Morningstar Advisor - February/March 2010 - 51

accepted in recent years, but that wasn’t the case when the fund opened its doors. Initially, Stattman says, “U.S. stock-picking was really, really important to us, and we did a good job of U.S. stock-picking.” Stattman ran the fund’s stock sleeve, while former comanager Brian Ison, who worked alongside Stattman since the fund’s inception through 2002, managed the fund’s fixed-income allocation. Early on, additional teams within the fund’s then-advisor, Merrill Lynch Asset Management (which later morphed into Merrill Lynch Investment Managers), oversaw security selection in European and Asian equities. Back then, Stattman says, “international investing was not quite an oddity, but it certainly was a specialty. It was thought of as alien or risky, or at least detached from the mainstream.” Yet over time, Stattman and Ison honed their craft and expanded their operation. Dan Chamby joined the team in 1993 as an analyst, playing a big role in fixed income and currencies, and later stepped into the comanager role in 2004. Several senior analysts who also came on board in the early 1990s remain with the fund to this day. Over that stretch, management developed key relationships with people working in other capacities within Merrill Lynch, including Aldo Roldan, who would later officially join the team and become comanager. Stattman and Ison quickly established reputations as talented global managers, which drew investors to the fund, including Henry Goodwin, a senior financial advisor and first vice president with Merrill Lynch based out of Houston. “I attended a meeting in 1989 where Merrill Lynch introduced the fund,” Goodwin says, “and Ison said that we’d probably hear more exciting stories elsewhere. Then the next presenter, who was a manager who had garnered lots of publicity, got up with a disgusted look on his face and said, ‘I want to tell you something about Ison and Stattman—every dime of my retirement money is in their fund.’ “ Goodwin began allocating clients into the fund from its inception throughout the 1990s and developed a profound appreciation as the fund eked out a small profit during the 2000-2002 downturn. “I’ve been through two secular bear markets since the late 1960s, and if you take 2000 through 2002 as a major market decline and consider the fund came through that without a loss, I thought at that point it can be a core investment for many clients.” The fund itself was treated as an oddity at Merrill Lynch, says Judy Rice, who has worked with the team for more than a decade. “Merrill Lynch Investment Managers had us pigeonholed, trying to put us into a style box. Operationally, marketingwise, and investmentwise, it was very challenging for us.” That changed in 2006, when BlackRock took over Merrill Lynch Investment Managers. Follow the Trail savvy top-down calls, however. Within the team, Stattman cultivates an atmosphere that challenges conventional wisdom and rewards curiosity. “There’s a tremendous amount of space in order to develop your own views,” comanager Roldan says. “It’s more like finding a trail and following it to the fullest extent.” Chamby cites flexibility as one of the team’s strengths. “There’s more than one way to look at an investment, and different environments will drive different ways of looking at an investment,” the comanager says. That line of thinking may strike some as unorthodox, but it’s calculated. Senior analyst Patrick Edelmann recalls, “I started out as an equity guy, and on my first day, Dan [Chamby] calls me into his office and asks me to look at a distressed credit in Asia.” Chamby responds: “This was no accident. If you’re intellectually curious, and you’re willing to break out of your comfort zone, you’re going to learn something from it and bring back your perspective to the investment.” Stattman and the team usually shift the portfolio’s allocations gradually, but allowing managers and analysts to follow multiple trails has helped the team move quickly when necessary, as two recent examples illustrate. In mid-2007, Roldan began to see irregularities in the trading of securities related to subprime mortgages. The lack of trading in those securities led him into the fund’s cash stake. The deeper he and the team dug, the more concerned they became, and as the credit crisis worsened during the second half of 2008, the team shifted billions of dollars into Treasury bills and took the portfolio’s cash stake up to 20% of assets. Those steps helped the fund sustain a lighter loss in 2008 than 80% of its peers. Heading into 2009, Chamby drew upon the team’s past experience investing in convertible bonds, and the fund reallocated 12% of assets into those securities as the markets began to thaw. Stattman has long thought more in absolute terms, rather than trying to keep the fund aligned with a set of benchmarks or peers. Typically, the team starts its work by homing in on geographic regions, sectors, or currencies where it sees signs of big improvement or deterioration. The approach can lead to quite-bold positioning. For several years before the markets’ turmoil in 2007 and 2008, the team became more skeptical of excessive borrowing in the United States. That skepticism led to relatively light stakes in companies dependent on the U.S. consumer in favor of those reliant on consumers in burgeoning Asia. The fund also treaded lightly in the financial sector and largely steered clear of corporate bonds, which it believed offered little compensation for their risks. Those long-standing views helped shield the portfolio when the subprimemortgage and credit crises eventually erupted. There’s more to management’s strategy than MorningstarAdvisor.com 51

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Morningstar Advisor - February/March 2010

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