Morningstar Advisor - February/March 2010 - 67

It might look like it, but this isn’t a closet index fund. It has a fairly high R-squared with the MSCI AC World Index over the past three years because nearly all markets have trended in the same direction—mostly down. But the fund doesn’t have a ton of holdings overlap with the benchmark. And even in the holdings that overlap, the fund’s stakes differ vastly from the bogy’s. It has 2% of assets in wireless firm Verizon VZ, but the index dedicates just 0.43% of assets to the stock. And the fund has top-25 positions in several lesser-known names that dominate local niches, such as Dutch telecom firm Royal KPN and Fortum Oyj, a Swedish utility. Neither garners more than 0.10% of the index’s assets. American Funds New Perspective ANWPX small-cap mandate, these firms tend to occupy relatively small niches. Management searches for smaller companies that are growing at above-average rates. The team also looks for strong balance sheets, cash flows, and dividend yields, and it pays a lot of attention to valuations and diversification. Zach Egan and Louis Mendes monitor the aggregate portfolio to make sure its sector and other bets aren’t too aggressive. They engage in defensive currency hedging from time to time to reduce currency risk. The fund levies a 2% redemption fee on shares held fewer than 60 days. The fund holds nearly 200 such stocks, keeping issue-specific risk in check. On a portfolio level, the team is benchmark-aware. Management keeps its sector weightings roughly in line with the category averages. While owning nearly 200 stocks can dilute the impact of individual picks, here it creates space for eclectic companies, like the top holding, Naspers. Naspers is a South African multimedia company with a one-third ownership stake in Tencent, a Chinese social networking and gaming company. After Tencent’s shares tripled in 2009, the managers believe that they are now getting much of Naspers’ remaining business for free. Oppenheimer International Growth OIGAX CSCO recently put in a bid on the firm, and Evans’ position as a long-term shareholder helped him lead the charge to increase the firm’s bid for Tandberg, which has been one of this portfolio’s success stories. Although Evans buys more risky emergingmarkets and small-cap fare than do most foreign large-growth managers, the fund has improved on the volatility front in recent years. This is partly due to Evans’ decision to double the number of holdings in 2005. This helps mute the impact of individual stock missteps and smooth overall performance. Indeed, the fund’s volatility (as measured by standard deviation) during the past five years was lower than most foreign large-cap funds’. Vanguard Emerging Mkts Stock Idx VEIEX There’s no secret sauce here. Management buys financially sound firms with strong competitive advantages, such as dominant market share. But unlike many of its peers, the team here knows it’s not just what you do but when you do it. They load up on top firms only at a discount, usually when they face near-term issues that the managers think are surmountable. And not only do they hold on for the long haul, they often add to their position on dips, even if shares are simply retreating after a nice runup. The fund has plenty going for it. Its managers are experienced and draw on a large and proven team of analysts. Advisor Capital Research & Management is a good steward with a top corporate culture that retains talent. And the fund is a good deal for shareholders. At 0.71%, its expense ratio is so low that shareholders quickly work off this share class’ initial sales load and then enjoy a lower total cost of ownership. Columbia Acorn International ACINX This fund used to track a customized MSCI Index but as of August 2006 began tracking the MSCI Emerging Markets Index. The customized index meant that over the years the fund has excluded some popular markets, such as Taiwan and Russia, but now major emerging markets are included. The fund is very cheap. Those who can tolerate the roller-coaster ride almost sure to result from emerging-markets investing will find this fund a suitable vehicle. It is much less expensive than the actively managed alternatives, and its most recent 0.39% expense ratio is also much cheaper than the cost of the big exchange-traded competitor, iShares MSCI Emerging Markets Index EEM. (At times of stress such as the latter quarter of 2008, the iShares fund can also trade at significant discounts or premiums to its NAV, unlike a mutual fund.) This fund can, therefore, be a useful part of a broader portfolio, as long as shareholders don’t overdo their allocation to it and don’t expect it to provide monster gains every year. This fund offers a nice blend of disciplined diversification and opportunism. Its broadly diversified portfolio frees the management team to be more aggressive with its issue selection. They focus on companies with profitable franchises, but because of the fund’s Manager George Evans fills this portfolio with companies that stand to benefit from long-term themes such as mass affluence, new technology, restructuring, and aging. So, he hangs on to most of his picks through thick and thin, often adding to them when their stock prices slip. For example, Evans added to long-term holding Nintendo NTDOY throughout last year because of its position in what he views as an attractive industry. (The video game maker’s stock price fell by roughly 38% in 2009, partly due to slumping sales.) And consider Norwegian videoconferencing firm Tandberg, which Evans picked up more than 10 years ago because he was bullish on high-end video technology. Networking giant Cisco Systems MorningstarAdvisor.com 67

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Morningstar Advisor - February/March 2010

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