Morningstar Advisor - Winter 2008 - 50

Spotlight What you want to know—as your fund moves from box to box—is whether the manager is changing style or whether it’s the box that is causing the changes. Jeff McConnell, senior consultant, Morningstar Associates JM: Market-cap creep tends to be the permanent style shift that we see. Once they go up, they’re not going back down. JM: Right. Once you have to move up for asset When you end up with a portfolio that is relatively neutral to the market overall on style, how do you make certain that you aren’t owning the entire stock market? BH: We’re going to pay for active management, reasons, it’s rare that they ever come back down again. If the liquidity wasn’t there before, it’s not going to be there again. So that’s something that we look at. As Bill mentioned, the value-versus-growth issue is a much more flexible. One of the things that we’ve seen over the past year is moves from value to blend or blend to growth. That’s just a result of value stocks outperforming for six years; the value stocks themselves are appreciating and moving over in the style box. It really highlights one of the issues of style consistency. When you’re drawing lines in the style box, what you want to know—as your fund moves from box to box—is whether the manager is changing style or whether it’s the box that is causing the changes. And you could have minute variations where a fund keeps technically crossing over, yet it’s less variation than with one that’s moving from across the segment but never crossing the line. JM: That’s right. You have to look at that, and even a move from small cap to mid–cap. There are a couple funds we have right now where they have crossed over into mid-cap, but they’ve always been at average market caps of $1.4 billion, $1.5 billion. That’s not a shift in style—it’s not like a fund that goes from $800 million to $1.6 billion. That’s a shift that we would look at much more differently. and the best way to add value is to not be like a benchmark. We tend to favor funds that are more concentrated in nature. Most of our managers probably own 100 stocks or less. Within the small-cap segment, some of those funds tend to hold a few more names because that’s a more volatile area. But within the large-cap space, many of our managers own 20, 30, or 40 stocks, and they’re really trying to have conviction in their ideas. JM: Any time you combine a handful of funds together, you’re going to end up with a large lists of stocks that you own. We favor more-focused managers and avoid those with the real diffused portfolios that look a lot like the index. If you end up with a portfolio that exactly matches the index, you’re not actively managing anymore. So we’ll use people like Marsico and Sands Capital Management, who are very aggressive and very focused. The aggregate portfolio will contain very few, if any, large individual stock bets, but within the category, you will have much different weights relative to those given indexes by style. You’re taking active bets individually, and your hope is that the active management in each sector or each category will add up to a good element for the overall portfolio. This is getting a little bit away from style, but are you looking at sector breakdowns in a similar way? JM: It’s not a primary consideration. We’ll look at it and we’ve added some sector funds to our portfolios from time to time when, for example, we had almost nothing in the health care sector. The same thing might happen with a technology fund, but for the most part, if we find we’re underweighted relative to the market in one sector, it’s not really cause for panic on our part. BH: We monitor our sector weightings relative to the broad equity market. What we find for asset allocation portfolios, where you have multiple managers and multiple styles, you’re not going to have huge sectors bets. You just want to make sure you’re not completely lacking in particular sector. Or if you are, you want to understand why. Maybe a sector’s just way overvalued and none of the managers like it, so we do monitor that. We do manage some portfolios that consist of ETFs and those are the ones where the sector allocations are a bigger driver because we’re utilizing sector specific ETFs that we believe are attractively valued. So it’s within that product line we’re going to have some pretty big over- or underweightings based on the sector allocation. Thank you Jeff and Bill. K 50 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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