Morningstar Advisor - Summer 2008 - 67

T. Rowe Price Tax-Free High-Yield PRFHX MF $14K 13 12 LB Muni TR 03 04 05 06 07 08 This fund’s measured approach works. Manager Jim Murphy and his team don’t recklessly chase yield by making big bets on risky sectors or issue. Rather, they do detailed bottom-up Jan-03 Jan-04 build a mix of securities with analysis and Jan-05 Jan-06 Jan-07 Jan-08 attractive risk/reward profiles. In 2007, for Sep-06 Aug-07 Oct-06 Sep-07 Oct-07 Nov-07 Oct-05 Aug-06 Jul-07 Feb-03Nov-03Jul-04 Apr-05 Feb-06 Mar-07 Mar-08 Mar-03Dec-03Sep-04 Jun-05 Mar-06 Apr-07 Apr-08 Apr-03 Feb-04Nov-04Jul-05 Apr-06 May-07 May-08 May-03 Mar-04 Feb-05 Jun-03 Apr-04 May-05 May-06 Jun-07 Jun-08 Jul-03 May-04 Aug-03 Jun-04 Sep-03 Aug-04 Aug-05 Jun-06 Oct-03 Oct-04 Sep-05 Jul-06 example, Murphy mostly steered clear of airline and real-estate-related issues Nov-06 he Feb-07 Feb-08 Mar-05Dec-05 Dec-06 Dec-04 Nov-05 because Dec-07 didn’t think they paid adequate compensation for their risk levels. Going light in these troubled areas helped the fund hold up better than rivals in 2007’s tough market. Still, the fund’s 5.2% yield is higher than the typical fund in its category. This prudent high-yield muni fund would be a nice complement to a portfolio. We’ve long considered it steady rather than spectacular, which is a good thing. S $22K 19 16 S&P 500 TR dividend growth, the new equity must be issued at a premium to book value. Historically, gaining access to capital has not been a problem, but recently, Allied’s stock price has swooned, reducing the premium to book value at which the firm is able to issue new equity. If these tight capital-markets conditions persist, Allied could be worth much less, but should the firm return to some form of historical normalcy, the total return on an investment in Allied could easily exceed its already-lofty dividend yield. International Allied Capital ALD 03 04 05 06 07 08 Once upon a time, not too long ago, the practice of merely investing in 24000 foreign stocks might have been considered risky. Now, investors fret 17000 about having too small a foreign stake. Oh, how the times have 10000 changed. Yet, while investors’ 3000 comfort with investing abroad and sophistication in building portfolios has clearly grown, it’s not as if there’s any shortage of high-quality, if slightly aggressive, foreign-investing options to consider. We’ve teed-up a few below, ranging from a Chinese chipmaker and a globetrotting international small-cap manager to an equally intrepid team that turns foreign benchmark-hugging on its head. Overview by Jeffrey Ptak This fine fund would be a great addition to a portfolio. It’s been successfully run since its 1995 inception by David Herro, Morningstar’s 2006 International-Stock Manager of the Year. Herro has made a career of getting off the beaten path. He runs a concentrated portfolio focused on undervalued small caps, while the typical foreign fund spreads its bets across hundreds of pricier global behemoths. Herro dives into battered areas and makes occasional forays into emerging markets. He takes his lumps from time to time, but his intrepid style has prevailed over time. This fund has returned an average of 13% annually since inception, crushing the MSCI EAFE Index. S $24K Vimicro VIMC 17 MSCI EAFE TR 10 06 07 08 One of the largest feathers in Allied Capital’s hat is that it has maintained or increased its regular dividend for more than 40 years. The total return Allied has generated for shareJan-03 Jan-04averaged 12.4% annually from holders has Jan-05 Jan-06 Jan-07 Jan-08 38000 1996 to 2007, compared with only 8.1% for the Feb-03Nov-03Jul-04 Apr-05 May-06Feb-07 Feb-08 Mar-03 Feb-04 Apr-03 Apr-04 May-05 Jun-06 Mar-07 Mar-08 May-03 May-04 Jun-05 Jun-03 Jun-04 Jul-03 Aug-03 Aug-04 Jul-05 Sep-03 Sep-04 Aug-05 Jul-06 Apr-07 Apr-08 Oct-04 Sep-05 Aug-06May-07 May-08 Nov-05 Sep-06 Jun-07 Jun-08 Oct-06 Jul-07 Nov-06Aug-07 Sep-07 Oct-07 S&P 500 during31000time.Apr-06 this The Oct-03 Nov-04 Oct-05 Dec-03 Dec-04 Dec-05 stock is yielding Mar-04 Feb-05 Feb-06 Dec-06 Nov-07 Mar-05 Mar-06 Dec-07 almost 14%. While this yield is attractive, it 24000 also points to some risks to investing in the company. Because Allied pays out the majority 17000 of its earnings, it depends on the capital 10000 markets to finance growth. Moreover, to finance Oakmark International Small Cap OAKEX MF $38K 31 24 S&P 500 TR 03 04 05 06 07 08 China-based Vimicro International designs semiconductors providing multimedia functions that are used in consumer electronics and mobile phones. The bulk of its revenue is from webcam chips in PCs and laptops, a market that Vimicro now leads. The firm’s success translated into rapid growth for the company between 2001 and 2006, with sales increasing from $2 million to $127 million over that period. Jan-06 Jan-07 Jan-08 In an effort to diversify its business, Vimicro has Apr-06 expandedApr-07Aug-07 Feb-08Jun-08 steadily into the mobile-phone Feb-06Jun-06 Mar-06 Jul-06 Feb-07Jun-07 Mar-07 Jul-07 May-07 Sep-07 Mar-08 Apr-08 May-08 Dec-05 May-06market over the past several years. Oct-06 multimedia Aug-06 Nov-06 Dec-06 Oct-07 Nov-07 Dec-07 Challenges remain in its bread-and-butter Sep-06 webcam-chip business. But should demand take off for some of the company’s newer products, the stock could be a big hit. If none of its new products catch fire, on the other hand, Vimicro could slowly burn the rest of its cash—the firm is trading for less than cash on the balance sheet—and the stock could be worthless to owners. Thornburg International ADR This isn’t your standard foreign large-blend SA MorningstarAdvisor.com 67

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Morningstar Advisor - Summer 2008

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