Morningstar Advisor - April/May 2009 - 59

only earns a 5-star rating based on its valuation but also earns a Financial Health Grade of A and a Stewardship Grade of B. Haywood Kelly Separate Account Keeley Corporate Restructuring Small Cap $26K 21 16 11 04 05 06 07 S&P 500 TR corporate restructurings. He trolls for spin-off plays, firms emerging from bankruptcy, distressed utilities, or firms trading at big discounts to the sum of their underlying assets. The only constants are the presence of strong cash flow and some sort of catalyst to unlock value. Keeley has consistently hit the mark over time, and this strategy has a great long-term record. Keeley has long found the most firms meeting his criteria among industrials and energyrelated firms. These sectors swooned in 2008, so even though Keeley’s picks were better than average, the fund got stung. But Keeley’s sticking with his infrastructure and energy stocks because he sees ongoing growth and underfollowed stocks in these areas. For example, Walter Industries WLT has been spinning off businesses on favorable terms for a couple of years. It is now a pure play on metallurgical coal but is lightly followed. And top holding Leucadia LUK is a holding company with widely varying interests, including an Australian iron miner, an early-stage biotech firm, and to a 28% stake in subprime auto lender AmeriCredit ACF. But Leucadia has a proven record of successful capital allocation. This strategy’s sector concentrations can leave it out of step with the market at times, but we have confidence Keeley will continue to outperform over the long term. Michael Breen ss 08 09 Successful execution of a distinct strategy gives this separate account an edge. Manager and firm founder John Keeley specializes in Hindsight: Summer 2007 While our stocks picks have struggled, an ETF comes through. Fuel Tech FTEK Jan-04 $1 1.25 Jan-07 Jan-08 Jan-09 Vanguard Dividend Appreciation VIG $1 Jan-05 Jan-06 1.00 S&P 500 Feb-04Oct-04Jun-05Feb-06Oct-06Jun-07 Mar-08 Feb-09 Mar-04 Dec-04 Sep-05 Jun-06 Apr-07 Apr-08 Mar-09 Apr-04 Mar-05 May-04 Apr-05 Apr-06 Jun-04 May-05 May-06 May-07 May-08 Jul-04 Aug-04 Jul-05 Sep-04 Aug-05 Jul-06 Nov-04 Oct-05 Aug-06 Jul-07 Jun-08 Nov-05 Sep-06 Aug-07 Jul-08 Nov-06 Sep-07 Aug-08 Oct-07 Sep-08 Nov-07 Oct-08 Nov-08 .75 Feb-05 Dec-05 Dec-06 Dec-07 Dec-08 Mar-06 Feb-07 Feb-08 Mar-07 0.75 0.50 S&P 500 .75 08/07 03/09 08/07 03/09 Aug-07 Our stock picks from the Summer 2007 issue have struggled: Washington Mutual was a complete miss, and Motorola MOT, Thomson TMS, and Fuel Tech FTEK have lost much more than the market. We remain most confident in Fuel Tech, a maker of pollution-control systems. Political uncertainty over environmental regulation and headwinds from the global economic downturn are pressuring revenues and the stock has shed around two thirds of its value since we first recommended it, but we think it remains well positioned for the long haul. Fuel-Tech has carved a niche for itself with its proprietary slag-reduction technology, which allows utilities using coal-fired systems to cost-effectively reduce emissions. We give the firm a narrow moat. Client-retention rates remain high, indicating that despite increasing competition from large rivals Fuel-Tech’s offerings remain differentiated. We’ve ratcheted back our growth projections to reflect a tough environment, but Fuel Tech still trades at a huge discount to our fair value estimate. This tiny firm carries plenty of risk, but its potential upside is enormous. Mar-09 This ETF has held up much better than the overall market since we recommended it, and it remains appealing. It tracks the Mergent Dividend Achievers Select Index, a collection of big firms with strong market positions and entrenched competitive advantages. An additional screen from Vanguard means the ETF only buys firms that have increased their dividends in each of the past 10 years and appear capable of maintaining the streak. Most top holdings, including Wal-Mart Stores WMT, Johnson & Johnson JNJ, Procter & Gamble PG, and Abbott Labs ABT, are assigned wide economic moats by Morningstar’s equity analysts. Wide-moat stocks have held up comparatively well in the current bear market, and all but one of this ETF’s top-25 holdings fared better than the S&P 500 Index in 2008. The ETF has also benefited from cutting loose several struggling firms, including Citigroup C, that appeared unable to maintain their dividends. Despite a good run, this ETF still looks attractive. It trades at a 25% discount to our estimate of its fair value, and its stable of predictable, financially sound firms is a tonic for uncertain times. Michael Breen Sep-07 Dec-07Feb-08Apr-08Jun-08Aug-08Oct-08Dec-08Feb-09 Oct-07 Jan-08Mar-08 Nov-07 May-08Jul-08Sep-08 Nov-08Jan-09 Aug-07Oct-07Dec-07Feb-08Apr-08Jun-08Aug-08Oct-08Dec-08Feb-09 Sep-07Nov-07Jan-08Mar-08 May-08Jul-08Sep-08 MorningstarAdvisor.com Nov-08Jan-09Mar-09 59

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Morningstar Advisor - April/May 2009

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