Four offerings deemed to be right for right now.
This article first appeared in the August/September 2011 issue of Morningstar Advisor magazine. Get your free subscription today!
Stock: Toyota TM
Although Toyota has had to deal with more than its fair share of headwinds since early 2010, we believe most of these issues are short-term, and the world's largest automaker is in prime position to outperform expectations. Down 15% from its pre-earthquake price and trading at less than 70% of our fair value estimate (as of June 24), market fright against Japanese equities and overblown concerns over Toyota's supply chain disruptions provide potential investors with a significant margin of safety. New cost-cutting measures along with a return to full production likely by the end of the year has Toyota poised to capture pent-up demand for its brand and what we expect to be big growth in the auto industry. (David Hirsch)
Mutual Fund: Artisan Value ARTLX
This fund has delivered on its potential. The management team, which has posted stellar returns at Artisan Small-Cap Value ARTVX and Artisan Mid-Cap Value ARTQX, has steered this large-value portfolio to top-quintile results since its 2006 inception. Why now? Although the fund has mounted a comeback in terms of relative performance in the first half of 2011 after a weak 2010, the top holdings in its compact portfolio are generally foundering and arguably cheap. Three of the fund's four largest holdings--Cisco CSCO, Microsoft MSFT, and Target TGT--account for 14% of assets, have posted double-digit losses, and now earn an average of 4.33 stars from Morningstar's equity analysts. (Five is the cheapest.) (Greg Carlson)
Separate Account: Primecap Management Equity
The team behind the successful Vanguard Primecap VPMCX and Vanguard Capital Opportunity VHCOX consists of growth investors, but they've always possessed a healthy contrarian streak. That has made for streaky returns at times. For example, the mutual funds they run have posted humdrum relative returns in the post-bear-market bounceback, but that's due in part to their concerns about the valuations of the rapid growers that have led the way. Their bets can take a while to work out, but their remarkable long-term track record inspires confidence. (Greg Carlson)
Exchange-Traded Fund: WisdomTree Emerging Markets Equity Inc DEM
WisdomTree Emerging Markets Equity Income DEM is an attractive alternative to a marketcap- weighted emerging-markets ETF. DEM comprises about 300 of the highest-dividendyielding emerging-markets stocks, which are then weighted by annual cash dividends paid. This strategy has resulted in significantly better risk-adjusted returns when compared with the market-cap-weighted MSCI Emerging Markets Index (the underlying index for iShares MSCI Emerging Markets EEM and Vanguard MSCI Emerging Markets VWO)--the three-year Sharpe ratios for DEM and the MSCI Index were 0.50 and 0.25, respectively.
Part of DEM's outperformance has been driven by its dividend yield, which is currently about double that of EEM and VWO. We also note that many emerging-markets large-cap stocks are partially government-owned, and at times, these entities may put political goals ahead of the interests of minority shareholders, which can weigh on share prices. Relative to VWO and EEM, DEM has a lower exposure to these types of companies. (Patricia Oey)
Hindsight: June/July 2010
Our picks fared reasonably well for the most part in a stock market environment that started out with a worrisome decline but then saw stock prices charge upward and smooth out. A separate account run by a team from FPA in the same small/mid-value style as FPA Capital FPPTX handily beat its Russell 2500 Index benchmark as well as the mid-value category norm--despite a hefty 30% stake in cash-- thanks in part to a bet on the energy sector, which performed well over the whole of the period.
Not coincidentally, our stock pick, oil behemoth ExxonMobil XOM, also posted a solid peer-beating gain. And while the emphasis of fund pick Aston/Montag & Caldwell Growth MCGFX on "quality" growth stocks kept it modestly behind its Russell 1000 Growth Index benchmark, the fund still turned in a fine absolute gain. The big misfire was iPath S&P 500 VIX Short-Term Futures VXX. That exchange-traded note generally does well when volatility spikes, but volatility has dropped sharply, and the price of the ETN has steeply declined, too. (Greg Carlson)