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<#>© 2011 Morningstar Investment Services, Inc. All rights reserved. Morningstar Investment Services is a registered investment advisor and wholly owned subsidiary of Morningstar, Inc. The Morningstar name and logo are registered marks of Morningstar, Inc. The information contained in this presentation is the proprietary material of Morningstar Investment Services. Reproduction, transcription or other use, by any means, in whole or in part, without the prior written consent of Morningstar Investment Services is prohibited. Morningstar Managed Portfolios is offered by Morningstar Investment Services, and is intended for citizens or legal residents of the United States or its territories. This program can only be offered by a registered investment advisor or investment advisor representative.
Morningstar Investment Services, Inc.
× Semi-Annual Investor CallJuly 28, 2011
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Technical Details
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Agenda
× Second Quarter Review
× Our Investment Philosophy
× The Big Picture
× Q&A
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Second Quarter Review
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Second Quarter Review
× Up-and-down quarter
× European debt crisis, fears of economic downturn weighed on stocks
× Commodity price increase, Japan quake also took a toll
× However, late-quarter rally left major indexes roughly flat
× Bond market fared well amid flight-to-quality, de-risking
Past performance is not indicative offuture results. Indices are unmanaged and notavailable for direct investment.
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Second Quarter Review
× MIS portfolio performance
× In general, the more stock-heavy the strategy, the more-challenging the quarter
× All but four diversified mutual-fund strategies gained in 2Q
× ETF portfolios fared well thanks to higher-quality bias
× Stock Basket performance mixed, with less-aggressive strategies leading the way
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Second Quarter Review
× Bond-heavier mutual-fund strategies fared best in second quarter
× Largely mirrors trend in markets, asset-mix of strategies concerned
× Year-to-date, all strategies in the black
× More-aggressive strategies have logged largest gains
Selected Mutual Fund Portfolios
(2.00)
(1.00)
0.00
1.00
2.00
3.00
4.00
5.00
6.00
Agg. Growth --Tax Deferred
Growth -- TaxDeferred
Mod. Growth --Tax Deferred
Inc. & Growth --Tax Deferred
Conserv. -- TaxDeferred
Global Opps. Abs. Return
2011 2Q 2011 YTDPast performance is not indicative offuture results. See page 37 for Seed account performance disclosure.
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Second Quarter Review
× All ETF strategies posted gains during second quarter
× Larger in more-conservative strategies
× High-quality “explore” positions like healthcare sector fund buoyed performance
ETF Portfolios
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00
8.00
Agg. Growth Growth Mod. Growth Inc. & Growth Conserv. Contrarian Contrarian &Growth
Contrarian &Income
2011 Q2 2011 YTD
Past performance is not indicative offuture results. See page 37 for Seed account performance disclosure.
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Second Quarter Review
× Reallocated mutual-fund, ETF portfolios
× Updated strategic asset allocations based on updated inputs from Ibbotson Assoc.
× Made fund-specific changes
× Example: Sold Artio Int’l, bought Manning & Napier World Opps or IVA Worldwide
For illustrative purposes only.
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Second Quarter Review
× Less-aggressive Stock Basket strategies had best success in second quarter
× i.e., Tortoise, Dividend
× Year-to-date, all strategies have generated positive returns
× Hare and U.S. Wide-Moat Focus portfolios are the standouts
Seeded Stock Basket Portfolios
(6.00)
(4.00)
(2.00)
0.00
2.00
4.00
6.00
8.00
10.00
2011 2Q 2011 YTD
Global Equity
Foreign Equity
Cap. Appreciation
Small/Mid-CapEquity
EquityIncome.
Hare Tortoise Dividend U.S. Wide MoatFocus
Past performance is not indicative offuture results. See page 37 for Seed account performance disclosure.
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Our Investment Philosophy
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Our Philosophy
× We invest for the long term
× We are independent thinkers
× We employ a disciplined, consistent investment process
× We actively manage portfolios
× We are sensitive to costs and taxes
× We invest clients’ money as if it were our own
× We communicate in a timely and candid fashion
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How We Build Portfolios
× Look through the lens of a long-term investor
× Stress diversification
× Rigorous fundamental research
× Bottoms-up
× Macro informs, doesn’t govern, how we construct portfolios
× We “tilt” our portfolios toward areas that appear mispriced
× Also, cognizant of risks, adjust accordingly
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The Big Picture
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Questions
× Will the economy sustain its growth?
× Will the jobs picture brighten?
× Will real estate emerge from the doldrums?
× Will leaders contain the sovereign debt crisis?
× Will tightening in emerging markets produce a soft landing?
× Will commodities prices spike anew?
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Answers
Question Answer
Economic growth Muted, uneven growth
Jobs improvement Sluggish and patchy, reflecting small-business unease
Real estate Gradual improvement; no “correction”
Debt crisis Containable, but window closing; tepid Eurozone growth
Emerging markets Bumpy transition, but growth to continue
Commodities Spike possible, but prize as currency, inflation hedge
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The Debt Ceiling
× Potentially de-stabilizing
× A political, not economic, phenomenon
× Bi-partisan sport
× Discomfort = leverage
× Expect agreement at 11th hour
× Reference: “Hitting the Roof: Thoughts on the Debt Ceiling” (May 2011)
For illustrative purposes only.
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As the Consumer Goes…
Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May
Sources: Bureau of Economic Analysis, FactSet, Ibbotson Associates.
-2
-1
0
1
2
3
4
5
Perc
ent
-10
-5
0
5
10
15
20
25
Percent
1.982.32
2.88
4.384.03
3.64
1.76 2.27 2.451.99
-0.05
Real personal consumptionThree-month percent change, annualized
Total (Left)Nondurable goods and services (Left)Durable goods (Right)
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Deleveraging Continues
2002 2003 2004 2005 2006 2007 2008 2009 2010
Sources: Federal Reserve Flow of Funds Accounts, FactSet, Ibbotson Associates.
-150-150
-100-100
-50-50
00
5050
100100
150150
200200
250250
300300
350350
$ bi
llions
Q1
Household debtChange per quarter, $ billions
Home mortgageConsumer credit
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Shallow Jobs Recovery
2008 2009 2010
Sources: BLS, FactSet, Ibbotson.
-10,000-10,000
-9,000-9,000
-8,000-8,000
-7,000-7,000
-6,000-6,000
-5,000-5,000
-4,000-4,000
-3,000-3,000
-2,000-2,000
-1,000-1,000
00
1,0001,000
2,0002,000
Thou
sand
s
-6940.00
May 54.00
Nonfarm payrolls, recent historyThousands
One-month changeCumulative change since Jan. 2008
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Small Businesses Jittery, Capital-Starved
2010
Sources: National Federation of Independent Businesses, FactSet, Ibbotson Associates.
00
1010
2020
3030
4040
5050
6060
7070
8080
9090
100100
Perc
ent
May-11
Small businesses' problems% of surveyed businesses who reported that their single most important problem is...
Competition from large businessesCost of laborCost or availability of insuranceFinance and interest ratesGovernment requirements and red tape
InflationPoor salesQuality of laborTaxesOther
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Small Businesses Jittery, Capital-Starved
2002 2003 2004 2005 2006 2007 2008 2009 2010
Sources: Federal Reserve, FactSet, Ibbotson Associates.
-80
-60
-40
-20
0
20
40
60
80
Perc
ent
-25
-20
-15
-10
-5
0
5
10
15
20
25
Percent (inverted scale)
Net % of respondents tightening standards for
commercial and industrial loans
Tightercredit
Looser credit
Q2 -13.50
Jun 24: 4.08
Lending conditions for small businesses
Lending standards (Left)Bank loans and leases, 12-month % change (Right)
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Japanese Quake Disrupts Supply Chains
2002 2003 2004 2005 2006 2007 2008 2009 2010
Sources: Institute for Supply Management, FactSet, Ibbotson Associates.
20
25
30
35
40
45
50
55
60
65
70
75
Inde
x
Expanding
Contracting
Jun 51.60
Jun 53.60
New ordersISM new orders index
ManufacturingNon-manufacturing
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Companies Are Flush
1985 1990 1995 2000 2005 2010
Sources: U.S. Federal Reserve's Flow of Funds Accounts, FactSet, Ibbotson Associates.
2
4
6
8
10
12
14
16
Perc
ent
5
10
15
20
25
30
35
40
45
50
55
Percent
13.13
Q1 52.58
Liquid assets of nonfarm nonfinancial businessesAs a % of...
Total financial assets (Left)Short-term liabilities (Right)
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Profits Are Strong
1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
Sources: U.S. Bureau of Economic Analysis, FactSet, Ibbotson Associates.
1
2
3
4
5
6
7
8
9
10
Perc
ent
2
4
6
8
10
30-year average
Q1-11 8.43
Corporate profitsAfter tax, including inventory and capital consumption adjustments, as a % of GDP
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Stocks Fairly Priced, But Blue-Chips Undervalued
All Stocks
Wide-Moat
Stocks
Past performance is not indicative offuture results. See page 37 for Seed account performance disclosure.
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In Fixed Income, Credit Looks More Attractive Than Treasuries
Sector
3/31/2011 6/30/2011 3/31/2011 6/30/2011 3/31/2011 6/30/2011 3/31/2011 6/30/2011U.S. Treasury 2.87 2.84 6.75 6.87 2.06 1.73 2.06 1.73
U.S. Corporate Investment Grade 5.65 5.57 10.12 10.11 4.08 3.84 4.07 3.83
U.S. Corporate High Yield 8.34 8.28 6.88 6.89 7.49 7.67 7.02 7.32
U.S. MBS Float Adjusted 4.93 4.88 6.26 6.51 3.66 3.46 3.66 3.46
Global Aggregate ex-USD 3.42 3.39 7.78 7.85 2.85 2.75 2.85 2.75
Coupon Maturity Yield to Maturity Yield to Worst
Source: Morningstar Investment Services and Barclays Capital Live, July 15, 2011.
Past performance is not a guarantee of future results. Indices are unmanaged and not available for direct investment.
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Real-Estate Valuations More Compelling
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Sources: S&P, U.S. Census Bureau, U.S. Bureau of Labor Statistics, FactSet, Ibbotson Associates.
0.70.7
0.80.8
0.90.9
11
1.11.1
1.21.2
1.31.3
1.41.4
1.51.5
1.61.6
1.71.7
1.81.8
1.91.9
Inde
x (J
anua
ry 2
000
= 1
)
Homes are less
affordable than in Jan.
2000
Homes are more affordable than in Jan. 2000
Apr
Home prices relative to rent and incomeS&P Case-Shiller 20-city home price index
Relative to personal disposable income per householdRelative to CPI-U owners' equivalent rent
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Home-Supply Glut Easing
2002 2003 2004 2005 2006 2007 2008 2009 2010
Sources: National Association of Realtors, FactSet, Ibbotson Associates.
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
5,000
Thou
sand
s
2
4
6
8
10
12
14
Months
How many months it would take to sell current inventory of
homes, at current level of sales per month 9.30
May 3720.00
Inventory of existing homes for sale
Inventory of total existing homes for sale, NSA (Left)Months of supply (Right)
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Home-Supply Glut Easing
2002 2003 2004 2005 2006 2007 2008 2009 2010
Sources: U.S. Census Bureau, FactSet, Ibbotson Associates.
00
5050
100100
150150
200200
250250
300300
350350
400400
450450
500500
550550
600600
Thou
sand
s
May
New homes for saleThousands. Not seasonally adjusted.
CompletedUnder constructionNot started
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Emerging Markets Fighting Inflation
World consumer pricesOne-year % change. Weighted by GDP at PPP. Through 2011:Q1.
5.71
3.04
4.18
5.22
1.21
5.96
3.24
1.01
2.03
3.633.483.11 3.15
-2
-1
0
1
2
3
4
5
6
7
2008:Q1 2008:Q3 2009:Q1 2009:Q3 2010:Q1 2010:Q3 2011:Q1
Sources: IMF, Trading Economics, Ibbotson Associates.
Perc
ent
USA
Eurozone
Other advanced economiesChina
Other developing economies
World
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Summary
× Economic expansion likely to continue
× Not positioning for recession in 2011, early 2012
× But gains likely to be muted, uneven
× Jobs picture unlikely to brighten quickly
× More deleveraging to come
× Smaller firms cautious
× Housing market likelier to improve than markedly deteriorate
× Growth in emerging economies to cool, but not expecting recession
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Summary
Issue Portfolio Positioning Ideas
Economy × Think expansively× Stress high-quality× Utilize flexible managers× Fully invest
Interest Rates and Inflation × Shorten portfolio durations× Neutral commodity allocation× Embrace credit risk× De-emphasize interest-rate risk× Underweight TIPS
Bonds × Underweight Treasuries× Overweight spread sectors× Buy munis× Use absolute-return
Stocks × Focus on blue-chips× Underweight small-caps× Consider dividend-payers
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For More Information…
For illustrative purposes only.
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Q&A
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The information, data, analyses and opinions presented herein do not constitute investment advice; are provided solely for informational purposes and therefore are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. The opinions expressed are as of the date written and are subject to change without notice. Except as otherwise required by law, Morningstar Investment Services shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. Past performance is not a guarantee of future results.
The information contained herein is the proprietary property of Morningstar Investment Services and may not be reproduced, inwhole or in part, or used in any manner, without the prior written consent of Morningstar Investment Services.
© 2011 Morningstar Investment Services, Inc. All rights reserved. Morningstar Investment Services is a registered investment advisor and wholly owned subsidiary of Morningstar, Inc. The Morningstar name and logo are registered marks of Morningstar, Inc. Morningstar Managed Portfolios is offered by Morningstar Investment Services, and is intended for citizens or legal residents of the United States or its territories. This program can only be offered by a registered investment advisor or investment advisor representative.
Index Returns Individual index performance is provided as a reference only. Each index is unmanaged and is not available for direct investment. Since indices and/or composition levels may change over time, actual return and risk characteristics may be higher or lower than those presented. Although index performance data is gathered from reliable sources, Morningstar Investment Services cannot guarantee its accuracy, completeness or reliability. Benchmark data sources are: Morningstar, Inc., Russell Mellon Analytical Services, Barclays Capital, Citigroup, Morgan Stanley, Standard & Poor’s, NAREIT, Dow Jones, and Merrill Lynch.
S&P 500 Index – The Standard & Poor's index of 500 stocks is a popular standard for measuring stock market performance among the biggest, most broadly-based companies in the U.S.
Appendix: Disclosures
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Appendix: Disclosures
Portfolio Performance The portfolio returns presented are derived from portfolios seeded on the Inception Dates noted in the table. Portfolios designated with a roman numeral were created due to closures of certain underlying funds to new investors within the original portfolios. Except for the underlying funds replacing those that are closed to new investors, these portfolios have the same underlying funds, investment objective, and time horizon as the original same strategy portfolios. Therefore, the historical performance for a portfolio designated with a roman numeral is a blend of the performance of the original portfolio and successive same strategy portfolios as detailed under the Inception Dates. Except for the closures of some underlying funds to new investors in the original portfolios, these portfolios have the same objective, underlying funds and time horizon. Portfolios designated with an “R” are those containing certain underlying funds that are closed to new investors within the original portfolios. The historical performance for a portfolio designated with an “R” is the performance of the original portfolio and that of the closed fund; the historical performance of the portfolio of the same name is a blend of the performance of the original portfolio and successive same strategy portfolios. Except for the underlying funds replacing those that are closed to new investors, these portfolios have the same underlying funds, investment objective, and time horizon as the original same strategy portfolios.
Return calculations do not include the Total Maximum Annual Program Fee (see fee table below) and assume all dividends and capital gains distributions are reinvested, are net of fund expenses and are based on the underlying funds’ net asset value as of the close of trading on the New York Stock Exchange at the last business day of a month. The Seeded Portfolios have similar investment objectives and strategies as the portfolios recommended to individual clients. The purpose in presenting the Seeded Portfolio performance is to provide a historical indication of the performance of the portfolio’s strategy. The Seeded Portfolios may not have contained the same holdings that are currently underlying the portfolios provided to individual clients. Past performance does not guarantee future results. In no way should the Seeded Portfolio performance be considered indicative of a portfolio’s future performance nor should it be viewed as a substitute to the actual portfolios being recommended to individual clients. Results of an investment made today in the Morningstar Managed Portfolios Program may differ substantially from the historical performance shown and as a result, an individual client may incur a loss. Returns greater than one year are annualized.
Total Maximum Annual Program Fee: Mutual Fund – 150 bps, ETF – 141 bps, SSB – 165 bps
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