Morningstar Advisor - June/July 2009 - 57

expertise in that area. All are senior notes paying huge yields. We retain full confidence in this fund. Michael Breen Separate Account Delafield Value $18K 15 12 9 04 05 06 07 08 09 S&P 500 TR Delafield Value is a hidden gem. It’s run by Dennis Delafield and Vince Sellecchia, who have built a strong record by staying in their circle of competence. This separate account and its mutual fund sibling Delafield DEFIX have always kept a slug of assets in industrial-materials stocks, an area where the managers have proved great at identifying catalysts to jump-start firms’ results. They currently have more than 60% of assets parked in industrials, but this isn’t a top-down sector bet. The managers are pure bottom-up investors who buy firms with solid cash flows whose shares are trading at a discount to their estimate of intrinsic value because of near-term challenges. The duo says a deteriorating global economy has hammered shares of industrial firms, giving them a chance to build positions in several top operators at big discounts. They added to Acuity Brands AYI, a maker of electrical equipment and lighting, as it tumbled in late 2008. The team says the firm is set to improve margins after spinning off its specialty chemical unit. Acuity trades at a price/earnings ratio that is less than half its industry’s average, despite having a solid balance sheet and prodigious free cash flow. The portfolio is full of such cheap but viable firms. It has held up comparatively well in the bear market despite its economically sensitive nature and stands to benefit more than most in a recovery. Michael Breen Hindsight: Fall 2007 It’s mea culpa time. The picks we made in our fall 2007 issue have performed abysmally as a group. Less than half of them have beaten their broad market benchmarks since we recommended them. On a dollar-weighted basis, they’re even worse. Our stock picks did most of the damage. Borders Group BG, CapitalSource CSE, and Crosstex Energy XTEX have all shed more than 90% of their value. All three have been crushed by the economic downturn and are struggling to restructure in hopes of staying going concerns. There’s no guarantee they’ll succeed. Telecom Corp of New Jan-04 Pick Zealand NZT has shed 60% of its value, but we think it has staying power and will bounce back. Our ETF picks also lag their broad benchmarks, but by a much smaller amount. We’ve soured on SPDR KBW Bank KBE because of the uncertainty brought by government intervention in the financials sector, but we still like our other picks. The bright spot was our mutual fund picks. All four are handily beating their respective benchmarks, and we remain high on all of them. And our separate account picks mostly got the job done, with two of three besting the market. Michael Breen Jan-05 Jan-06 Jan-07 Jan-08 Type Jan-09 Cum Return to Date (%) Back Then, We Said Now, We Say Feb-04 Feb-05 Feb-06Nov-06Jul-07Mar-08 Feb-09 Mar-04 Apr-04 Apr-05 Apr-06 Feb-07Nov-07Jul-08Mar-09 May-04 May-05 May-06 Mar-07Dec-07Sep-08 Jun-04 Jun-05 Jun-06 Apr-07 Feb-08 Jul-04 Aug-04 Jul-05 Sep-04 Aug-05 Jul-06 May-07 Apr-08 Apr-09 Oct-04 Sep-05 Aug-06 Jun-07 May-08 Sep-06 Aug-07 Jun-08 Oct-06 Sep-07 Aug-08 Oct-07 Oct-08 SPDR KBW Bank ETF KBE ETF ETF MF MF MF MF S S S S SA SA SA –70.63 –51.98 –52.88 –36.67 –28.49 –38.17 –29.54 –95.88 –92.48 –93.88 –60.01 * –41.89 –37.44 –46.01 –55.39 7.13 “A rare opportunity for bargain-hunters.” “Decent way to spice up a portfolio.” “Despite quirks, a sturdy holding.” “Has done well in tough markets.” “Strict value discipline delivers.” “Will hold up in tough times.” “Keeps a lid on risk.” “We think the glass is half full.” “Solid fundamentals and big yield.” “Has built itself a moat.” “Tons of cash flow give it strength.” “Ben Graham devotees are good.” “Has been the best of both worlds.” “Veteran managers with great record.” “Government intervention changes the game.” “Has taken its lumps but appealing.” “We think it will be back.” “One of our favorites.” “Conservative streak serves it well.” “A compelling choice.” “Now’s a great time to buy.” “New management boosts chances of survival.” “Numerous strategy changes haven’t worked.” “Little to be excited about.” “Market position remains strong.”t “Has demonstrated its worth.” “Still solid.” “Caught in market downdraft.” PowerShares Financial Preferred PGF Nov-04 Oct-05 Dec-04 Nov-05 Dec-06 Mar-05Dec-05 Mar-06 Jensen Fund JENSX Mutual Qualified TEQIX ETF Nov-08 Dec-08 May-09 WisdomTree International Large Cap DOL Van Kampen American Franchise VAFAX Vanguard Convertible Securities VCVSX Borders Group BGP CapitalSource CSE Crosstex Energy XTEX Telecom Corp of New Zealand NZT Fenimore Asset Management Value Product Manning & Napier Core Equity W.H. Reaves Utility/Energy Equity S&P 500 MSCI EAFE BarCap US Agg Bond TR USD Index Index Index The Fall 2007 issue was mailed to subscribers in mid-October 2007. Return data is from Oct. 31, 2007, through March 31, 2009. *Data unavailable at press time. MorningstarAdvisor.com 57

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Morningstar Advisor - June/July 2009

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