Five offerings deemed to be right for right now.
This article originally appeared in the June/July 2013 issue of MorningstarAdvisor magazine. To subscribe, please call 1-800-384-4000.
Stock: Capital One Financial
Fair Value Estimate: $74
Morningstar Rating: 4 Stars
Economic Moat: Narrow
Forward P/E: 8.5
Market Cap: $34.4 billion
Capital One has evolved from a monoline credit card company to a diversified holding company offering a broad spectrum of financial products and services to consumers and businesses. As a result of bold acquisitions into traditional and nontraditional banking spaces, Capital One has become the seventh-largest bank by deposits in the United States. Capital One can be generally divided into three segments: credit cards, consumer banking, and commercial banking. It has an astounding 74 million customer accounts. While the company is well-known for its credit-card segment, we think Capital One’s expansion into other consumer and commercial banking businesses will be the primary growth catalyst in the nearer term.
Mutual Fund: T. Rowe Price Capital Appreciation
Category: Large Blend
Morningstar Rating: 5 Stars
Morningstar Analyst Rating: Gold
Minimum Investment: $2,500
Total Assets: $15.2 billion
This broadly diversified fund does a lot of things right. David Giroux oversees a portfolio with an equity weighting of 50% to 70%, where he focuses on undervalued blue chips. The rest of the fund is composed of a mix of traditional bonds, leveraged loans, convertible bonds, and cash; he’ll also write covered call options for additional income. Deft security selection has led the equity, bond, and converts sleeves to each outperform their respective benchmarks during his nearly seven-year tenure, and returns have been remarkably consistent versus the fund’s
moderate allocation peers.
Separate Account: Bridgeway Blue Chip 35 Index
Category: Large Blend
Investment Style: Large Blend
Total Number of Holdings: 37
Morningstar Rating: 3 Stars
Total Assets:$407 million
This concentrated fund homes in on the market’s behemoths, but it does so in a sensible way. The fund tracks an in-house index composed of the 35 largest U.S. companies by market capitalization—except it won’t own more than four firms from the same sector, so it must reach further down the market-cap ladder for constituents. The fund further diversifies by weighting its holdings equally rather
than by market cap. The index is typically reconstituted every few years (except
when high market volatility results in big market-cap changes) to keep trading
costs down. This construction method, paired with the fund’s cheap 0.15% expense ratio, has led to fine risk-adjusted returns.
Closed-End Fund: AllianceBernstein Income
Earnings Rate (Share Price): 4.87%
6-Month Average Discount: -8.2%
Total Expense Ratio: 0.64%
Effective Duration: 9.2 years
Leverage Ratio: 1.47
Average Daily Volume: $4.8 million