Morningstar Advisor - June/July 2011 - (Page 20)

Talking Points Time to Play Defense? What Morningstar analysts are hearing about navigating the market’s now-mature recovery. The Issues It has paid to be on offense lately. Since stocks’ March 2009 nadir, lower-quality, cyclical fare has ruled the roost, as is usually the case in a recovery’s early innings. As the rally has matured, though, many managers have been moving toward more-defensive areas such as health care and consumer staples. Others have bulked up their cash stakes. Managers have toned down risk for good reason. Stocks aren’t richly priced, but at 16 times earnings, the S&P 500 Index’s P/E ratio is just below where it stood at its mid-2007 peak. And while profit margins haven’t fully recovered from their 2008 depths, the 12.5% S&P 500 average isn’t far from the 14.6% high it reached in mid-2007. Lastly, global threats and developed governments’ fiscal woes loom. Still, investors shouldn’t run for the hills. Profit margins may have rebounded, but that’s mostly because companies slashed costs in the downturn. Continued economic improvement could sustain margins. Further, investor exuberance, typically at a fever pitch at rallies’ heights, remains low. Many managers argue that large, defensive names are attractive. Finally, there is a paucity of alternatives: With interest rates at low levels, stocks look attractive by comparison. Quotable “On the whole business profitability has been restored to historical averages, and equity valuations are neither depressed nor ebullient. In other words, the environment is, in many ways, back to normal.” Pzena Investment Management John Hancock Classic Value PZFVX “I’m very interested in sustainability [of dividends]. I’m not interested in rapid dividend growth to get back to some level and then just staying there. Caution is still the byword. I want to make very, very sure that the capital question has been solved.” Don Kilbride Vanguard Dividend Growth VDIGX The Points r The impact of the Fed’s quantitativeeasing program, designed to spur lending and buoy housing prices, has been muted and could spur inflation, says Tom Forester of Forester Value FVALX. While the fund’s cash stake is far from its 50% 2008 high, it stands at a still-hefty 20%. He’s shied away from highly leveraged firms, favoring low-debt, low-valuation names like Microsoft MSFT. Forester remains leery of big banks because of the difficulty in valuing their assets, instead favoring less-leveraged insurer Travelers TRV. r With valuations and profitability reverting to historical averages, the market environment looks pretty normal, argues John Hancock Classic Value’s PZFVX Richard Pzena. However, he still says value stocks, defined as the market’s cheapest 20%, still look attractive relative to the broad market. Pzena has cut his stake in economically sensitive names such as J.C. Penney JCP in favor of more-defensive staples and health-care stocks such as Molson Coors TAP and Abbott Laboratories ABT. r Fidelity Dividend Growth FDGFX continues to sport a cyclical look, but manager Larry Rakers has shifted his focus toward stocks that fare best in a recovery’s latter stages. In the consumer arena, he says he prefers hotel and media names such as Accor AC and Walt Disney DIS. And in industrials, he favors aerospace and trucking stocks, such as Honeywell HON and Navistar NAV. “However, we do not think it necessarily means that stocks overall are cheap and attractive. On a relative basis that may be so, but stocks as a group only look cheap if you assume that companies’ operating margins, many of which are considerably elevated over their long-term averages, will continue to increase.” Clyde McGregor and Ed Studzinski Oakmark Equity & Income OAKBX “Market conditions in stocks continue to be characterized by a hostile syndrome of overvaluation, overbought conditions, overbullish sentiment, and rising interest rates, which has historically been associated with a poor return/risk profile, on average, across a wide variety of subsets of historical data.” John Hussman Hussman Strategic Growth HSGFX 20 Morningstar Advisor June/July 2011

Table of Contents for the Digital Edition of Morningstar Advisor - June/July 2011

Morningstar Advisor - June/July 2011
Letter From the Editor
Questions for the Secret Society
Are 529 Plans a Useful Tool for Clients’ College-Savings Goals?
Taking the Lead
How to Sell Covered Calls
The College-Savings Challenge
Time to Play Defense?
Four Picks for the Present
Investment Briefs
Careful What You Wish For
Caution in Utilities After Japan Crisis
Blossoms and Thorns in the 529 Garden
Lower Fees, Competitive Returns Help More 529s Make the Grade
Morningstar Grades 529 Plans
529 Risks Include the Political
Researching 529 Plans Made Easy
How Closed-End Funds Are Born
Boutique Within a Bank
The Inefficient Pricing of Moats
More Steak Than Sizzle
Mutual Fund Analyst Picks
50 Most Popular ETFs
Undervalued Stocks With Wide Moats
The Dangers of Demonizing

Morningstar Advisor - June/July 2011