Morningstar Advisor - June/July 2012 - (Page 18)

Talking Points Managers Prep for Housing Rebound What Morningstar’s mutual fund analysts are hearing about the housing market. The Issues Five years after the real estate bubble burst and decimated the housing market, there finally may be glimmers of hope on the horizon. While a quick turnaround remains unlikely, some reports indicate an upward move in key housing statistics. According to the National Association of Realtors, existing-home sales in March were notably higher than a year ago, mirroring a string of year-over-year improvements for the past nine months. If that trend persists, the group’s chief economist expects existing-home sales in 2012 to be the strongest seen since the housing market collapsed. With mortgage rates near record lows and renting more expensive than buying in some markets, fund managers are taking note. But there’s more than one way for funds to benefit from a housing rebound. Quotable “Housing remained depressed in 2011, but we began to see stabilization in the prices of non-distressed homes, while new housing inventories and starts were at 50-year lows, while affordability was at a 50-year high. Yet, housing stocks, such as Pulte Homes and KB Homes, traded at prices lower than the bottom in 2008, when housing prices, affordability, inventories, and starts were all headed in the wrong direction. Prices were slated to fall over 30%, and billions of dollars of land impairments were ahead for the industry, yet the stocks were higher then than they were in 2011, when the companies’ write-offs were ending and many were turning profitable again. Go figure.” Bill Miller Legg Mason Capital Management Opportunity LMOPX “We’ve been in search of cyclical segments of the U.S. market where stocks are still trading at depressed levels. Housing and autos are specific examples that meet this criterion.” Matt Fruhan Fidelity Large Cap Stock FLCSX The Points r Deep-value manager Arnie Schneider has been bullish on a housing recovery for some time, owning KB Home KBH in Schneider Small Cap Value SCMVX since 2009 and buying Meritage Homes MTH in 2010. Those two stocks consumed 9% of the fund’s assets as of December. Schneider Value SCMLX, which has a larger-cap focus than the small-cap fund, had a combined 9% stake in NVR NVR, Toll Brothers TOL, and KB Home at year-end. r Legg Mason Capital Management Opportunity LMOPX had an 8.5% position in homebuilders as of December, which hurt performance for the year as PulteGroup PHM and KB Home fared poorly. Manager Bill Miller notes that those firms traded at lower levels in 2011 than in the thick of the crisis in 2008, even though housing data indicated an impending turnaround. r Royce Opportunity RYPNX manager Buzz Zaino is bullish on homebuilders given low interest rates and an increasing willingness of banks to lend. He expects pent-up demand to unfold in the next few years and is playing the recovery through homebuilder Toll Brothers, Beacon Roofing Supply BECN, and furniture companies La-Z-Boy LZB and Ethan Allen ETH. r Fidelity’s industrials and materials sector leader Tobias Welo also finds homebuilders attractive, contributing picks Lennar Corp. LEN, Ryland Group RYL, and PulteGroup to Fidelity Stock Selector All Cap FDSSX. As an institution, Fidelity is the biggest owner of KB Home, DR Horton DHI, and Toll Brothers, owning roughly 15% of each firm’s shares. r Walter McCormick and Emory Sanders, who took over at John Hancock Large Cap Equity TAGRX in December, are playing the recovery through Home Depot HD and Lowe’s Companies LOW. The duo anticipates a cyclical rebound in home-improvement spending. The fund held a combined 5.5% stake in the firms as of February. 18 Morningstar Advisor June/July 2012

Table of Contents for the Digital Edition of Morningstar Advisor - June/July 2012

Morningstar Advisor - June/July 2012
Contributors
Letter From the Editor
Be Worth Remarking About
How Important Is Stewardship?
From West Point to Points East
Where a Fund’s Secrets Lie
Getting Fund Directors on Board
Managers Prep for Housing Rebound
Four Picks for the Present
Investment Briefs
A Hedge Against Career Risk
Natural Gas Reaches Capitulation
Family Matters
How Good Stewardship Predicts Superior Performance
Stewardship Goes Back to the Fundamentals
On the Go for Fixed Income
Where Shareholders Ride First Class
Dangers Lurk in Exchange-Traded Notes
Stocks on Sale in a Strong Market
A Good Steward Is Easy to Find
Our Favorite Mutual Funds
50 Most Popular ETFs
Undervalued Stocks With Wide Moats
Buffett Rule’s Biggest Losers

Morningstar Advisor - June/July 2012