth somewhere in the midsingle digits. On the other hand, if management can fire up the growth engine and expand by more than 50 stores this year, the stock could be an easy double. Value Value investing essentially boils down to getting more in value than what you are paying for in price. Deep-value investing can be classified as buying those securities that 20000 could potentially be near bankruptcy and worth nothing, but if they make 14000 it through and avoid insolvency, they 8000 could be worth multiples of the current stock price. To be sure, this 2000 type of investing is not for the faint of heart and is only appropriate for investors who are comfortable with risk and willing to do a lot of work on their investments. What’s more, it’s sometimes better to buy a basket of these types of securities than only one, as this strategy allows investors to spread their risky bets over a wider range of potential outcomes. Overview by Justin Fuller MF $40K Schneider Small Cap Value SCMVX 30 20 S&P 500 TR 03 04 05 06 07 08 Just remember: Short-term performance is meaningless. This fund got poleaxed by its financials in 2007, particularly the now-bankrupt American Home Mortgage. The fund lost Jan-03 for the year and lagged nearly all its 17% Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Feb-03Nov-03Jul-04Mar-05Dec-05Sep-06 Jun-07 Mar-08 Mar-03 Feb-04Nov-04Jul-05Mar-06Dec-06Sep-07 Jun-08 Apr-03 Mar-04 Feb-05Nov-05Jul-06Mar-07 Feb-08 May-03 Apr-04 Apr-05 Feb-06Nov-06Jul-07 Apr-08 Jun-03 May-04 May-05 Apr-06 Apr-07 May-08 Jul-03 Jun-04 Jun-05 May-06 May-07 Aug-03 Aug-04 Aug-05 Jun-06 Sep-03 Sep-04 Sep-05 Aug-06 Aug-07 Oct-03 Oct-04 Oct-05 Oct-06 Oct-07 Dec-03 Dec-04 Feb-07Nov-07 Dec-07 Depot HD peppering its top-10 holdings, one might wonder if there are any battered stocks that this separate account doesn’t own. Rest easy. There’s a method to manager Richard Pzena’s madness. As Kunal Kapoor highlighted S MBIA MBI in last issue’s Morningstar Conversation, Pzena’s a veteran value hound who thinks $20K near-term business deterioration creates the Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 best long-term opportunities. He willingly dives 14 S&P 500 TR into battered firms as long as he’s confident Feb-03Nov-03Jul-04Mar-05Dec-05Sep-06 Jun-07 Mar-08 Mar-03willMay-04Feb-05Nov-05Jul-06Mar-07 capital Apr-03 Mar-04generate strong returnsAug-07May-08 May-03 Apr-04 Apr-05 Feb-06 Feb-07Nov-07 Jun-03 stillNov-04Jul-05 Apr-06 May-07 Apr-08 Jul-03 Jun-04 May-05 May-06 Aug-03 Aug-04 Aug-05 Jun-06 Sep-03 Oct-03 Oct-04 Sep-05 Aug-06 Jul-07 Jun-08 Dec-04 Oct-05 Sep-07 Oct-07 8 they Dec-03Sep-04 Jun-05Mar-06 Apr-07 Feb-08 on Oct-06 Nov-06 Dec-07 Dec-06 over time. He’s found happy hunting among Feb-04 04 03 05 06 07 08 depressed financials, and this strategy now has about half its assets in that sector. Such Over the last few years, MBIA has weathered concentration can cause near-term pain, but some tough times, but none as difficult as those Pzena has proved his mettle over the long haul. encountered today. The company has exposure to subprime Jan-05 Jan-06 Jan-07 Jan-08 Jan-03 Jan-04 collateralized debt obligations, and defaults on these risky debt instruments Income could ultimately call into question MBIA’s Income matters. This old saw is no Feb-03 Dec-03Sep-04 Jun-05 Apr-06 Feb-07 Feb-08 Mar-03 Feb-04Nov-04Jul-05 Jun-06 Mar-07 Mar-08 Apr-03 Mar-04 May-03 Apr-04 May-05Feb-06Nov-06Jul-07 Apr-08 Jun-03 May-04 Jul-03 Jun-04 Aug-03 Jul-04 Sep-03 Aug-04 Aug-05 Jul-06 May-07 May-08 Oct-03 Oct-04 Sep-05 Aug-06 Jun-07 Jun-08 Oct-05 Sep-06 Aug-07 Nov-05 Oct-06 Sep-07 Dec-06 Oct-07 solvency—or Dec-04 immensely diluteNov-07 atMar-05Dec-05 least existing Dec-07 Nov-03 Feb-05 Mar-06 Apr-07 Apr-05 May-06 less true for being so often repeated. shareholders if MBIA is forced to raise even When global markets were steadily more equity capital. MBIA’s AAA credit rating, ascending, it was easy to focus however, was also difficult to obtain; it requires exclusively on capital appreciation. long-demonstrated risk-management prowess and a strong financial position. Its primary But a dollop of economic and market product—insured municipal-bond obligauncertainty has more investors tions—has provided real value to customers. discovering the reassurance that a Expansion into other structured credit vehicles steady stream of income brings. It’s outside of its main product line further enriched simple: It takes cash to consistently corporate coffers, which produced a virtuous cycle of enviable returns. If the company can pay dividends, and you can’t fake return to profitably insuring municipal bonds, its cash. High-yielding securities not stock price could be worth multiples of what it only provide steady income, they is trading for today; if the credit market also attest to an entity’s financial worsens, however, it’s still a possibility that health. Below are several securities shareholders could be left with nothing. Pzena Large Cap Value With Citigroup C, Capital One COF, Freddie Mac FRE, Fannie Mae FNM, Pfizer PFE, and Home SA rivals. It has25000 slid further in 2008 so far, although it’s topping most of its small-value rivals. 20000 Don’t be scared off. Manager Arnie Schneider is a deep-value investor who isn’t afraid to buy 15000 struggling companies that he thinks can turn things around. He occasionally has his nose for 10000 value bitten off, but he has been right much more often than not over time, leading to topnotch long-term returns. This fund recently reopened, and we recommend it. It has almost no correlation with the broader market, making it a nice diversifier. $25K 20 15 S&P 500 TR 03 04 05 06 07 08 we are confident will maintain their solid income streams. Overview by Michael Breen 66 Morningstar Advisor Summer 2008

Morningstar Advisor - Summer 2008

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