Morningstar Advisor - December 2010/January 2011 - (Page 22)

Talking Points Tech Is the Apple of Managers’ Eyes What Morningstar’s analysts are hearing from mutual fund managers about technology. The Issues Large-cap portfolio managers are buzzing about technology. Leaders of tech companies are wiser today than they were in the dot-com era, fund managers say. They’re conserving cash, limiting debt, and making smarter acquisitions. On average, tech-stock valuations are attractive after a decade of weak returns. The typical tech-stock fund lost 5% annualized over the past decade, while the S&P 500 was flat. Apple AAPL has commanded attention. It’s like its growth, innovation, and loyal customer base; the only real debate swirls around its valuation. More large-cap value, blend, and growth funds own Microsoft MSFT, but there’s much debate around it. Can it compete? Does it have to at its current valuation? IBM IBM has been lauded for transforming itself from a hardware company to a services firm and for buying back shares, which boosts the firm’s earnings per share. Will others follow suit? Google GOOG has managers scratching their heads. Its shares dropped more than 25% through August. Some have taken notice, and the stock has recovered ground. Quotable “My biggest mistake on Apple was not buying it at $3 or $4 10 years ago. Now, it’s a conundrum. It’s trading at 85% the market cap of ExxonMobil, but it won’t come close to ExxonMobil on cash flow. A lot is needed to move it higher.” Bill Miller Legg Mason Capital Management Value Trust LMVTX owned by most large-blend and large-growth funds and has been a market darling for at least the past five years. Portfolio managers “Odds are it’s going higher. The iPad gives it an added leg of growth. The valuation isn’t extreme yet, but it is a crowded stock.” Nick Thakore Putnam Voyager PVOYX The Points r For the most part, American Funds is in character. Although Apple remains a popular holding at the family, most of the funds have been trimming it. On the flip side, they’ve been adding to Google, one of the tech sector’s harder-hit stocks. There’s less of a consensus on Microsoft, however. Several funds, including New Economy ANEFX and Growth Fund of America AGTHX, have pared their Microsoft stakes, while Investment Company of America AIVSX and Capital World Growth & Income CWGIX have boosted their holdings. The latter two consider income: Microsoft has increased its dividend over the past five years and currently boasts a dividend yield more than 60% greater than its industry average. r T. Rowe Price Growth Stock PRGFX recently sold Microsoft. Manager Rob Bartolo says that it was a legacy holding from when he took over the fund three years ago. Bartolo is disappointed with Microsoft’s lack of innovation, but T. Rowe’s tech analyst still likes it and thinks it can grow, so it’s held in other T. Rowe portfolios. r Jeff Constantino, who runs MFS “It’s too quick to say [Microsoft is] on death’s door. If its only business was desktop software, it’d be in trouble. But there are other levers here, too. Having said that, it’s becoming clearer to more and more people that a lot of these guys should start behaving like industrial companies. They need to think about how to allocate capital.” Robert Hagstrom Legg Mason Capital Management Growth Trust LMGTX Massachusetts Investors Growth Stock MIGFX, says that others in tech ought to emulate IBM, saying that the firm is one of the tech rarities that has a “solid record of wealth creation.” Constantino likes its sustainability and the fact that it isn’t in tech’s “sexiest areas where others throw money” merely for the sake of growth. Among tech, IBM provides ballast to a portfolio. Legg Mason’s Bill Miller agrees, adding that it’s still one of the market’s best values, despite trading near its 52-week high. “We think IBM can support double-digit earnings growth. Add that to its dividend yield, [share] buybacks, and valuation, and we think it’s a good buy.” Marc Pinto Janus Growth & Income JAGIX 22 Morningstar Advisor December/January 2011

Table of Contents for the Digital Edition of Morningstar Advisor - December 2010/January 2011

Morningstar Advisor - December 2010/january 2011
New on
Letter From the Editor
What Strategies Do You Use to Help Retirees Hedge Against Longevity Risk?
Investment Briefs
Four Picks for the Present
Scaring the Swiss
Tech Is the Apple of Managers’ Eyes
How to Read an Sec Filing
A Strategy That Loves Performance Chasers
Things Fall Apart, Even in Industrials
A Future in Questions, Not Answers
Research Over Chocolates
Creating Portfolios That Confront Retirement’s Risks
Building in-Retirement Portfolios to Last
On the Lookout for Guaranteed Income Streams
What Fires Up Mairs & Power
All Aboard!
Aiming at Alternatives
Stuff Your Stocking with Out-of-Favor Bargains
Stable, High Yields (No Bonds Included)
Mutural Fund Analyst Picks
50 Most Popular ETFs
Undervalued Stocks with Wide Moats
Twelve Bee, Huh?

Morningstar Advisor - December 2010/January 2011