Morningstar Advisor - June/July 2009 - 54

Undiscovered Manager Josh Strauss focused approach gives shareholders access to the managers’ best ideas. “There is more risk in having a larger portfolio full of names we don’t know well,” Strauss says. And they certainly know their names well. Take top holding John B. Sanfilippo & Son, the nut producer. The stock meets the SRI criteria (“nuts are a good source of vegetarian protein,” Strauss says) and the valuation is right (“the stock trades at less than half of book value,” he adds). The team may have included it in the portfolio on this basis alone. But the managers had an even higher degree of confidence in their ability to analyze the stock. Ron Strauss, firm president and father of Josh and comanager Adam, was a sell-side analyst at Chicago-based William Blair in 1991 when the firm took John B. public. The elder Strauss has followed it ever since, owning it when its price was deemed cheap enough, such as the $5.20 a share that it now trades at. The Appleseed managers are so comfortable with the stock that it’s the fund’s largest holding at a whopping 16.8% of assets. Mar 09 Rick Singer mortgage real estate investment trusts as a way to profit from an impending housing collapse beginning in 2006. Two names the fund holds are Annaly Capital Management NLY and Anworth Mortgage Asset Corp. ANH, both mortgage REITs with similar businesses. Annaly is a spread lender: It borrows money on a low-cost, short-term basis and reinvests it in higher-yielding, longer-term securities. “We had a slightly inverted yield curve then,” Strauss says. “We thought that eventually the Fed would have no choice but to raise rates and the yield curve would normalize.” That’s what happened. Over the past 12 months, the stock is down 4%, handily beating similar names and the S&P 500. “Anytime you cut rates like that, it’s like crack cocaine for mortgage REITs.” Anworth, meanwhile, invests in mortgagebacked securities issued by government agencies such as Fannie Mae FNM and Freddie Mac FRE. Most investors would prefer to carve a mile-wide no-investment zone around these entities, but the Appleseed team sees things differently. For one, they see little credit risk in Anworth’s portfolio because of the implicit federal backing. Plus, the stock trades close to book value. “If they were to liquidate their portfolio, they would be selling the second-most-liquid security in the world,” Strauss says. At $6.33 a share, Anworth has an 18% dividend yield. Its profits of $1.15 per share a year are more than enough to support the $1 dividend, Strauss reasons. The REITs also pass SRI muster. “They invest in things that prop up the housing market,” he says. That proves that value and social responsibility can go hand in hand. K Ilana Polyak is a freelance financial journalist. Bill Pekin Ronald Strauss Adam Strauss Appleseed Fund APPLX $12K 10 8 6 Dec 06 Sep 07 Jun 08 S&P 500 Dec-06 Category 2 Mid-Cap Value Sep-07 Expense Ratio (%) 0.9 1-Yr Anl Total Rtn (%) –7.61 1-Yr Anl TR % Rank Cat 1 Jun-08 Mar-09 Morningstar Rating Not Rated Minimum Investment $2,000 Data as of April 30, 2009. The fund is full of these high-conviction names because it takes a lot to actually gain entree into the portfolio. Four out of five of the managers must agree on inclusion before a name is added. “It takes a while for stocks to come before the committee,” Josh Strauss says. “So, by the time they get there, we have a two-thirds pass rate.” Overweight Financials The fund got a big boost from one surprising area: financials. Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Feb-07 May-07 Aug-07 Nov-07 Feb-08 May-08 Aug-08 Nov-08 Feb-09 Mar-07 Jun-07 Dec-07 Mar-08 Sep-08 Dec-08 Like other value managers, Appleseed’s management became concerned about inflated housing prices in 2005 and sold off its housing-related names. In late 2007, the managers began to dump big banks because of concerns about off-balance-sheet financing. The managers turned their attention to 54 Morningstar Advisor June/July 2009

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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