Morningstar Advisor - June/July 2010 - 57

Investments à la Carte

Four Picks for the Present
Mutual Fund: Aston/Montag Caldwell Growth N MCGFX
Morningstar Rating Total Assets $3 billion Category 7 Large Growth Investment Style 7 Large Growth Yield (%) 0.33 Expenses (%) 1.11

QQQQ
Ownership Zone

Fund centroid represents weighted average of domestic stock holdings Zone represents 75% of fund’s domestic stock holding

Value

Blend

Growth

This fund proves the old saw that quality never goes out of style. Its debt/capital ratio and P/E are lower than the S&P 500 Index’s, but its net profit margin and return on equity are much higher. In short: It owns firms with minimal debt and superior profitability, yet it paid less than average for them. That’s always a winning combination, but it looks especially

attractive now in an environment of a shaky economic recovery and volatile markets. Its top holdings include such proven firms as 3M MMM and Wal-Mart WMT, whose stable market positions and strong balance sheets give them an edge in uncertain times. Michael Breen

Separate Account: FPA Small/Mid-Cap Absolute Value
Total Assets $2.3 billion Investment Style Category 2 Mid Cap Value Cash Stake (%) 28.5 of assets Avg Manager Tenure 17.5 years Debt/Capital Ratio 23.7 Annl Portfolio Turnover (%) 12

Large Mid Small Large Mid Small

This quirky separate account’s mantra is that a good defense is the best offense. It’s run by a talented team from First Pacific Advisors—investing legend Bob Rodriguez’s firm. It has more than a fourth of its assets in cash, and more than half its equity portfolio is in energy-related stocks. The former not only

Value

Blend

Growth

acts as ballast in choppy markets, but it gives the managers plenty of dry powder to quickly jump on opportunities that arise in a market reversal. The latter gives the separate account a much better chance than most to handle the rising inflation the managers think is inevitable as a result of massive increases in government debt. Michael Breen

Exchange-Traded Fund: iPath S&P 500 VIX Short-Tm Futures ETN VXX
Assets Under Management $1.211 billion Monthly Premium/Discount Return May 3–May 11 2010 (%) 21.31 Return YTD (%) –24.08 Return 1-Year (%) –69.09 1-year Correlation with S&P 500 –0.49 Fee (%) 0.89

2.0 1.5 1.0 0.5 0.0 –0.5 –1.0 01/09 01/10

Sophisticated investors with a long-term view could use this fund to partially guard their portfolios against future downturns, but they must first understand the unusual risks and returns of this exotic asset class. Volatility jumps in sync with stock price crashes, spiking whenever the S&P 500 collapses. This behavior makes sense, as expected volatility serves as a

proxy for the amount of uncertainty in the market. This relationship between volatility and price makes the VIX one of the best diversifiers for an equity portfolio. Unfortunately, it is also a strongly mean-reverting asset class, so it produces zero long-term return. There is always a cost for decent insurance, but the payoff can be large when disaster strikes. Paul Justice

MorningstarAdvisor.com 57

http://www.MorningstarAdvisor.com

Morningstar Advisor - June/July 2010

Table of Contents for the Digital Edition of Morningstar Advisor - June/July 2010