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June/July 2012 Picks

Four offerings deemed to be right for right now.

Morningstar Analysts, 06/05/2012

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

Stock: Covidien COV
Fair Value Estimate: $76
Morningstar Rating: 4 Stars
Uncertainty: Medium
Economic Moat: Narrow
Average Credit Quality: Unrated
Market Cap: $26 billion

After a few years of investing in research and development, bolstering its salesforce, and pruning its product lineup, Covidien has returned to prominence in the medical-device arena. The company’s strong product pipeline, a management team dedicated to maximizing returns on investment, and favorable secular trends bode well for its prospects. The company established a strong moat around its business, particularly in devices, and represents a compelling long-term investment opportunity. Covidien built its device business on its technological know-how and distribution network, which resulted in leadership positions across most of its product categories. As long as the company doesn’t fall too far behind in its technology, it is essentially assured a steady market share and growth.
Alex Morozov

Mutual Fund: Janus Triton JATTX
Category: Small Growth
Investment Style: Small Growth
Morningstar Rating: 5 Stars
Morningstar Analyst Rating: Silver
Expenses:  0.93% 
Total Assets: $3 billion

This small-growth fund has been on a roll lately. In the past, that might have been a red flag for a Janus fund, but this one has become a success by focusing on sturdy companies rather than taking big risks. Managers Chad Meade and Brian Schaub started their careers at Janus during the firm’s brutal performance in the 2000–02 bear market. As a result, they stick with companies that possess sustainable competitive advantages and trade at undemanding valuations. The fund has excelled during their six-year tenure, shining in both rallies and choppy markets. A modest 0.93% expense ratio seals its appeal.
Greg Carlson

Separate Account: Invesco Large Cap Value
Category: Large Value
Investment Style: Large Value
Total Number of Holdings: 72
Morningstar Rating: 3 Stars
Total Assets: $15.5 billion

This account has changed names since Invesco acquired Van Kampen in 2010, but it’s been run by the same management team for a long time. Lead skipper Kevin Holt, for example, has been a manager on the team since 1999. The managers have steered the mutual fund Invesco Van Kampen Comstock ACSTX to solid long-term returns using a deep-value, low-turnover strategy that prizes low valuations and turnaround stories. While this portfolio can have a cyclical bent at times, the managers have kept it out of deep trouble by limiting stock-specific risk and making prudent calls, such as avoiding most big banks going into the financial crisis of 2008.
Greg Carlson

Exchange-Traded Fund: iShares MSCI Singapore Index EWS
Morningstar Category: Pacific/Asia ex-Japan Stock
Expense Ratio: 0.52%
AUM: $1.5 billion
12-Month Yield: 3.6%
3-Year Standard Deviation: 27.1%
Average Daily Volume: 1.8 million

Broad emerging-markets funds have exposure to risky areas such as Russia and India, but investors can use regional funds to customize an emerging-markets allocation. We think iShares MSCI Singapore Index EWS is an attractive option for exposure to fast-growing Southeast Asia, as well as China. Most of the companies in this fund have regional operations but are domiciled in Singapore, a country with an established rule of law. Relative to a broad emerging-markets fund, EWS has been just as volatile, but less correlated to the S&P 500. About 45% of EWS’ portfolio is composed of financial firms, including banks and real estate companies. The growth outlook for both sectors in Southeast Asia is robust. One near-term risk, however, is that many of these real estate firms have assets in China, where the government is trying to cool the property market. On the domestic front, the Singapore economy is healthy, which should be supportive of both equities and the Singapore dollar. This fund does not hedge its foreign-currency exposure, so it will benefit when the Singapore dollar appreciates against the greenback.
Patricia Oey

Hindsight: April/May 2012
Our picks from a year ago performed well for the most part. Stock pick Visa V was a home run, soaring 61.6% over the period because of strong revenue and earnings growth. Mutual fund pick Artisan Value ARTLX handily beat its Russell 1000 Value benchmark thanks to savvy technology picks such as Apple AAPL, and its management team won the award for Morningstar Domestic-Stock Fund Manager of the Year for 2011. Separate account Dodge & Cox Balanced edged its typical moderate-allocation peer because of an emphasis on large firms and a bigger-than-average equity stake. Meanwhile, the trend-following models of exchange-traded fund pick Cambria Global Tactical GTAAX struggled in a choppy market. 
Greg Carlson

Pick: Artisan Value Fund Investor Shares ARTLX
Type: Mutual Fund
Cumulative Return to Date (%): 9.81
Back Then, We Said: “Looks well-suited for the times…”
Now, We Say: “A very solid holding…”

Pick: Dodge & Cox Balanced
Type: Separate Account
Cumulative Return to Date (%): 3.91
Back Then, We Said: “Managers have made a lot of good moves…”
Now, We Say: “Still on offense…”

Pick: Cambria Global Tactical ETF GTAA
Type: ETF
Cumulative Return to Date (%): -6.21
Back Then, We Said: “A unique investment strategy”
Now, We Say: “Its value will be seen over the long term…”

Pick: Visa, Inc. V
Type: Separate Account
Cumulative Return to Date (%): 61.56
Back Then, We Said: “An eye for quality.”
Now, We Say: “We’re more cautious on its long-term prospects…”

The April/May 2011 issue was mailed to subscribers in April 2011.  Return data is from April 1, 2011, through April 1, 2012.


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