Morningstar Advisor - April/May 2010 - 52

Undiscovered Managers

Timothy Hartch

ing.” That said, Keller makes a typically measured assessment: “There are more existential threats than I can recall in the past, and that is reflected in our valuation.” The ability to spend cash wisely is one of the main attributes Hartch and Keller look for in company management. Even though Liberty Global and Liberal Media Interactive don’t boast squeaky-clean balance sheets, both are controlled by John Malone, who has a proven track record for leveraged growth. “We have enormous respect for him,” says Hartch. “Of course, Comcast [a cable company, as is Liberty Global] is a larger position because it has lower debt load.” As for stellar capital allocators, the fund’s top holding is Berkshire Hathaway BRK.A, at 6% at the end of January. As Keller puts it, “You won’t be shocked that with our way of thinking, we are well versed in the lessons and career of Warren Buffett.” Keller considers Buffett’s purchase of Burlington Northern BNI “a reasonable value for an asset that is a politically advantaged transportation mechanism.” What’s more, the railroad is a “decent hedge against inflation; it has an irreplaceable asset and can price accordingly over time.”
Evergreen Approach

Michael Keller

Hartch says, “energy doesn’t meet all of our criteria; it’s a commodity, so it doesn’t have a loyal customer base, but it is obviously essential.” That said, management isn’t investing in energy as a commodity per se. “EOG has low operating risk, low development costs, and one of the best returns on capital in the industry due to its focus on technology,” Hartch says. All told, Hartch and Keller’s approach may be a reassuring one for clients who are skittish about stocks and the economy. Morningstar mutual fund analyst Ryan Leggio notes that their strategy is reminiscent of that of Bruce Berkowitz of Fairholme FAIRX, Morningstar’s domestic-equity Manager of the Decade—but less daring. Berkowitz’s current position in Berkshire Hathway, for example, is about twice this fund’s stake. Hartch and Keller’s insistence on a significant discount to intrinsic value also brings Longleaf Partners LLPFX to mind—but this fund will never delve into the deep turnaround plays that led Longleaf to a 50.6% loss in 2008. That does mean that the fund may not shine in rallies. Although its 21.7% loss in 2008 was far less drastic than the S&P 500’s, its 2009 gain of 21.6% was five points behind the market’s (and far less than Longleaf Partner’s 53.6%). Hartch emphasizes that the fund aims for absolute returns, not a benchmark in any one year. “It is important that new investors have a good understanding of our approach,” he says, “and my sense is that they do.” Indeed, the fund saw regular net inflows throughout 2009. “Investors are worried after this significant increase in equity prices. Whether they missed out on it, or fear giving some back, they want a strategy with an evergreen approach.” With the overall portfolio recently trading at a 73% discount to intrinsic value, now seems an eminently sensible time to buy. K
Laura Lallos is a former Morningstar analyst and editor and frequent contributor to the magazine.

BBH Core Select BBTEX
$14K 12 10 8 05 06 07

S&P 500 TR 08 09 10

Category 4 Large Blend

Expense Ratio (%) 1.19

Morningstar Rating 5-Yr Anl Total Rtn (%) Jan-06 Jan-05 Jan-09 Jan-07 Jan-10 Jan-08 QQQQ 5.57 Feb-05Jul-05Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Mar-05 Sep-05 Mar-06 Sep-06 Mar-07 Sep-07 Mar-08 Sep-08 Mar-09 Sep-09 Mar-10 Apr-05 Oct-05 Apr-06 Oct-06 Apr-07 Oct-07 Apr-08 Oct-08 Apr-09 Oct-09 May-05Nov-05May-06Nov-06May-07Nov-07May-08Nov-08May-09Nov-09 Jun-05 Feb-06Jul-06 Feb-07Jul-07 Feb-08Jul-08 Feb-09Jul-09 Feb-10 Aug-05 Aug-06 Aug-07 Aug-08 Aug-09 Minimum Investment $10,000 Data through Feb. 28, 2009. 5-Yr Anl TR % Rank Cat 1

and personal-finance software with QuickBooks, Quicken, and TurboTax. Dell DELL has a lock on a loyal corporate customer base and a direct sales business model that cuts out middlemen. The corporate market seems set to migrate to Windows 7, which will also require companies to upgrade aging hardware. Microsoft MSFT itself will benefit from that Windows 7 upgrade, of course. Further, Keller believes it has not yet “moved its piece on the chessboard” when it comes to taking on the threat posed by the likes of Google GOOG. With thousands of developers working on its Azure platform, Microsoft is “uniquely positioned to set the agenda for the change from desktop to cloud comput-

Hartch and Keller are hardly running for the hills to stockpile gold, but hedging against inflation is a theme that threads through the portfolio. “We are not being driven by a macro call,” Hartch emphasizes, “but it is important to be cognizant of potential challenges. Businesses with pricing power are good in any environment, but particularly in this one. Otherwise, profit margins become squeezed.” Waste Management WM and Vulcan Materials VMC, for example, have innate competitive advantages built on irreplaceable hard assets—landfills and aggregates, respectively—that also stand as barriers against inflation. Natural-gas producer EOG EOG serves that purpose as well. Granted, as

52 Morningstar Advisor April/May 2010



Morningstar Advisor - April/May 2010

Table of Contents for the Digital Edition of Morningstar Advisor - April/May 2010

Morningstar Advisor - April/May 2010
Contents
New On MorningstarAdvisor.com
Contributors
Letter from the Editor
Our Job: Building Better Investors
What’s Your Biggest Long-term Concern for the Economy?
An Early Start
Women’s Work
Investment Briefs
Markowitz 2.0
Asset Allocation Is King
A Decade of Riskier Assets ...
... but with plenty of Silver Linings
Be Prepared
Facing up to the Economy’s Problems
Levelheaded
Surviving on Conviction
Four Picks for the Present
Pharmaceutical Firms Get the Urge to Merge
Funds That Look Cheaper Than the Market
Finding Dividend Leaders
Mutual Fund Analyst Picks
50 Most Popular ETFs
Undervalued Stocks with Wide Moats
VAs: Assets Rise as New Sales Slip
New at Morningstar
When You Wish Upon a Star
Morningstar Advisor - April/May 2010 - Morningstar Advisor - April/May 2010
Morningstar Advisor - April/May 2010 - Cover2
Morningstar Advisor - April/May 2010 - 1
Morningstar Advisor - April/May 2010 - 2
Morningstar Advisor - April/May 2010 - Contents
Morningstar Advisor - April/May 2010 - 4
Morningstar Advisor - April/May 2010 - 5
Morningstar Advisor - April/May 2010 - New On MorningstarAdvisor.com
Morningstar Advisor - April/May 2010 - 7
Morningstar Advisor - April/May 2010 - Contributors
Morningstar Advisor - April/May 2010 - Letter from the Editor
Morningstar Advisor - April/May 2010 - 10
Morningstar Advisor - April/May 2010 - Our Job: Building Better Investors
Morningstar Advisor - April/May 2010 - 12
Morningstar Advisor - April/May 2010 - 13
Morningstar Advisor - April/May 2010 - What’s Your Biggest Long-term Concern for the Economy?
Morningstar Advisor - April/May 2010 - 15
Morningstar Advisor - April/May 2010 - An Early Start
Morningstar Advisor - April/May 2010 - 17
Morningstar Advisor - April/May 2010 - Women’s Work
Morningstar Advisor - April/May 2010 - 19
Morningstar Advisor - April/May 2010 - Investment Briefs
Morningstar Advisor - April/May 2010 - 21
Morningstar Advisor - April/May 2010 - Markowitz 2.0
Morningstar Advisor - April/May 2010 - 23
Morningstar Advisor - April/May 2010 - 24
Morningstar Advisor - April/May 2010 - 25
Morningstar Advisor - April/May 2010 - 26
Morningstar Advisor - April/May 2010 - 27
Morningstar Advisor - April/May 2010 - Asset Allocation Is King
Morningstar Advisor - April/May 2010 - 29
Morningstar Advisor - April/May 2010 - 30
Morningstar Advisor - April/May 2010 - 31
Morningstar Advisor - April/May 2010 - 32
Morningstar Advisor - April/May 2010 - 33
Morningstar Advisor - April/May 2010 - A Decade of Riskier Assets ...
Morningstar Advisor - April/May 2010 - ... but with plenty of Silver Linings
Morningstar Advisor - April/May 2010 - 36
Morningstar Advisor - April/May 2010 - Be Prepared
Morningstar Advisor - April/May 2010 - 38
Morningstar Advisor - April/May 2010 - 39
Morningstar Advisor - April/May 2010 - 40
Morningstar Advisor - April/May 2010 - 41
Morningstar Advisor - April/May 2010 - 42
Morningstar Advisor - April/May 2010 - 43
Morningstar Advisor - April/May 2010 - Facing up to the Economy’s Problems
Morningstar Advisor - April/May 2010 - 45
Morningstar Advisor - April/May 2010 - 46
Morningstar Advisor - April/May 2010 - 47
Morningstar Advisor - April/May 2010 - 48
Morningstar Advisor - April/May 2010 - 49
Morningstar Advisor - April/May 2010 - Levelheaded
Morningstar Advisor - April/May 2010 - 51
Morningstar Advisor - April/May 2010 - 52
Morningstar Advisor - April/May 2010 - 53
Morningstar Advisor - April/May 2010 - Surviving on Conviction
Morningstar Advisor - April/May 2010 - 55
Morningstar Advisor - April/May 2010 - 56
Morningstar Advisor - April/May 2010 - 57
Morningstar Advisor - April/May 2010 - Four Picks for the Present
Morningstar Advisor - April/May 2010 - 59
Morningstar Advisor - April/May 2010 - 60
Morningstar Advisor - April/May 2010 - Pharmaceutical Firms Get the Urge to Merge
Morningstar Advisor - April/May 2010 - 62
Morningstar Advisor - April/May 2010 - 63
Morningstar Advisor - April/May 2010 - Funds That Look Cheaper Than the Market
Morningstar Advisor - April/May 2010 - 65
Morningstar Advisor - April/May 2010 - Finding Dividend Leaders
Morningstar Advisor - April/May 2010 - 67
Morningstar Advisor - April/May 2010 - Mutual Fund Analyst Picks
Morningstar Advisor - April/May 2010 - 69
Morningstar Advisor - April/May 2010 - 70
Morningstar Advisor - April/May 2010 - 71
Morningstar Advisor - April/May 2010 - 50 Most Popular ETFs
Morningstar Advisor - April/May 2010 - 73
Morningstar Advisor - April/May 2010 - Undervalued Stocks with Wide Moats
Morningstar Advisor - April/May 2010 - 75
Morningstar Advisor - April/May 2010 - VAs: Assets Rise as New Sales Slip
Morningstar Advisor - April/May 2010 - 77
Morningstar Advisor - April/May 2010 - 78
Morningstar Advisor - April/May 2010 - New at Morningstar
Morningstar Advisor - April/May 2010 - When You Wish Upon a Star
Morningstar Advisor - April/May 2010 - Cover3
Morningstar Advisor - April/May 2010 - Cover4
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