Morningstar Magazine - February/March 2014 - (Page 10)

10 Questions Morningstar Managers of the Year Interviews conducted on Jan. 15. Edited for clarity. Domestic Equity: Dennis Lynch and team, Morgan Stanley Institutional Growth MSEQX 1 AMZN was a top contributor last year. You have had it in the portfolio for over a decade. How has your team's view on this stock evolved? Lynch: Amazon marries the technology advantages of an Internet company-they offer long tail inventory; they are able to aggregate customers through the Internet. But it has also built a massive logistics network that no one can equal. 2 In contrast to the longtime holding in Amazon, Tesla TSLA entered the growth portfolio in 2013. Is it fair to call that company an emerging franchise? Lynch: We didn't expect the sudden runup and the quick adoption that has happened. We spent a number of years researching the potential for electric cars. What our research showed is that Tesla had the right approach. International Equity: David Samra and Daniel O'Keefe, Artisan International Value ARTKX 3 What were the drivers of performance in 2013? Samra: Investments in higher-quality assets have gone through a period where they revalued significantly from low multiples. We also had several tech names that have driven returns including Mastercard MA and Google GOOG. 4 Could you talk about Baidu BIDU. You don't tend to own much in emerging markets. Samra: Baidu is simply a knockoff of Google. There is a transition going on as people move away from searching on a desktop to searching on their mobile devices. That transition causes disruption. Baidu's share price came down during that transition. Between a cheap stock and a strong balance sheet, Baidu fell right in our wheelhouse. Fixed Income: Daniel Ivascyn and Alfred Murata, PIMCO Income PIMIX 5 Your fund has a large allocation to nonagency residential mortgages and commercial mortgage-backed securities. Can you talk about that allocation? Ivascyn: We had the view the U.S. housing market would stabilize and potentially go up. That's driven our focus on the nonagency segment. It was an opportunity to buy investments we thought were priced attractively. 6 The housing sector has evolved over the years. What kind of changes have you observed in the market place and what is available to you? Ivascyn: The spread you earn versus higher-quality investments has narrowed because the housing market has begun to heal. It's a sector that remains attractive, but its attractiveness versus other credit-related sectors has narrowed. Alternatives: Brian Hurst and Yao Hua Ooi, AQR Managed Futures AQMIX 7 What is the case to be made for managed futures? Hurst: We found trend-following strategies tend to do well when there are big equity drawdowns. So, when you combine it with people's typical portfolios, which hold 50% or more in equities, they help smooth the ride out. 8 Since 2008, managed-futures funds have taken a shellacking, so why has trend-following not worked since the recession? Ooi: Markets have been choppy, and there have been fewer obvious trends the past five years. That said, there have been sectors that have done quite well, particularly in currency and fixed income. Allocation: Steven Romick, Mark Landecker, and Brian Selmo, FPA Crescent FPACX 9 One of the unique things about the fund the past year was the performance you were able to post with a large cash stake. Can you talk about what you have done there? Romick: Our goal first and foremost is to generate equity rates of return while protecting capital. If we think we can't do that, we end up in cash. As cash was building during the course of the year, we thought it was incumbent on us to diversify some of that cash. We used short-term corporate paper and some sovereign paper. 10 You have almost no bonds in your portfolio. Why? Romick: Our high-yield exposure is the lowest it's ever been. We don't think we are getting paid to play. 10 Morningstar February/March 2014

Table of Contents for the Digital Edition of Morningstar Magazine - February/March 2014

Morningstar Magazine - February/March 2014
Letter From the Editor
Preparing for the Next 50 Years
Morningstar Managers of the Year
Fixing the Trust Deficit
Rethinking the Path to Retirement
Same Old, Same Old
Global Briefs
The Economic Implications of an Older World
Banking on Performance
Is the Affordable Care Act Healing Health Care’s Woes?70
Baxter Has a Positive Prognosis
Leading Fidelity’s Charge for RIAs
Our Favorite Mutual Funds
50 Most-Popular Equity ETFs
Undervalued Stocks With Wide Moats
Moving the Goal Post

Morningstar Magazine - February/March 2014