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Two Analyst Picks See Big Outflows in June

Plus, Appleseed weeds out big banks, and more.

Morningstar Analysts, 07/19/2010

Morningstar's most recent estimates of fund flow data turned up a few interesting examples of shareholders heading for the exits at two solid funds. Longleaf Partners LLPFX, an Analyst Pick with about $7.4 billion in assets, experienced $303 million in outflows in June. The fund's performance puts it at the head of the pack for the year to date through July 14, 2010, but it trailed peers and the S&P 500 Index in June. Helmed by Mason Hawkins and Staley Cates, the fund struggled in the late 2007-early 2009 bear market and is capable of rough stretches. But shareholders who have stuck with the fund over the long term have benefited. It's among the couple dozen large-blend funds to have outpaced the S&P 500 over the trailing 10- and 15-year periods under essentially the same managements.

Analyst Pick Dodge & Cox International Stock DODFX, a $33 billion foreign large-value fund, saw $390 million walk out the door in June. International stock funds overall experienced outflows last month because of concerns about the European debt crisis. The MSCI EAFE Index has fallen 8.2% so far this year.

Despite those recent worries, U.S. fund investors have still poured $19.6 billion into international stock funds so far this year through the end of June. Meanwhile, they've taken almost $17.0 billion out of domestic stock funds. Dodge & Cox International Stock also stumbled over some untimely financials sector investments in the recent bear market. Longer-term results remain strong, though. Since its mid-2001 inception, the fund gained 8.0%, topping rivals' 4.3% and the MSCI EAFE's 1.1% return over that period.

Appleseed Draws Line in the Sand
Banks deemed too big to fail are now too big to own for one socially responsible investing fund. Appleseed APPLX, the SRI value fund managed by Pekin Singer Strauss, recently amended its sustainability screens to weed out these banks.

According to Josh Strauss of the fund's portfolio management team, their process will now exclude banks that hold more than $10 trillion in notional value of derivative contracts. That currently makes J.P. Morgan Chase & Co. JPM, Bank of America BAC, Goldman Sachs GS, Citigroup C, and Morgan Stanley MS off-limits. Of these firms, only Citigroup has been in the portfolio in the past; the team sold it in October 2007.PAGEBREAK

Appleseed's managers look for high-quality firms with strong cash flows and clean balance sheets. Price/book value is a key metric in their valuation process for banks, and with securities on bank balance sheets not marked to market, book value has become a fictitious number, Strauss said. He noted that if true restructuring occurs in the banking industry, they would consider discontinuing the screen. The firm opted to change their investment policy regarding big banks now because the team doesn't anticipate meaningful reform happening in the near future.

This young fund's approach has worked so far. Since its late 2006 inception, it has returned about 7% annualized, while its typical mid-cap value peer and the S&P 500 Index are in the red for the period, with losses of 3.6% and 5.0%, respectively.

Torray Scoops Up Separate Account Manager
Torray LLC, advisor to the Torray Fund TORYX, has acquired Resolute Capital Management, a Washington, D.C.-based asset manager that runs separate accounts. Approximately $100 million in assets, a staff of six, and Resolute's president, Nicholas Haffenreffer, have joined Torray.

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