Morningstar Advisor - Winter 2008 - 20

Investment Briefs strong results in a variety of climates in the past, as Herro and comanager Chad Clark have regularly executed their bold strategy well. It boasts superior 10-year and since-inception returns. And the foreign small/mid-value fund’s focused and distinctive strategy make it an exceptional portfolio diversifier. Oakmark International has outpaced its typical peer by comfortable margins over the past decade. Those results, plus our overall confidence in Herro, make us think that this foreign largevalue fund is a good option for hardcore value fans with long time horizons. Tweedy, Browne Worldwide High Dividend Yield Value TBHDX This fund seeks companies with above-average dividend yields and reasonable valuations around the globe. Vanguard FTSE All World Ex-US Index VEU This is an ETF that covers the globe, including emerging markets, which aren’t present in most foreign stock index funds. Marsico Global MGLBX Its initial expense ratio makes it one of the cheapest funds in the world-stock category, and a strong management team adds to its appeal. Beating the House: Percentage of domestic actively managed large-cap equity funds that outperformed the market % Return of S&P 500 % of funds that beat the market 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 28.6 21.0 –9.1 –11.9 –22.1 28.7 10.9 4.9 15.8 5.5 29 43 68 52 50 44 47 62 32 54 Best New Funds of 2007? Time Will Tell In the flood of new fund filings this past year, seven offerings caught the attention of Scott Berry, Morningstar’s associate director of fund analysis. Each, he says, has the potential for long-term success. Not one domestic-equity fund makes his list—Berry says pickings were slim, although he mentions that Fidelity 100 Index FOHIX and Vanguard High Dividend Yield Index VHDYX might be worth considering. PIMCO Income PONAX This fund looks far and wide for opportunities, with government bonds, junk bonds, emergingmarkets issues, and complex derivatives all playing possible roles. American Funds Short-Term Bond Fund of America ASBAX A cheap expense ratio gives it a leg up on rivals. Vanguard Total Bond Market BND This is the ETF version of Vanguard Total Bond Market Index VBMFX, a Morningstar Analyst Pick. Thornburg International Growth TIGAX This fund is led by strong managers who also run the successful Thornburg Core Growth THCGX. Active Managers Excel in Down Markets Over the past 10 years, an average of 48% of all domestic actively managed large-cap stock funds achieved a higher return than the S&P 500 Index, Morningstar research analyst Preethi Parmar finds. During years of strong doubledigit returns, a smaller fraction (about 39% on average) of active funds performed better than the market, while a larger percentage (about 57% on average) of funds beat the market during less-favorable market conditions. The benefit of an actively managed fund is the potential that the fund will outperform its peers or benchmarks. Active managers attempt to provide higher returns relative to the market while also using defense measures to counter a downturn. Fund managers move in and out of positions to take advantage of arbitrage opportunities they identify. In effect, they may be able to better handle periods of poor market performance and better capitalize on opportunities when markets perform well. Investors pay for the potential of downside protection and upside opportunity in the form of fees and expenses. While some active managers are better than others at adding long-term alpha, it is apparent that the “house” usually wins. Market Outlook: Time to Buy? Yes, according to Morningstar’s equity analysts’ bottom-up analysis of the U.S. stock market at the end of the fourth quarter. They estimated that the S&P 500 was about 8% undervalued at the time, which translated into a 13% expected long-term return. (To arrive at that return, they assume that market prices migrate to Morningstar’s fair value estimates over a three-year stretch.) Slicing the market by sector, most areas are cheaper now than three months ago, says Haywood Kelly, Morningstar’s director of security analysis. In nine out of 12 sectors, the average stock is trading at less than its fair value. Kelly see the largest discounts in consumer (retail stocks in particular look cheap), financials, media, and hardware (where semiconductor stocks are cheap again). During the past quarter, analysts also raised their fair value estimates for a host of energy companies based on a more-bullish long-term oil forecast. At the end of December, the median energy stock they covered was 6% undervalued. K 20 Morningstar Advisor Winter 2008

Morningstar Advisor - Winter 2008

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