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February/March 2012 Picks

Four offerings deemed to be right for right now.

Morningstar Analysts, 02/01/2012

Stock: Ford F
Fair Value Estimate: $23
Morningstar Rating: 5 Stars
Uncertainty: High
Economic Moat: None
Credit Rating: BBB-
Market Cap: $39.9 billion

Ford Motor Co.’s products, marketing, and union contract should position the automaker to compete better than in the past. Still, it will take time for the company to regain market share in the United States. Ford continues to increase its consideration in the United States, mostly because it did not take government loans and is making better cars. In 2010, Ford picked up nearly 0.9 percentage points of market share. Another key change is building more Ford models on common platforms, which will improve economies of scale. By middecade, Ford expects that 75% of its global production, or 6 million vehicles, will come from five vehicle architectures. This move will also allow Ford to switch production faster to meet changing demand while also cutting costs via better economies of scale.
Dave Whiston

Mutual Fund: Weitz Value WVALX
Category: Large Value
Investment Style: Large Blend
Morningstar Rating: 3 Stars
Total Assets: $946.3 million
Expenses: 1.21%
Turnover: 42.0%

Wally Weitz made a name for himself investing in cheap, distressed fare and later suffered for that strategy at times in the 2000s. He has lately toned things down, requiring a bigger margin of safety for troubled firms and scooping up more-established firms at sizable discounts to their prospects. Indeed, the fund recently owned just one major bank (Wells Fargo WFC) and has made a onceunimaginable foray into the technology sector. These moves have paid off nicely of late, and Weitz’s long-term record is still stellar. A greater reliance on sturdy fare and a longstanding double-digit cash position should serve investors well if markets remain rocky.
Greg Carlson

Separate Account: Jennison Large Cap Growth Equity
Category: Large Growth
Total Number of Holdings: 73
Morningstar Rating: 4 Stars
P/B Ratio: 4.46
Assets in Top 10 Holdings: 27.93%
Average Turnover Ratio: 65%

This is one of the most-dependable largegrowth strategies around. Sig Segalas, who’s managed this account for decades (he also has run Harbor Capital Appreciation HACAX since its 1990 inception), and his team seek out firms that are relatively stable and have strong earnings growth prospects, yet aren’t too pricey. It’s a balancing act, but they’ve pulled it off quite well on a consistent basis: They’ve outperformed most of its large-growth peers in most types of markets, and patches of weak returns have been short-lived. And the team’s recent heavy emphasis on quality businesses paid off in turbulent 2011.
Greg Carlson

Exchange-Traded Fund: PowerShares S&P 500 Low Volatility SPLV
Morningstar Category: Large Value
Expense Ratio: 0.25%
AUM: $985 million
SEC Yield: 3.1%
% Portfolio Wide Moat: 32%
% Portfolio Narrow Moat: 59%

One of the more popular trends in new ETFs has been low-volatility funds, and PowerShares S&P 500 Low Volatility SPLV is our pick among the crop. Low-volatility stocks, like value stocks and small-cap stocks, have historically provided higher risk-adjusted returns over a long time horizon. This “low volatility premium” runs counter to Modern Portfolio Theory and instead is attributed to a market environment in which investors tend to tilt toward higher-risk stocks with the expectation of higher returns. Ironically, their collective bet on high-beta stocks leads to low risk-adjusted returns. Lower-volatility portfolios also benefit more from the effects of compounding, relative to a market-cap-weighted portfolio. However, investors should be aware that low-volatility strategies tend to underperform during strong bull markets. This ETF holds the 100 stocks of the S&P 500 that have had the lowest volatility over the past year. Not surprisingly, it has a heavy exposure to consumer defensive and utility names.
Patricia Oey

Hindsight: December/January 2011

Mutual fund Primecap Odyssey Stock POSKX, run by a team with a long, superb record, is slightly behind the Russell 1000 Growth Index (but well ahead of its typical large-growth peer) since its selection; the fund owns more small- and mid-cap firms than the index does, also has been a headwind in a year where behemoths held up better. Separate account Fiduciary Management of Milwaukee Large Cap Equity has virtually matched the S&P 500 Index; its emphasis on sturdy fare with stable revenues helped in the market’s dips, but it lost ground in rallies. Vanguard’s S&P 500 ETF has provided tight, low-cost tracking of the index as usual; its 7.6% gain wasn’t thrilling, but that would make most investors happy during this bumpy period. Finally, chipmaker Advanced Micro Devices AMD has dropped 30% as supply shortages slowed production and it struggled to keep up with Intel INTC.
Greg Carlson

Pick: Advanced Micro Devices AMD
Type: Stock
Cumulative Return to Date (%): -30.32
Back Then, We Said: “New chips should provide a significant boost”
Now, We Say: “Should defy an industry slowdown via market share gains”

Pick: Vanguard S&P 500
Type: Exchange Traded Fund
Cumulative Return to Date (%): 7.60
Back Then, We Said: “Extremely low tracking error and economies of scale”
Now, We Say: “A solid core equity holding”

Pick: Primecap Odyssey Stock
Type: Mutual Fund
Cumulative Return to Date (%): 6.58
Back Then, We Said: “Team has generated outstanding long-term records”
Now, We Say: “An excellent performer with a contrarian-growth strategy”

Pick: Fiduciary Management of Milwaukee Large Cap Equity
Type: SA
Cumulative Return to Date (%): 6.53
Back Then, We Said: “Holds up better in rough patches”
Now, We Say: “Success in different environments inspires confidence”


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