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Four Picks for the Present

Our research team offers up a blue-chip financial, foreign large-growth fund, and dividend ETF.

Morningstar Analysts, 10/11/2011

Stock: J.P. Morgan Chase & Co JPM
Fair Value Estimate: $61
Morningstar Rating: 5 Stars
Uncertainty: High
Economic Moat: Narrow 
Credit Rating: A+

J.P. Morgan is well positioned to meet oncoming challenges and exceed expectations. The company's disciplined approach and conservative capital base leading up to the financial crisis allowed it to effectively weather that storm, and it is now taking action to reward shareholders. J.P. Morgan recently increased its dividend and instituted a giant share buyback program, all while making the necessary changes to meet future requirements. The bank also has a proven crisis leader at the helm in Jamie Dimon. All of this hasn't convinced the market—on Aug. 23, the stock was trading at less than book value and a 45% discount to our fair value. David Hirsch

Mutual Fund: Thornburg International Value TGVAX
Category: Foreign Large Growth
Morningstar Rating: 4 Stars
Total Assets: $7.5 billion
Expenses: 1.33%
Turnover: 22% 
Assets in Top 10 Holdings: 22.88%

This is no standard-issue value fund. Lead manager Bill Fries, along with comanagers Wendy Trevisani and Lei Wang, have long invested in a mix of value plays, steady growers, and emerging franchises. Lately, valuations have led them to emphasize the latter group, pushing the fund from Morningstar's foreign large-blend category to foreign large-growth. They've also been buying larger firms of late for valuation reasons; its average market capitalization is one of the category's highest. While the fund sometimes has a well-above-average stake in emerging markets, the managers have stuck with well-established companies in those markets and the fund's volatility has been relatively low. Greg Carlson

Separate Account: Montag & Caldwell Equity
Category: Large Growth
Total Number of Holdings: 34
P/B Ratio: 3.46
U.S. Stocks: 98.02%
Minimum Investment: $25,000
Assets in Top 10 holdings: 41.13%

This fund seeks a select list of the biggest fish in the pond. It typically holds just 30 to 35 stocks, and its average market capitalization is consistently well above the large-growth category norm. Veteran lead skipper Ron Canakaris and his team look for giant firms that crank out relatively stable revenue streams and are undervalued relative to their growth prospects. The fund has generally held up better in tough times than most peers and lagged in rallies led by cyclical fare. As a result, it's produced fine risk-adjusted returns over the long haul. It's lost less than most of its peers in August's turbulent market, and it's an attractive play on the market's behemoths, which are arguably still undervalued. Greg Carlson

Exchange-Traded Fund: iShares High Dividend Equity HDV
Assets: $252 million
Expense Ratio: 0.40%
Average Market Cap: $63 billion
Portfolio Dividend Yield: 4.4%
S&P 500 Dividend Yield: 2.2%
Inception Date: 3/29/2011
   
Strategies that focus on dividend payers need a way to separate the wheat from the chaff. IShares High Dividend Equity Fund HDV is based on the Morningstar Dividend Yield Focus Index, which relies on two quality screens: a qualitative assessment of the firm's economic moat; and a quantitative assessment of the firm's balance sheet and market risk, called distance to default. The combination results in a list of stable companies that is then sorted by yield. The fund selects the 75 highest-yielding stocks (which helps boost the yield of the fund) and then weights them by dividends paid (which tilts the fund toward large-cap value stocks). During slower economic growth, dividend-paying stocks should play a more important role in the portfolio. Michael Rawson

Hindsight: August/September 2010
Our picks from a year ago have been a mixed bag thus far. Exchange-traded note JPMorgan Alerian MLP Index AMJ, which holds master limited partnerships in the energy sector that are tied to revenues based on volume and generate hefty dividends, had the biggest absolute return (8%); it beat the S&P 500 Index by 4 percentage points. Meanwhile, foreign large-blend fund Artisan International ARTIX turned its performance around by shifting out of a bet on European financials and into China and Hong Kong picks that have paid off nicely. It's well ahead of its MSCI EAFE Index benchmark. Stock pick Molson Coors TAP has muddled along, lagging the S&P. And promising new separate account Evermore Global Value Strategy (run by a former Mutual Series manager) has struggled, trailing the MSCI All Country World Index by 10 percentage points. Greg Carlson

Pick: Molson Coors Brewing TAP
Type: Stock
Cumulative Return to Date (%): –2.19
Back Then, We Said: "Executes cost-saving measures effectively"
Now, We Say: "A superior capital allocator and operator"

Pick: JPMorgan Alerian MLP Index AMJ
Type: ETF
Cumulative Return to Date (%): 8.26 
Back Then, We Said: "Higher-yielding equities not well-represented in standard indexes"
Now, We Say: "Still provides insurance, but difficult to recommend now"

Pick: Artisan International ARTIX
Type: Mutual Fund
Cumulative Return to Date (%): 4.38
Back Then, We Said: "Quality never goes out of style"
Now, We Say: "Take the long view"

Pick: Evermore Global Value
Type: Separate Account
Cumulative Return to Date (%): –7.02
Back Then, We Said: "Holds merit for those valuing diversification"
Now, We Say: "Will likely remain a long-term winner"

Cumulative Return to Date (%)
S&P 500 TR Index: 4.02
MSCI EAFE NR USD Index: 1.06
MSCI AC World NR USD Index: 2.42

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