Morningstar Advisor - December/January 2010 - 57

Longtime manager David Katz likes to purchase great business at cheap prices. He only buys companies trading at a 30% discount to his estimate of their fair value, and he doesn’t buy many of them. Turnover is low, and the portfolio typically holds just 30-40 stocks. In 2008 and early 2009, high-quality companies were pummeled alongside riskier fare, so Katz had a biggerthan-normal universe of stocks to work with, and he upgraded the portfolio’s quality. For example, he sold longtime holding Time Warner TWX, a media firm, when Walt Disney DIS, another media business he liked even better, dropped to an attractive price. He also added small stakes in dominant market leaders like Coca-Cola KO and Procter & Gamble PG. Katz will repurchase favorites when their prices become appealing again, as he did late last year with Western Union WU. A concentrated portfolio means this fund can stumble if a few picks miss the mark, as happened with financials last year. The fund lost more than most large-blend funds in 2008, but its long-term performance is solid. Its 10-year record handily tops the S&P 500 and is in the category’s top decile. Since July 1996, when Katz took over management duties, the fund has returned an annualized 6.8%, versus a 4.4% gain for its category rivals and a 5.3% return for the index. Katz’s strategy has some built-in risks, but this is a strong choice for the long haul. Courtney Goethals Dobrow Hindsight: Summer 2008 á la Carte Our picks from the Summer 2008 issue have been solid. First, the bad: Stock pick Allied Capital ALD went off the rails. The business-development firm made bad investments and had to restructure its debt on unfavorable terms. We thought it would survive the credit crunch and thrive. We were wrong. It’s shed 62% of its value since we recommended it, and we’ve abandoned it. ETF iPath Dow Jones-AIG Commodity DJP and Thornburg International ADR Strategy have struggled a bit, but we stand by them and believe short-term pain will still yield long-term gain. Now the good: The rest of our picks easily beat their respective benchmarks, some markedly so. Our best calls have been three stocks. Retailer Coldwater Creek CWTR faces a challenging macro environment and has had to slow its growth but Pick Type Cum Return to Date (%) has benefited from a consumer rebound. It’s up 35% since our Summer 2008 issue. Chinese semiconductor maker Vimicro International VIMC and bond insurer MBIA MBI continue to face big economic head winds and operational challenges, but they were so cheap when we recommended them that we’ve notched double-digit gains. We remain confident in Vimicro’s long-term prospects but have cooled on MBIA because of challenges to its core business model. Our fund picks have all been good. All have posted gains while their respective indexes are still in the red. The SPDR S&P Homebuilders ETF XHB has a small loss since we picked it but has held up much better than the overall market. Our analysts continue to think this speculative ETF has good upside over the long haul. Back Then, We Said Now, We Say Coldwater Creek CWTR Vimicro International Corporation ADR VIMC MBIA Incorporated MBI Artio Global High Income A BJBHX FBR Focus FBRVX Oakmark International Small Cap I OAKEX T. Rowe Price Tax-Free High-Yield PRFHX Schneider Small Cap Value SCMLX SPDR S&P Homebuilders XHB iPath Dow Jones-AIG Commodity Idx TR ETN DJP Allied Capital Corporation S&P 500 MSCI EAFE BarCap US Agg Bond TR S S S MF MF MF MF MF ETF ETF ETF Index Index Index 26.93 16.93 15.53 10.02 3.55 3.26 2.20 –3.13 –3.71 –34.53 –61.95 –12.72 –12.62 8.83 “Scaling back but still attractive.” “New forays hold promise and risk.” “Huge risk, but also upside.” “Flexibility a plus.” “Patience will pay off.” “Takes its lumps, but is a winner.” “Steady approach works.” “Deep value style hurting but will come back.” “Not for the risk averse.” “Valuable diversifier.” “Credit crunch needs to abate.” “Long-term prospects still good.” “Still excited about it.” “Future extremely uncertain.” “Still getting the job done.” “Future unclear: Top manager has left.” “Big-time rebound.” “Showing its strength.” “Roaring back.” “Digging out of its hole.” “Rewarding for diligent investors.” “Outlook for equity holders looks bleak.” The Summer 2008 issue was mailed to subscribers in mid-August 2008. Return data is from July 31, 2008, through Sept. 30, 2009. MorningstarAdvisor.com 57

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Morningstar Advisor - December/January 2010

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