Morningstar Advisor - February/March 2013 - (Page 42)

Spotlight Where It Could Pay to Be Active By Michael Herbst A look at how our 2012 Fund Managers of the Year stack up against their benchmarks. Some investors prefer all passive or all active exposure to the markets, yet a growing number are opting for a combination. Some investors seek passive exposure to broad asset classes or specific indexes, such as domestic equity or the Barclays U.S. Aggregate Bond Index, while favoring active managers they believe can add value in narrower or less-efficient pockets of the market. Others scout out active managers with the broadest opportunity set—think global equity or opportunistic fixed income—with the idea that skill plus wide hunting grounds equals better chance of gains. Still others let specific criteria such as expenses, stewardship, or measures of risk-adjusted performance drive the decision-making process. capital. No single bet propelled our managers to the top of their categories in 2012, but if there’s a unifying trait, it’s that they’re generally more willing to protect investors on the downside than to try to wring out that last penny of gains amidst rising risks. No matter your approach, the winners of the annual Morningstar Fund Managers of the Year awards make a strong case for active management in their respective corners of the market. Historically, we’ve offered awards for managers investing in domestic stocks, international stocks, and fixed income. In 2012, we introduced awards in two new categories—alternatives and allocation (for managers investing across multiple asset classes) to recognize investors’ growing interests in those areas. Beyond a great year, our winners must be Morningstar Medalists, have generated strong long-term, risk-adjusted returns, and be good stewards of investor Domestic Stock 42 Morningstar Advisor February/March 2013 While our awards highlight past achievements, we’re confident in each’s long-term prospects, due in part to their deep research resources and willingness to stick with their discipline in good times and bad. To see what these active managers bring to the table, we discuss some of the key differences between their funds and passive vehicles that offer exposure to the managers’ stated benchmarks. Bill Frels and Mark Henneman Mairs & Power Growth MPGFX Category Large Blend Analyst Rating Bill Frels and Mark Henneman have a penchant for companies located within a stone’s throw of their St. Paul, Minn., office, yet many of those have a national or global footprint such as 3M MMM, Target TGT, and Medtronic MDT. The duo values first-hand interaction with company management teams, but ultimately, they seek profitable growers with sustainable competitive advantages and sell when valuations look rich. The resulting portfolio is similar in some respects to the passive exchange-traded fund iShares Core S&P 500 IVV. The two funds’ recent valuation and profitability metrics—as well as their exposure to the defensive, sensitive, and cyclical equity super sectors— are not decidedly different. Yet due to their stock-selection criteria, Frels and Henneman’s portfolio is heavier on the basic materials, health-care, and industrials sectors; lighter in technology and consumer cyclical stocks; and offers little or no exposure to the energy, communication, or real estate sectors. The fund scored big wins in two of the tougher sectors in 2012—basic materials and industrials—with long-held positions such as Valspar VAL, Toro TTC, Pentair PNR, and H.B. Fuller FUL. Yet strong performance came across sectors, including wins with Baxter BAX and MTS Systems MTSC. Management’s ken for the slow and steady means the fund might not keep up in sharp equity market rallies, yet strong downside protection is one of its hallmarks. The fund held up better than most of its large-blend rivals in late 2012’s swoon, and over the trailing decade, it captured only

Table of Contents for the Digital Edition of Morningstar Advisor - February/March 2013

Morningstar Advisor - February/March 2013
Letter From the Editor
Social Media, the Old- Fashioned Way
Do You Use Active Strategies?
Youth Appeal
How to Buy the Unloved 2013
Morningstar Managers of the Year
Investments á la Carte
Investment Briefs
Approaches to Absolute-Return Investing
In Agriculture, It’s Good to Be Strong
Yes, There Are Good Active Funds
The Decoupling
Where It Could Pay to Be Active
The Active Fund That Defies Obsolescence
The Epitome of an Active Manager
Lines of Communication
The Existence of Market Timing ‘Intelligence’
A Route to Commodities that Bypasses the Futures Market
Best Positioned for Health-Care Reform
Diversified Stock Funds That Earn Their Stars
Our Favorite Mutual Funds
50 Most-Popular Equity ETFs
Undervalued Stocks With Wide Moats
A Twisted Debate

Morningstar Advisor - February/March 2013