Morningstar Advisor - April/May 2009 - 10

Contributors Brett Ryder The illustrations in this issue were created by Brett Ryder. His work has also appeared in The Economist, Financial Times, Los Angeles Times, The New York Times, and a panoply of other venues. Hailing from the United Kingdom, he’s a graduate of Camberwell Art College London and St. Martin’s College London. As for the inspiration for his work, including the cover’s hook-heavy fisherman and the kraken that introduces the Spotlight section (page 30), Ryder cites eclectic influences. “I’ve always had a fascination with bygone medical journals, dusty advertising boards, and the Haynes BSA 650 motorcycle manual,” he says. “Such an assortment of taste in fine illustration combined with an ability to replace a four-cylinder manifold with only a few ‘minor’ screws left over was always destined to have a profound influence on my work.” Perhaps it is due to overaggressive marketing from the providing firms; after all, names like ‘double,’ ‘2X,’ and ‘Ultra’ sound decidedly positive,” he says. “What some investors fail to realize is that, over long holding periods, the only thing that doubles—and occasionally quadruples—is the standard deviation. “ In “How Leveraged ETFs Compound the Misery” (page 40), Justice discusses the reasons these funds underperform over longer holding periods. He’s also alarmed by their popularity. “The assets that these funds have attracted raised my suspicions that some investors were not using these funds properly,” he says. His suspicions were proved true after hearing outraged financial advisors lambaste these products at the conference. “On several occasions, I heard snakebitten investors snipe that ‘These funds should come with a warning label, just like cigarettes.’ My intention in writing this article was to do exactly that.” regularly in Morningstar Advisor. This issue, he also contributes an article on using indexes (“A Multiple-Lense Approach to Analysis,” page 25). “Too much fund analysis is just slicing and dicing past returns,” he says. “I believe that digging into portfolios and understanding manager strategies is much more rewarding and is essential if we are to help investors better deploy funds in their portfolios.” Eric Jacobson A longtime mutual fund analyst, Eric Jacobson had switched focus a bit and was working on Morningstar’s indexes team—until fund analyst Miriam Sjoblom asked him to look at an Oppenheimer fund, which brought him back to fund analysis. “She had grilled the managers but was having trouble reconciling their comments with the fund’s performance,” he says. After picking away at it together and scrubbing the fund’s SEC filings, the pair found an extreme rarity among open-end funds: portfolio leverage. “We started digging into other funds and found one after another whose managers had failed to mention that they were using leverage, but who had piled on layers of risk, via leverage, credit-default and index swaps. Needless to say, a lot of bond funds failed to pull their weight in 2008.” Jacobson writes about what he and Sjoblom found in “Where Leverage Lurks,” (page 32). Don Phillips Don Phillips is Morningstar’s original fund analyst, and as editor of Morningstar Mutual Funds, he established the well-known Morningstar editorial voice of clearly and concisely explaining technical financial information. One of the financial-planning community’s thought leaders, he has been instrumental in Morningstar’s growth, helping to develop the Morningstar Style Box, the Morningstar Rating, and more. Nowadays, he wears a variety of hats—he’s a member of the board of directors, a managing director, and president of fund research (which includes research on mutual funds, exchange-traded funds, and alternative investments). His column, Phillips Curve (page 80), appears Paul Justice Morningstar ETF strategist Paul Justice learned firsthand from hundreds of outraged financial advisors at the 2008 Inside ETFs Conference that some old lessons need to be taught again. “Most investors understand the potential perils of using leverage via a margin account or through options and derivatives, but expectations for leveraged ETFs seem to be different. 10 Morningstar Advisor April/May 2009

Morningstar Advisor - April/May 2009

Table of Contents for the Digital Edition of Morningstar Advisor - April/May 2009