Morningstar Advisor - February/March 2010 - 41

when we evaluate global managers, we place a premium on teams that have long histories of investing around the globe. Absent that experience, we like to see strategies that are easily adaptable to global mandates. Dodge & Cox Global Stock DODGX is one such example. Long before the global fund’s 2008 launch, Dodge & Cox had great familiarity with global markets. As the fund manager of both domestic and international products, it has a deep bench of veteran U.S. and non-U.S. analysts. Moreover, many of the domestic and international companies that it has owned over the years have conducted business in both the United States and abroad, so the firm’s analysts have developed extensive experience evaluating the dynamics of global industries. With both the analysts and the analytics in place, it was a natural step for the firm to offer a global mutual fund. When might we use a foreign-stock manager instead of a manager with a global mandate? It can be a function of what we believe a manager’s core competence to be. For example, we favor Artio International Equity II JETAX over Artio’s global equity products because we think that Artio’s competitive advantage in its equity sleeve is its understanding of markets outside the United States. Also, we might use international funds to more-precisely express a tactical view on the attractiveness of certain market segments. Fixed Income debt has been the most common type of issuance abroad. But that is changing, especially in emerging markets, where fiscal health has bred confidence in the local currency and spurred issuance of local-currency-denominated bonds. According to BNY Mellon Asset Management, local-currency bonds now represent two thirds of the total outstanding emerging-markets debt, up from 40% in 2002. The growth of the local-currency market is a welcome development. Local-currency bonds offer exposure to strengthening emerging economies, for example. We also find such bonds useful as a means of diversifying our currency exposure. That goal has taken on greater urgency of late: A gaping U.S. budget deficit carries the risk of inflation and could further devalue the dollar, a lethal combination for investors in dollar-denominated bonds. Unfortunately, few core bond managers venture far outside the domestic fixed-income market, and those who do tend to keep their foreign exposure to a minimum. We’ve found some of our favorites among global firms, such as Artio Global Investors. The firm’s understanding of the macroeconomic picture around the globe, which it first developed for its equity products, helps inform its fixed-income research. Artio Total Return BJBGX and Artio Global High Income BJBHX benefit in that regard. Even among global-bond funds, however, local-currency exposure is often minimal. Therefore, to further diversify our strategies’ currency exposure, we use PIMCO Developing Local Markets PLMIX, which invests in local-currency, short-duration debt issued by emerging-markets countries. The management team focuses on countries it thinks employ prudent fiscal and monetary policies to contain inflation and fortify the local currency. Real Estate commercial-property sector, comprises less than half of the global market. While those are good reasons to consider global real-estate, we think that the more compelling justification is its potential to further diversify the typical stock/bond portfolio. Foreign real-estate investments exhibit low correlations with the global equity and bond markets. We’ve found foreign real estate’s diversifying properties especially useful as we’ve adopted a moreglobal posture in our strategies. Foreign real estate counterweights the increased international stock and bond exposure. Given the specialized nature of global real estate, we tend to opt for managers who invest in both U.S. and foreign real estate. Global real-estate managers boasting long track records and ample resources are better equipped to determine the optimal split between domestic and foreign real-estate investments, we find. Further, we value the insights that a global perspective affords, because real-estate investors often put on blinders in their focus on the local market, forsaking attractive opportunities. Of the global real-estate managers that we monitor, we favor those that veer off the beaten path in search of names that look cheap on an absolute basis. Our favorite is Third Avenue Real Estate Value TAREX. This fund, which Mike Winer has managed since its 1998 inception, holds far fewer positions than the typical global real-estate fund in Morningstar’s database. Because Winer doesn’t manage the fund against a benchmark, he’s free to hold cash when attractive opportunities are scarce and to range into more-obscure names. K Marta Norton, CFA, is an investment manager with Morningstar Investment Services, Inc. Though many investors take a “do-no-harm” approach to fixed-income investing, we find that global fixed income offers a number of advantages. Such strategies tend to exhibit low correlations with the U.S. equity market and afford exposure to an increasingly diverse array of economies, issuers, and currencies. Importantly, we can employ such strategies without fundamentally altering the risk profile of the strategies we manage. The United States has dominated the global fixed-income market, and dollar-denominated About MIS We consider real estate the third important component of a global strategy. The U.S. real-estate market, which has been dogged by the housing collapse and the besieged Morningstar Investment Services, a registered investment advisor, offers Morningstar Managed Portfolios, a suite of actively managed fund, stock, and ETF portfolios. Visit http://global.morningstar.com/mis. MorningstarAdvisor.com 41

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Morningstar Advisor - February/March 2010

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