Morningstar Advisor - Winter 2008 - 44

Spotlight The View from the Investment Side Two Morningstar portfolio managers use the style box, but not to police their investments. Ever wonder how Morningstar uses the style box in practice? Not for fund analysis, but for actual investment management? We thought it would be interesting to discuss investment style with the folks at Morningstar who are managing portfolios. So we sat down for an in-depth style conversation with Jeff McConnell and Bill Harding. McConnell is a senior consultant with Morningstar Associates, a consulting group that manages several fund-of-funds offerings and creates premier lists and fund lineups for retirement plans. Harding is director of research for Morningstar Investment Services, a fee-based investment management service for financial planners. This discussion was edited for clarity and length. Morningstar Advisor: When you’re thinking Bill Harding: We do something similar, but there’s a little bit of a difference. We start by setting a strategic asset allocation, which will represent the neutral mix over time. We break the domestic-equity segment into large-cap, mid-cap, and small-cap. We don’t have a dedicated growth versus value allocation, but we’re going to compare it to our large-, mid-, and small-cap indexes. We’re willing to have biases in our portfolios or have over- or underweightings of either growth versus value or large to small. For example, recently we’ve been overweight large-cap stocks and overweight growth relative to the neutral allocation. BH: It’s a little bit of both, but we employ a valuation discipline and a lot of the underlying fund managers share a similar philosophy, so they’re tending to move in the direction that we would move as well. JM: We’ve seen the same thing in our portfolios, just because the managers are buying the depressed growth stocks, so most of our portfolios have shifted toward growth as well. It’s up to us to determine: Do we want to cut that weight back or do we allow it to stand? Is that a strategic decision—you believe an area is undervalued so you overweight it? BH: It is. We take into account what the How do you balance the goal of meeting a specific style breakdown versus the desire to use the best portfolio managers? BH: Our focus is on trying to find the best about investment style, are you looking at the Morningstar Style Box and saying, “We want x% here, x% here, and x% here?” Jeff McConnell: When we build a portfolio, we have targets at the large-cap, mid-cap, and small-cap levels for the domestic-equity portion. Our long-term goal is to have a rough balance between growth and value. So we have a target weight for large-cap growth, a target weight for large-cap value, for mid-cap growth, and so on. underlying active managers are doing—we’re looking at the holdings of each of the funds and then aggregating it all up to the portfolio level. If our value-oriented managers are starting to buy some depressed growth names, we’re going to be able to see that in the data and then decide if we’re comfortable with that or not. So it’s driven by the portfolio managers, as opposed to your making a judgment call? managers within a certain investment style. We’re going to make sure that we have managers that pursue a value-oriented philosophy and combine those with managers that employ a growth philosophy, so that we’re well diversified overall. But we don’t try to be too style-pure: We don’t expect a value manager always to be 100% invested in value stocks. As I mentioned, the opportunities may be in core or growth areas. It’s the same within the large, mid, and small areas. Sometimes, we will use managers that are more all-cap in nature. In cases like that, I think 44 Morningstar Advisor Winter 2008

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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