Morningstar Advisor - June/July 2009 - 49

managers may seek out companies in trouble, but they require sound balance sheets, healthy cash flow, and demonstrated strength in particular areas of business—and reason to anticipate a turnaround, such as a change in leadership. That fosters the possibility that “others might recognize the value for us,” Ashton says, and acquire the company. Former holdings Wendy’s International and IKON Office Solutions were bought out in 2008. Distinctive Holdings The idiosyncratic portfolio has a hardware stake nearly three times the large-cap value average. Hewlett-Packard HPQ, Dell DELL, Intel INTC, and Cisco CSCO made up 12.5% of assets at year-end. Ashton says that Hewlett-Packard was emblematic of what the team seeks in a value opportunity: a company with a sustainable advantage that is beset by temporary problems. “Bad news is a good place to start because it usually begets lower valuations,” he says, laughing. The managers initiated the position in HP earlier this decade, when the company’s PC business was crushed by competitors Dell and IBM IBM. The company was kept afloat by its strong printer, server, and IT businesses, however, and new management turned things around. Dell, Intel, and Cisco were added as value opportunities arose in 2006 and 2007. Intel, for example, was under pressure from competitor Advanced Micro Devices AMD, but it makes the dual- and quad-core chips that customers have come to take for granted in their computers and handheld devices. Ashton expects that these are investments for the long haul, as an improving economy expands the market for the companies’ ever-advancing technologies. “One thing I’ve learned here is that not being in a hurry can yield benefits,” Ashton says. “A traditional value shop would have let Hewlett-Packard go earlier in the story, but there is more to come. The acquisition of [IT service provider] EDS opens lots of doors.” At year-end, the fund was dominated by a 26% stake in health care, primarily pharmaceuticals, which fared relatively well in 2008. Morris says the companies’ high dividend yields and strong balance sheets more than compensate for concerns such as patent expirations and increasing government regulations. Abbott Laboratories ABT, one of the best performers, bumped up against the fund’s 5% limit for an individual holding, and Bristol-Myers Squibb BMY, Pfizer PFE, GlaxoSmithKline GSK, and Schering-Plough SGP were all in the top 10 at year-end. Ashton says that although the major pharmaceutical players “weren’t run like ‘real’ companies in the past—they generated chemical compounds, then marketed them—they are now allocating capital much more efficiently.” These are also global businesses with terrific growth prospects. Yet, despite yields that are well-above market, the stocks’ price/earnings ratios remain below the S&P 500’s. Shedding Financials of America BAC. While the managers aren’t adding to the fund’s small position in the latter, they do expect benefits from its acquisition of Merrill Lynch, given the profitability of its retail brokerage. The fund’s largest insurance holding is Chubb Corp. CB, which boasts strong balance sheets and healthy operating cash flow. Its property and casualty insurance business is worlds away from the risky likes of AIG. Group disability insurer Unum Group UNM was a typical Homestead turnaround play, and new management had spurred a rebound before the stock was sideswiped by the falling market. Mid-Cap Stakes In the more traditional value arena, the fund had 13% financials at year-end, which is significant but less than three fourths of the typical large-cap value stake. “The current environment caused us to do something we don’t normally do: sell stocks when they are down,” Morris says. “Anyone who owns financials has had to average down.” The managers made a timely sale of Washington Mutual WAMUQ in late 2007, because the bank was overconcentrated in aggressively packaged mortgages. “We sold in the midteens, so we fared well,” Morris says. Over the past year, the managers also cleared out of Citigroup C, Genworth Financial GNW, and Fifth Third Bancorp FITB. “We decided which financials had the wherewithal to withstand the buffeting of the economy in general,” Ashton says. Keepers include the well-capitalized J.P. Morgan JPM, one of the fund’s top 10 holdings, and Bank The portfolio is further distinguished by a large stake in mid-cap names, roughly one third of assets. The fund’s $350 million asset base allows it to take advantage of names such as top-10 holding Parker Hannifin PH, which has outperformed its industry and the S&P 500 for the 10 years the fund has owned it. The manufacturing parts supplier “has a good record of getting larger [through acquisition] by looking for attractively priced assets, much as we do,” Ashton says. “It also provides exposure to markets such as China and India, which is a conservative way for us to invest in such markets.” Other lesser-known names also seem tailor-made for the management team’s long-term strategy. Defense contractor SAIC SAI, which went public several years ago, has shown strong, steady growth, “and yet it goes unnoticed,” Morris says. The fund has owned another under-the-radar stock, label-manufacturer Avery Dennison AVY, on and off for 10 years. The fund’s investment in small-cap Office Depot ODP is an atypical contrast: After making money moving in and out of the stock several times over the past five years, the managers dumped the stake last year. “It blew up,” Morris says. “There was bad planning, bad execution, and no turnaround, so MorningstarAdvisor.com 49
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Morningstar Advisor - June/July 2009

Table of Contents for the Digital Edition of Morningstar Advisor - June/July 2009

Morningstar Advisr - June/July 2009
Contents
New on MorningstarAdvisor.com
Letter from the Editor
Contributors
Is SRI a Relevant Investment Strategy?
A Head for Numbers
Building a Business on SRI
Investment Briefs
The Liquidity Premium
Navigating the SRI Patchwork
Profit and Progress
How the Fed Contributes to Crises
Holding Steady
Appleseed Adds Value to SRI Formula
Four Picks for the Present
Long-Term Investors Can Find Value among Industrials
Higher Yields, Hold the Risk
Bargains in U.S. Industrials
Mutual Fund Analyst Picks
50 Most Popular Equity ETFs
Undervalued Stocks
Most Popular Variable Annuities
New at Morningstar
Talkin’ ‘bout a Revolution
Morningstar Advisor - June/July 2009 - 47
Morningstar Advisor - June/July 2009 - Morningstar Advisr - June/July 2009
Morningstar Advisor - June/July 2009 - Cover2
Morningstar Advisor - June/July 2009 - Contents
Morningstar Advisor - June/July 2009 - 2
Morningstar Advisor - June/July 2009 - 3
Morningstar Advisor - June/July 2009 - New on MorningstarAdvisor.com
Morningstar Advisor - June/July 2009 - 5
Morningstar Advisor - June/July 2009 - 6
Morningstar Advisor - June/July 2009 - Letter from the Editor
Morningstar Advisor - June/July 2009 - Contributors
Morningstar Advisor - June/July 2009 - 9
Morningstar Advisor - June/July 2009 - Is SRI a Relevant Investment Strategy?
Morningstar Advisor - June/July 2009 - 11
Morningstar Advisor - June/July 2009 - A Head for Numbers
Morningstar Advisor - June/July 2009 - 13
Morningstar Advisor - June/July 2009 - 14
Morningstar Advisor - June/July 2009 - Building a Business on SRI
Morningstar Advisor - June/July 2009 - 16
Morningstar Advisor - June/July 2009 - 17
Morningstar Advisor - June/July 2009 - Investment Briefs
Morningstar Advisor - June/July 2009 - 19
Morningstar Advisor - June/July 2009 - 20
Morningstar Advisor - June/July 2009 - 21
Morningstar Advisor - June/July 2009 - 22
Morningstar Advisor - June/July 2009 - The Liquidity Premium
Morningstar Advisor - June/July 2009 - 24
Morningstar Advisor - June/July 2009 - 25
Morningstar Advisor - June/July 2009 - 26
Morningstar Advisor - June/July 2009 - 27
Morningstar Advisor - June/July 2009 - 28
Morningstar Advisor - June/July 2009 - 29
Morningstar Advisor - June/July 2009 - Navigating the SRI Patchwork
Morningstar Advisor - June/July 2009 - 31
Morningstar Advisor - June/July 2009 - 32
Morningstar Advisor - June/July 2009 - 33
Morningstar Advisor - June/July 2009 - 34
Morningstar Advisor - June/July 2009 - Profit and Progress
Morningstar Advisor - June/July 2009 - 36
Morningstar Advisor - June/July 2009 - 37
Morningstar Advisor - June/July 2009 - 38
Morningstar Advisor - June/July 2009 - 39
Morningstar Advisor - June/July 2009 - How the Fed Contributes to Crises
Morningstar Advisor - June/July 2009 - 41
Morningstar Advisor - June/July 2009 - 42
Morningstar Advisor - June/July 2009 - 43
Morningstar Advisor - June/July 2009 - 44
Morningstar Advisor - June/July 2009 - 45
Morningstar Advisor - June/July 2009 - 46
Morningstar Advisor - June/July 2009 - 47
Morningstar Advisor - June/July 2009 - Holding Steady
Morningstar Advisor - June/July 2009 - 49
Morningstar Advisor - June/July 2009 - 50
Morningstar Advisor - June/July 2009 - 51
Morningstar Advisor - June/July 2009 - Appleseed Adds Value to SRI Formula
Morningstar Advisor - June/July 2009 - 53
Morningstar Advisor - June/July 2009 - 54
Morningstar Advisor - June/July 2009 - 55
Morningstar Advisor - June/July 2009 - Four Picks for the Present
Morningstar Advisor - June/July 2009 - 57
Morningstar Advisor - June/July 2009 - Long-Term Investors Can Find Value among Industrials
Morningstar Advisor - June/July 2009 - 59
Morningstar Advisor - June/July 2009 - 60
Morningstar Advisor - June/July 2009 - 61
Morningstar Advisor - June/July 2009 - Higher Yields, Hold the Risk
Morningstar Advisor - June/July 2009 - 63
Morningstar Advisor - June/July 2009 - Bargains in U.S. Industrials
Morningstar Advisor - June/July 2009 - 65
Morningstar Advisor - June/July 2009 - Mutual Fund Analyst Picks
Morningstar Advisor - June/July 2009 - 67
Morningstar Advisor - June/July 2009 - 68
Morningstar Advisor - June/July 2009 - 69
Morningstar Advisor - June/July 2009 - 50 Most Popular Equity ETFs
Morningstar Advisor - June/July 2009 - 71
Morningstar Advisor - June/July 2009 - Undervalued Stocks
Morningstar Advisor - June/July 2009 - 73
Morningstar Advisor - June/July 2009 - 74
Morningstar Advisor - June/July 2009 - 75
Morningstar Advisor - June/July 2009 - Most Popular Variable Annuities
Morningstar Advisor - June/July 2009 - 77
Morningstar Advisor - June/July 2009 - 78
Morningstar Advisor - June/July 2009 - New at Morningstar
Morningstar Advisor - June/July 2009 - Talkin’ ‘bout a Revolution
Morningstar Advisor - June/July 2009 - Cover3
Morningstar Advisor - June/July 2009 - Cover4
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