Morningstar Advisor - June/July 2010 - 17

thematic ETF should be treated as a satellite specialty holding to complement a diversified portfolio, albeit one that could be held for several consecutive years. iShares Nasdaq Biotechnology IBB
One-Year Return: 41.2% Price/Fair Value: 0.99

The fund tracks roughly 130 biotech firms that are listed on the Nasdaq and have market caps of at least $200 million. Suffice it to say that there aren’t many Johnson & Johnsons JNJ or Pfizers PFE in that cohort: The fund invests nearly one third of assets in small-cap names that are plying innovative techniques to research, develop, and commercialize various drugs targeting certain diseases or therapeutic niches.

developed markets. With U.S. and international markets becoming more correlated, frontier markets have grown in popularity. While frontier markets are believed to be less connected to developed markets, this may no longer be the case, according to Morningstar senior research and communications analyst Preethi Parmar. Investors thinking of diversifying their portfolios to include investments in frontier-market stocks may be wise to take a closer look. The image illustrates the 12-month rolling correlation of U.S. stocks (represented by the S&P 500) to frontier-market stocks (represented by the MSCI Frontier Market Index) and international stocks (represented by the MSCI EAFE Index). As of December, correlation between U.S. and frontier-market stocks was as high as 0.7. This is much different from the days when frontier markets were negatively correlated to U.S. markets.

robust rebound over the past year, most of these reopened funds haven’t been overwhelmed with new money. As a result, they’re still open—but that may not be the case for or long. Russel Kinnel, Morningstar’s director of mutual fund research, recently pointed out three funds to get into while they’re still open. At Royce Special Equity RYSEX, hot performance generally comes during down markets. Manager Charlie Dreifus’ emphasis on firms with clean accounting and healthy balance sheets has helped make this small-company stock fund one of the best performers during bear markets. In 2008, for example, it lost 19.6%, compared with a drop of 33.8% in the small-company Russell 2000 Index. Because of Special’s performance history, money tends to flow into the fund near the end of bear markets. Vanguard International Explorer VINEX, which invests in fast-growing small and midsize foreign companies, has a significant advantage over its rivals: It charges only 0.45% a year, 0.5 percentage point less than its next-cheapest no-load-fund competitor. A team from Schroder Investment Management, led by Matthew Dobbs, has produced strong long-term results with a patient approach, holding stocks about three years on average. The fund’s asset level, currently $2.2 billion, is a little higher than it was when it last closed, in 2004. The last time Sequoia SEQUX closed to new investors, in 1982, it remained shut for a quarter of a century. Assets at the time of the first closure were about $248 million; today, they total $2.9 billion. One of Sequoia’s founding managers, the late Bill Ruane, had close ties to Warren Buffett. The fund is now in the hands of a new generation of managers, including Bob Goldfarb, who joined the firm in 1971 and has been a manager of Sequoia since 1998. K

A Closer Look at Frontier Markets
Historically, international stocks offered risk diversification benefits as a result of lower correlations to U.S. stocks. However, correlations between U.S. and international markets have increased significantly over the past five years. At one time, emerging markets provided potential for diversification, but performance soon became coupled with

Buy These Funds While You Still Have a Chance
One of the few good things about the 2007–09 bear market was that a number of fine stock funds that had been closed to new investors reopened. Despite the stock market’s

Frontier Correlation: The 12-month rolling correlation of U.S. stocks to frontier market stocks and international stocks.
S&P 500 vs. MSCI EAFE S&P 500 vs. MSCI Frontier Markets Index

1.0 0.8 0.6 0.4 0.2 0.0 –0.2 –0.4 –0.6 01/05–12/05 01/06–12/06 01/07–12/07 01/08–12/08 01/09–12/09

MorningstarAdvisor.com 17


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Morningstar Advisor - June/July 2010

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

Morningstar Advisor - June/July 2010
Contents
New on MorningstarAdvisor.com
Contributors
Letter From the Editor
What Risks to Bonds Are You Most Concerned About?
The Irrational Lizard Brain
Investment Briefs
The Problem With Financial Plans
Preparing for Turbulance
Different Models, Similar Results
The Game Is Up
Some People Are Bullish on Bonds
Bonds We Like
What Does Harry Markowitz Think?
Escape From the Pack
Four Picks for the Present
Rising Rates Could Affect Equities, Too
The Banking Sector Knocks on Wood
Back to Basics
On the Prowl for Smooth Operators
Mutual Fund Analyst Picks
50 Most Popular ETFs
Undervalued Stocks With Wide Moats
New at Morningstar
R-E-S-P-E-C-T
Morningstar Advisor - June/July 2010 - Morningstar Advisor - June/July 2010
Morningstar Advisor - June/July 2010 - Cover2
Morningstar Advisor - June/July 2010 - 1
Morningstar Advisor - June/July 2010 - 2
Morningstar Advisor - June/July 2010 - Contents
Morningstar Advisor - June/July 2010 - 4
Morningstar Advisor - June/July 2010 - 5
Morningstar Advisor - June/July 2010 - New on MorningstarAdvisor.com
Morningstar Advisor - June/July 2010 - 7
Morningstar Advisor - June/July 2010 - Contributors
Morningstar Advisor - June/July 2010 - Letter From the Editor
Morningstar Advisor - June/July 2010 - What Risks to Bonds Are You Most Concerned About?
Morningstar Advisor - June/July 2010 - 11
Morningstar Advisor - June/July 2010 - 12
Morningstar Advisor - June/July 2010 - 13
Morningstar Advisor - June/July 2010 - The Irrational Lizard Brain
Morningstar Advisor - June/July 2010 - 15
Morningstar Advisor - June/July 2010 - Investment Briefs
Morningstar Advisor - June/July 2010 - 17
Morningstar Advisor - June/July 2010 - The Problem With Financial Plans
Morningstar Advisor - June/July 2010 - 19
Morningstar Advisor - June/July 2010 - 20
Morningstar Advisor - June/July 2010 - Preparing for Turbulance
Morningstar Advisor - June/July 2010 - 22
Morningstar Advisor - June/July 2010 - 23
Morningstar Advisor - June/July 2010 - Different Models, Similar Results
Morningstar Advisor - June/July 2010 - 25
Morningstar Advisor - June/July 2010 - 26
Morningstar Advisor - June/July 2010 - 27
Morningstar Advisor - June/July 2010 - 28
Morningstar Advisor - June/July 2010 - 29
Morningstar Advisor - June/July 2010 - The Game Is Up
Morningstar Advisor - June/July 2010 - 31
Morningstar Advisor - June/July 2010 - 32
Morningstar Advisor - June/July 2010 - 32a
Morningstar Advisor - June/July 2010 - 32b
Morningstar Advisor - June/July 2010 - 32c
Morningstar Advisor - June/July 2010 - 32d
Morningstar Advisor - June/July 2010 - 33
Morningstar Advisor - June/July 2010 - Some People Are Bullish on Bonds
Morningstar Advisor - June/July 2010 - 35
Morningstar Advisor - June/July 2010 - 36
Morningstar Advisor - June/July 2010 - Bonds We Like
Morningstar Advisor - June/July 2010 - 38
Morningstar Advisor - June/July 2010 - 39
Morningstar Advisor - June/July 2010 - 40
Morningstar Advisor - June/July 2010 - 41
Morningstar Advisor - June/July 2010 - 42
Morningstar Advisor - June/July 2010 - What Does Harry Markowitz Think?
Morningstar Advisor - June/July 2010 - 44
Morningstar Advisor - June/July 2010 - 45
Morningstar Advisor - June/July 2010 - 46
Morningstar Advisor - June/July 2010 - 47
Morningstar Advisor - June/July 2010 - 48
Morningstar Advisor - June/July 2010 - 49
Morningstar Advisor - June/July 2010 - 50
Morningstar Advisor - June/July 2010 - 51
Morningstar Advisor - June/July 2010 - Escape From the Pack
Morningstar Advisor - June/July 2010 - 53
Morningstar Advisor - June/July 2010 - 54
Morningstar Advisor - June/July 2010 - 55
Morningstar Advisor - June/July 2010 - 56
Morningstar Advisor - June/July 2010 - Four Picks for the Present
Morningstar Advisor - June/July 2010 - 58
Morningstar Advisor - June/July 2010 - 59
Morningstar Advisor - June/July 2010 - Rising Rates Could Affect Equities, Too
Morningstar Advisor - June/July 2010 - 61
Morningstar Advisor - June/July 2010 - 62
Morningstar Advisor - June/July 2010 - The Banking Sector Knocks on Wood
Morningstar Advisor - June/July 2010 - 64
Morningstar Advisor - June/July 2010 - 65
Morningstar Advisor - June/July 2010 - Back to Basics
Morningstar Advisor - June/July 2010 - 67
Morningstar Advisor - June/July 2010 - On the Prowl for Smooth Operators
Morningstar Advisor - June/July 2010 - 69
Morningstar Advisor - June/July 2010 - Mutual Fund Analyst Picks
Morningstar Advisor - June/July 2010 - 71
Morningstar Advisor - June/July 2010 - 72
Morningstar Advisor - June/July 2010 - 73
Morningstar Advisor - June/July 2010 - 50 Most Popular ETFs
Morningstar Advisor - June/July 2010 - 75
Morningstar Advisor - June/July 2010 - Undervalued Stocks With Wide Moats
Morningstar Advisor - June/July 2010 - 77
Morningstar Advisor - June/July 2010 - 78
Morningstar Advisor - June/July 2010 - New at Morningstar
Morningstar Advisor - June/July 2010 - R-E-S-P-E-C-T
Morningstar Advisor - June/July 2010 - Cover3
Morningstar Advisor - June/July 2010 - Cover4
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