Morningstar Advisor - Spring 2007 - 54

Investments à la Carte world. Over the long haul, though, we think most investors benefit from exposure to developing economies. But it requires some tolerance for risk and a long-term view. The fund boasts a tiny 0.35% expense ratio, but it’s worth noting that there are cheaper options. (Vanguard Total Stock Market Index Fund VTSMX is slightly less expensive at 0.31%, and in early March 2007, Vanguard launched FTSE All World ex-US ETF VEU and charges just 0.25%.) But we still think this fund is worthy of your attention. Sonya Morris SA To top things off, the account’s investment minimum for retail investors is only $2,500, making Jain and his successful strategy easily accessible to most investors. Steve Deutsch E iPath Dow Jones-AIG Commodity Index DJP Alternative MF PIMCO All Asset PASAX Vontobel Asset Mgmt Emerging Markets Equity Rajiv Jain, the manager of Vontobel Asset Management Emerging Markets Equity separate account, is a successful investor for both mutual funds and separate accounts. For this strategy, Jain looks for well-managed businesses with consistent operating histories and financial performance that generate free cash flow. If there’s anything holding back this separate account, it may be cash drag. Jain persistently keeps some significant—perhaps precautionary—cash balances on hand. Still, the account has a lot going for it. It has a top-quartile 2006 gross return of 37.65%, an overall 4-star rating, one- and 10-year Sharpe ratios of 1.65 and 0.52, respectively, and a five-year capture analysis of strong outperformance in both positive and negative quarters. Able to pick from PIMCO’s expansive fund lineup, PIMCO All Asset has access to a wide array of investment types. PIMCO’s funds are extraordinarily strong across the board and are a powerful tool for this fund. Anybody can put together a portfolio of PIMCO funds. What furthers this fund’s appeal, however, is that it adjusts its asset allocation based on broad macroeconomic considerations. Those decisions emerge from a quantitatively driven model developed by subadvisor Robert Arnott. The model considers factors such as valuations, growth rates, and inflation to assess the attractiveness of each underlying asset class. The fund’s goal is to beat inflation by a meaningful margin and provide strong absolute returns. That goal, along with the fund’s unique approach, makes it an attractive complement for a portfolio that’s heavy in traditional stocks and bonds. If you prefer a supercharged version, PIMCO All Asset All Authority PAUAX uses leverage to multiply the outcome. Karen Dolan This is one of a handful of new investment vehicles known as exchange-traded notes. Like ETFs, ETNs track benchmark indexes and trade on an exchange throughout the day. But there are some important differences: ETNs are not funds; rather they are 30-year senior notes that guarantee the holder the returns of a specified index less expenses. In exchange for this assurance, the investor assumes credit risk. However, Barclay’s Bank (the issuer of the note) is a sturdy global financial institution with a superior credit rating, so the default risk is slim. Barclay’s contends that ETNs have tax advantages over competing ETFs that use futures to gain commodity exposure since futures can trigger higher tax consequences. IPath Dow Jones-AIG Commodity Index is a good way to add commodity diversification to a portfolio. While not exactly cheap, its 0.75% expense ratio is reasonable as commodity funds go. Plus, its benchmark, the Dow JonesAIG Commodity Index, won’t let a single commodity consume more than a third of assets. As a result, this ETN is not as oil heavy as most competing funds, where the oil weighting can be as high as 70%. Still, it sees its share of the turbulence that is a matter of course in the commodities market. Sonya Morris SA Galliard Capital Management Stable Value ETFs SPDR MSCI All Country World ex-US % Equity Exposure Greater Asia Americas Greater Europe iPath Dow Jones-AIG Commodity Growth of $10,000 $15K 13 S&P 500 0–10 11–20 21–30 31–40% 03 04 05 06 07 International pick: Brand-new, onestop diversifier that provides investors exposure to virtually the entire world, excluding U.S. Alternative pick: Actually an exchangetraded note. Index limits weightings to no more than a third of assets, mitigating exposure to volatile oil prices. An experienced management team has run Galliard Capital Management Stable Value since inception in 1985. The account has delivered what it promises to do. It has 5-star overall ratings for three-, five- and 10-year periods; strong Sharpe ratios; and attractive gross-offee returns—all for low management fees. The team has achieved these results by using managed synthetic GICs, which separate a GIC’s investment and insurance components and use a wrap contract by a bank or life insurance company to provide the insurance against market and cash flow risk. The firm says managed synthetics improve credit quality, diversification, and returns. Steve Deutsch K 54 Morningstar Advisor Spring 2007

Morningstar Advisor - Spring 2007

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