Morningstar Advisor - Winter 2008 - 28

Gray Matters How Private Equity Improves a Portfolio An efficient frontier of portfolios with stakes in private equity offers better risk/return characteristics historicallyEquity and forward-looking (right) than one without private equity. With Private (left) Without Private Equity With Private Equity Without Private Equity 36 27 18 9 0 20% 15 10 5 0% 10% 20% 30% 40% 50% 36% 27 18 9 0% 10% 20% 30% 40% 50% – Without Private Equity – With Private Equity Public Firms, Private Investments As of Dec. 31, 2007, the Red Rocks Listed Private Equity Index had 32 holdings and the Red Rocks International Listed Private Equity Index had 39. Here are each index’s top 10 holdings. Red Rocks Listed Private Equity Index Company Weighting % have two significant impacts. First, moving forward, listed private equity proxies will more accurately reflect the beta characteristics of the private equity asset class, as more private equity investments are securitized. Second, while most current investments in privateequity funds are dominated by fund-specific risk, securitization will generally lead to more-diversified private equity investments. As this happens, typical private equity portfolios will be characterized less by investmentspecific risk and more by the beta characteristics of the true private equity asset class. The diversification of private equity portfolios and the diversification of listed private equity indexes will enable investors to hedge unwanted private equity asset class beta and begin to practice portable alpha/portable beta strategies with private equity portfolios. Because of securitization, we believe that what was once considered a pure alpha strategy is becoming exotic beta and will relatively quickly become standard beta. Additionally, what was once an institutional-only asset class will begin to appear in the strategic asset allocation of individual investors—something that was unheard of 10 years ago. K Tom Idzorek, CFA, is director of research and product development for Ibbotson Associates. Red Rocks Intl Listed Private Equity Index Company Weighting % Leucadia Natl Cp LUK Fortress Investment Group FIG American Capital Strategies ACAS Blackstone Group L.P. BX 0 10 20 Capitalsource Inc CSE 30 40 9.75 9.00 8.50 8.00 50 6.00 3i Group Wendel Investment Eurazeo Onex Corp. Ratos AB 0 Macquarie Infrastructure Group 10 20 30 40 8.75 8.25 7.75 6.00 5.50 4.75 50 4.75 4.25 4.00 3.75 Allied Cap Corp ALD Apollo Investments AINV Macquarie Infrastructure MIC SVB Financial Corp SIVB KKR Financial Corp KFN Source: Red Rocks Capital 6.00 4.75 4.50 4.50 4.50 KKR Private Equity Investors Macquarie Airports Babcock & Brown Infrastructure Group Jafco private equity funds to implement a target private equity allocation. For other investors who want to include an allocation to private equity, investing in listed private equity is a viable and exciting alternative that, over time, should more accurately reflect the private equity asset class. While the focus of our research has been on the role of private equity in strategic asset allocations, one of the most exciting implications of the development of listed private equity indexes is the ability to make tactical asset allocations to the private equity asset class. The illiquid nature of traditional private equity funds prevents tactical asset allocators from quickly increasing or decreasing allocations to the asset class. Listed private equity indexes and the introduction of ETFs based on them enables investors to quickly and easily make tactical shifts. Fund-specific risk cannot be hedged, and the degree to which listed private equity proxies reflect the true beta characteristics of the private equity asset class is somewhat limited. We believe that the securitization of private equity investments is just beginning. This will Read the full white paper of this study at: http:// MorningstarAdvisor.com/uploaded/pdf/PrivateEquity.pdf Footnotes 1 In general, we are not fans of the “alternative” label, because it is often used as a catch-all bucket for more esoteric asset classes and newer investment strategies, which prevents a clear separation of alpha and beta. Strategic asset allocation is the beta decision and the implementation of that strategic asset allocation is the alpha decision. 2 Ennis, Richard M. and Michael D. Sebastian. “Asset Allocation With Private Equity” (2004). 28 Morningstar Advisor Winter 2008
http://MorningstarAdvisor.com/uploaded/pdf/PrivateEquity.pdf http://MorningstarAdvisor.com/uploaded/pdf/PrivateEquity.pdf

Morningstar Advisor - Winter 2008

Table of Contents for the Digital Edition of Morningstar Advisor - Winter 2008

Morningstar Advisor - Winter 2008
Contents
Letter from the Editor
Inbox
How Do You Use the Morningstar Style Box?
Real Estate Investing Goes Global
The Golden Touch
Investment Briefs
Learning to Fly with Equity Options
Another Block in Building a Portfolio
In a League of Their Own
Unlock the Box
Fashion Change
The View from the Investment Side
Unpredictable Style
Weighting the Fundamentals
Wire-to-Wire Consistency
The Secret's Out
Focus on Financials
Strongest Homebuilders Will Withstand the Wrecking Ball
Breaking Style Conventions
Playing It Safe with Financials
Back to Bond School
Mutual Fund Analyst Picks
Undervalued Stocks
Most Popular Variable Annuities
New at Morningstar
The Style Counsel
Morningstar Advisor - Winter 2008 - Intro
Morningstar Advisor - Winter 2008 - Morningstar Advisor - Winter 2008
Morningstar Advisor - Winter 2008 - Cover2
Morningstar Advisor - Winter 2008 - 1
Morningstar Advisor - Winter 2008 - 2
Morningstar Advisor - Winter 2008 - Contents
Morningstar Advisor - Winter 2008 - 4
Morningstar Advisor - Winter 2008 - 5
Morningstar Advisor - Winter 2008 - 6
Morningstar Advisor - Winter 2008 - Letter from the Editor
Morningstar Advisor - Winter 2008 - 8
Morningstar Advisor - Winter 2008 - Inbox
Morningstar Advisor - Winter 2008 - How Do You Use the Morningstar Style Box?
Morningstar Advisor - Winter 2008 - 11
Morningstar Advisor - Winter 2008 - Real Estate Investing Goes Global
Morningstar Advisor - Winter 2008 - 13
Morningstar Advisor - Winter 2008 - 14
Morningstar Advisor - Winter 2008 - The Golden Touch
Morningstar Advisor - Winter 2008 - 16
Morningstar Advisor - Winter 2008 - 17
Morningstar Advisor - Winter 2008 - Investment Briefs
Morningstar Advisor - Winter 2008 - 19
Morningstar Advisor - Winter 2008 - 20
Morningstar Advisor - Winter 2008 - 21
Morningstar Advisor - Winter 2008 - Learning to Fly with Equity Options
Morningstar Advisor - Winter 2008 - 23
Morningstar Advisor - Winter 2008 - 24
Morningstar Advisor - Winter 2008 - 25
Morningstar Advisor - Winter 2008 - Another Block in Building a Portfolio
Morningstar Advisor - Winter 2008 - 27
Morningstar Advisor - Winter 2008 - 28
Morningstar Advisor - Winter 2008 - 29
Morningstar Advisor - Winter 2008 - In a League of Their Own
Morningstar Advisor - Winter 2008 - 31
Morningstar Advisor - Winter 2008 - 32
Morningstar Advisor - Winter 2008 - 33
Morningstar Advisor - Winter 2008 - 34
Morningstar Advisor - Winter 2008 - 35
Morningstar Advisor - Winter 2008 - Unlock the Box
Morningstar Advisor - Winter 2008 - 37
Morningstar Advisor - Winter 2008 - 38
Morningstar Advisor - Winter 2008 - 39
Morningstar Advisor - Winter 2008 - Fashion Change
Morningstar Advisor - Winter 2008 - 41
Morningstar Advisor - Winter 2008 - 42
Morningstar Advisor - Winter 2008 - 43
Morningstar Advisor - Winter 2008 - The View from the Investment Side
Morningstar Advisor - Winter 2008 - 45
Morningstar Advisor - Winter 2008 - 46
Morningstar Advisor - Winter 2008 - 47
Morningstar Advisor - Winter 2008 - 48
Morningstar Advisor - Winter 2008 - 49
Morningstar Advisor - Winter 2008 - 50
Morningstar Advisor - Winter 2008 - 51
Morningstar Advisor - Winter 2008 - Unpredictable Style
Morningstar Advisor - Winter 2008 - 53
Morningstar Advisor - Winter 2008 - Weighting the Fundamentals
Morningstar Advisor - Winter 2008 - 55
Morningstar Advisor - Winter 2008 - 56
Morningstar Advisor - Winter 2008 - 57
Morningstar Advisor - Winter 2008 - 58
Morningstar Advisor - Winter 2008 - 59
Morningstar Advisor - Winter 2008 - 60
Morningstar Advisor - Winter 2008 - 61
Morningstar Advisor - Winter 2008 - Wire-to-Wire Consistency
Morningstar Advisor - Winter 2008 - 63
Morningstar Advisor - Winter 2008 - 64
Morningstar Advisor - Winter 2008 - 65
Morningstar Advisor - Winter 2008 - The Secret's Out
Morningstar Advisor - Winter 2008 - 67
Morningstar Advisor - Winter 2008 - 68
Morningstar Advisor - Winter 2008 - 69
Morningstar Advisor - Winter 2008 - Focus on Financials
Morningstar Advisor - Winter 2008 - 71
Morningstar Advisor - Winter 2008 - 72
Morningstar Advisor - Winter 2008 - 73
Morningstar Advisor - Winter 2008 - Strongest Homebuilders Will Withstand the Wrecking Ball
Morningstar Advisor - Winter 2008 - 75
Morningstar Advisor - Winter 2008 - Breaking Style Conventions
Morningstar Advisor - Winter 2008 - 77
Morningstar Advisor - Winter 2008 - Playing It Safe with Financials
Morningstar Advisor - Winter 2008 - 79
Morningstar Advisor - Winter 2008 - 80
Morningstar Advisor - Winter 2008 - Back to Bond School
Morningstar Advisor - Winter 2008 - 82
Morningstar Advisor - Winter 2008 - Mutual Fund Analyst Picks
Morningstar Advisor - Winter 2008 - 84
Morningstar Advisor - Winter 2008 - 85
Morningstar Advisor - Winter 2008 - 86
Morningstar Advisor - Winter 2008 - 87
Morningstar Advisor - Winter 2008 - Undervalued Stocks
Morningstar Advisor - Winter 2008 - 89
Morningstar Advisor - Winter 2008 - 90
Morningstar Advisor - Winter 2008 - 91
Morningstar Advisor - Winter 2008 - Most Popular Variable Annuities
Morningstar Advisor - Winter 2008 - 93
Morningstar Advisor - Winter 2008 - New at Morningstar
Morningstar Advisor - Winter 2008 - 95
Morningstar Advisor - Winter 2008 - The Style Counsel
Morningstar Advisor - Winter 2008 - Cover3
Morningstar Advisor - Winter 2008 - Cover4
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