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April/May 2012 Picks

Four offerings deemed to be right for right now.

Morningstar Analysts, 04/06/2012

This article originally appeared in the April/May 2012 issue of MorningstarAdvisor magazine.  To subscribe, please call 1-800-384-4000.

Stock: Charles Schwab Corp. SCHW
Fair Value Estimate: $23
Morningstar Rating: 5 Stars
Uncertainty: High
Economic Moat: Narrow
Average Credit Quality: High
Market Cap: $17.7 billion

Charles Schwab Corp. is perhaps still best known for its discount-brokerage roots, but these days the company is about much more than just a cheap trade. Since its beginning, the firm and its eponymous founder have spread the gospel of investing across the U.S. Today, Schwab remains a potent force in personal investing, but the company has complemented its trading-fee revenue with asset-based income. We like the corporation’s strong position in the personal-investing business, which we think holds the potential for added growth as individuals will continue to turn to investing to fund their future needs.
Gaston F. Ceron

Mutual Fund: Artisan Global Value ARTGX
Category: World Stock
Investment Style: Large Growth
Morningstar Rating: 5 Stars
Total Assets: $103 million
Expenses: 1.50%
Turnover: 32.3%

Run by David Samra and Dan O’Keefe, managers of the closed Artisan International Value ARTKX, this four-year-old fund has become an excellent holding as well. At each fund, the duo will hold companies of all sizes that trade at significant discounts to their estimated private market values yet have decent balance sheets and growth prospects. They run concentrated portfolios of 40–50 stocks and hold their picks for years. The result has been superb returns and muted volatility. Lately, the managers have moved further up the quality spectrum to take advantage of their relatively modest valuations. This fund has beaten 90% of its world-stock peers since its December 2007 launch.
Greg Carlson

Separate Account: Harrison Associates Equity & Income
Category: Moderate Allocation 
Total Number of Holdings: 109
Morningstar Rating: 4 Stars
P/B Ratio: 2.37
Assets in Top 10 Holdings: 30.38%
Average Turnover Ratio: 40%

Comanager Ed Studzinski recently retired after 12 years on board, but Clyde McGregor has run this strategy for more than 16 years, so it shouldn’t lose a step. He’s a wide-ranging value investor who buys firms at steep discounts but is willing to own growth stocks when they look cheap. The equity slice of the portfolio is capped at 75% of assets, and the remainder goes into highly rated government bonds. While the latter stake can be a drag when Treasuries trail lower-rated debt, McGregor has posted very strong risk-adjusted returns over the long haul.
Greg Carlson

Exchange-Traded Fund: Barclays S&P 500 Dynamic VEQTOR ETN VQT
Morningstar Category: Multialternative
Expense Ratio: 0.95%
AUM: $332 million
NAV: $132.57
1-Year Return: 17.53%
Average Daily Volume: 31,205

Many alternative funds seek to mitigate volatility by going long and short at the same time. This strategy usually reduces volatility but can also weigh on potential returns. The Barclays S&P 500 Dynamic VEQTOR ETN VQT takes a different approach by dynamically shifting its exposure among the S&P 500 Index, S&P 500 VIX Short-Term Futures Index, and cash, depending on market volatility. When market volatility is low, this ETN will track the performance of the S&P 500. As volatility rises, the ETN will decrease its exposure to the S&P 500 and increase its exposure to the S&P VIX Short-Term Futures Index (as a proxy for market volatility) to reduce downside risk. Volatility exposure is a compelling portfolio diversifier because volatility spikes when markets fall. The overall effect is a portfolio with below-average risk that can actually rise in a down market. In its short history, VQT has outperformed the S&P 500 with less overall risk. The main downsides to VQT are the above-average expense ratio and the credit risk you assume because it’s an exchange-traded note.
Timothy Strauts

Hindsight: February/March 2012
Our picks from a year ago generally did well. Pfizer PFE trounced the S&P 500 Index as investors flocked to the once-downtrodden company, no doubt drawn by its low absolute valuation and hefty yield in an environment where bonds offer minuscule payouts. Large-value-oriented separate account Diamond Hill Large Cap Equity finished comfortably ahead of the Russell 1000 Value Index (and matched the S&P) as manager Chuck Bath’s focus on financially solid firms with modest valuations (including Pfizer) found favor over the past 12 months. Meridian Value MVALX, a mid-blend fund, also performed well because of its higher-quality emphasis, although its future prospects are now uncertain following the recent death of longtime comanager James Aster, who founded its advisor. Our ETF pick from a year ago, SPDR KBW Bank, has since liquidated, so we can’t measure its performance. 
Greg Carlson

Pick: Pfizer AMD
Type: Stock
Cumulative Return to Date (%): 14.38
Back Then, We Said: “Solid foundation, strong cash flows.”
Now, We Say: “Can withstand generic competition.”

Pick: SPDR KBW Bank
Type: ETF
Cumulative Return to Date (%): ---
Back Then, We Said: “Pure exposure to 24 large, money-center banks.”
Now, We Say: Liquidated

Pick: Meridian Value MVALX
Type: Mutual Fund
Cumulative Return to Date (%): 4.73
Back Then, We Said: “A strong risk/reward profile.”
Now, We Say: “Suddenly has big shoes to fill.”

Pick: Diamond Hill Large Cap Equity
Type: SA
Cumulative Return to Date (%): 5.04
Back Then, We Said: “An eye for quality.”
Now, We Say: “Proven management, excellent results, great stewardship.”

The February/March 2011 issue was mailed to subscribers in February 2011. Return data is from Feb. 1, 2011, through March 1, 2012.


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