Morningstar Advisor - August/September 2009 - 56

Investments á la Carte Four Picks for the Present avoid the dangers of a slowing global market in commodities and gives the small-cap index much more exposure to local growth. Paul Justice ductor fabrication technologies involves smaller circuit sizes, new materials, and more process steps. This all amounts to a greater number of increasingly complex defects, which drives the growing need for ever-more-advanced PDC tools. KLA has a bright future. Haywood Kelly 15000 12000 9000 17000 6000 Unlike the global giants and exporters that 15000 dominate3000 emerging-markets large-cap funds, small-cap companies tend 13000 much to have more localized production costs and revenues, 11000 giving them greater exposure to their 9000 regional economy. As emerging economies 7000 continue to develop on the strength of domestic demand, this asset class provides an excellent investment in emerging economies’ success. Also, because these smaller companies are not in the global commodities market and have mostly local revenues, they have far less exposure to the dollar than do emerging-markets large caps. Investors seeking exposure to this asset class should consider WisdomTree Emerging Markets Small Cap Dividend DGS. KLA-Tencor occupies a sweet spot in the chip equipment industry because of its dominant position in the process diagnostic and control market. Chipmakers use PDC tools to measure and detect defects during semiconductor production and to identify and correct the problem sources; this lowers costs by reducing the number of faulty chips produced. KLA sits atop the PDC market with 50%-plus share. The firm has steadily gained share in recent years because of its wide economic moat. KLA’s vast experience in PDC has allowed the firm to build its leading technical expertise and extensive knowledge base, which are significant competitive advantages. Further, KLA’s dominant position gives it an advantage in maintaining its technological edge. The firm has the largest research-and-development budget in the PDC market, and its close working relationships with customers give the firm insight into future PDC needs. Despite a near-term business slowdown in the cyclical semiconductor equipment industry, KLA’s long-term growth prospects look good. Each successive generation of semiconFirm founder and lead manager Luther King has generated great long-term risk/reward profiles at his shop’s other separate accounts and mutual funds, and you can expect more of the same here. King started his career 40 years ago as a lending officer making commercial loans, and that experience still drives his investing style. Although many of his rivals didn’t get balance-sheet religion until after the most recent market debacle, King has always focused on firms with limited debt, strong cash flows, and solid returns on invested capital. The fund’s top holdings are heavy in such market-dominating steady-Eddies as Coca-Cola KO and Cisco Systems CSCO. But King isn’t a shrinking violet—he has added value over time with tactical bets. In 2008, he trimmed General Electric GE because of uncertainty in its credit arm. He replaced it with electrical-equipment-makers Danaher DHR and Emerson Electric EMR. They face plenty of near-term head winds but have strong balance sheets and continue to grow. He also added Kirby KEX, a leading maker of barges. Its This ETF sports a strong value tilt. Its holdings have an average P/E ratio around 10 as of May and a price/cash-flow ratio close to 7. The dividend yield on these companies has held steady at 6%, which shows expectations of continued strong earnings in the future. Finally, this fund has a somewhat less-leveraged portfolio than any other international equity class, which should help it survive a credit freeze better than most. Rather than investing heavily in the BRIC countries, this index instead has nearly 45% of its assets in Taiwan and South Africa, with other large stakes in Thailand, Malaysia, Israel, and South Korea. The resultant industry weighting helps 56 Morningstar Advisor August /September 2009

Morningstar Advisor - August/September 2009

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