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Portfolio Monitor

Monthly Report for THOMAS WINKE

May 06, 2010

marcelparcel Portfolio

?© 2010 Morningstar, Inc. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; (3) is not warranted to be accurate, complete or timely; (4) does not constituteinvestment advice of any kind; and (5) is being furnished by Morningstar solely in its capacity as a third-party research provider. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Pastperformance is no guarantee of future results. “Morningstar” and the Morningstar logo are registered marks of Morningstar, Inc.

Market Value

425

487

549

610

$672K

05-09 06-09 07-09 08-09 09-09 10-09 11-09 12-09 01-10 02-10 03-10 04-10

$24Mil

20

16

12

8

4

Years 5 10 20 30

75% Chance 692,524 878,320 1,520,037 2,740,936

50% Chance 936,163 1,345,230 2,777,709 5,735,576

25% Chance 1,265,516 2,060,346 5,075,974 12,002,040

Generated on May 06, 2010

Performance Overview | marcelparcel Portfolio | April 01, 2010 - April 30, 2010

marcelparcel Portfolio

Your Morningstar Personal Return % of Mutual Fund ReportingRating This Period Outperformed Period

QQQ 1.14% 17.00% Apr 2010

Portfolio Performance

1-Wk 1-Mo 3-Mo YTD 1-Yr 3-Yr* 5-Yr* 10-Yr* Sin. Purch*

Total Return % –2.91 1.14 11.53 7.63 42.72 –3.92 5.96 3.07 —

Personal Return % –2.91 1.14 11.50 7.62 42.42 –2.56 3.57 3.08 5.24

US Market Index Return % –2.63 1.55 11.43 7.36 37.81 –6.29 1.52 –1.17 4.55

*Annualized

Top 5 GainersName Morningstar Rating Price $ Market Value $ 1-Mo Return %

ADC Telecommunications, Inc. QQ 8.00 7,200.00 7.38

United Parcel Service, Inc. QQQ 69.14 26,618.90 7.14

Morgan Stanley Inst US Md Cp V ... QQQ 33.93 17,098.26 6.60

Sysco Corporation x QQQ 31.54 12,616.00 6.12

Quanta Services, Inc. . 20.13 6,039.00 5.34

Top 5 LosersName Morningstar Rating Price $ Market Value $ 1-Mo Return %

Transocean, Inc. QQQQ 72.32 7,232.00 –13.05

Kinetic Concepts, Inc. QQQ 43.30 12,990.00 –9.89

UnitedHealth Group, Inc. QQQQQ 30.31 15,155.00 –8.32

DWS International S QQ 43.93 10,947.38 –2.75

DWS International S 43.93 8,599.79 –2.75

Potential Value in 5, 10, 20 and 30 Years

Previous Balance $ 642,673.28

New Net Investment $ 0.00

Gain/Loss $ 8,814.90

Dividend $

Total 0.00

Capital Gain/Loss $

Total 0.00

Re-Invested Dividends $ 0.00

Re-Invested Interest $ 0.00

Current Balance $ 651,488.18

In this section we provide ahypothetical outlook on your portfolio’sfuture performance highlighting thepercent chance of achieving the valueswe project.

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13 20 27

5 10 11

2 6 4

LargeM

edSm

all

Value Core Growth

Size

Valuation

0 56 0

0 0 0

0 0 0

HighM

edLow

Short Interm Long

Credit Quality

Interest Rate Sensitivity


Portfolio X-Ray | marcelparcel Portfolio | April 01, 2010 - April 30, 2010

X-Ray Overview

Asset Allocation Equity Investment Style Fixed Income Style

Cash 2.32

U.S. Stocks 64.88

Foreign Stocks 31.85

Bonds 0.42

Other 0.03

Not Classified 0.49

Sector Weighting% Net Assets 1-Mo Return % Portfolio 1-Mo Return %

Portfolio S&P 500 Portfolio S&P 500 –0.35 –0.18 0 0.18 0.35

h Information Economy 20.48 24.43 0.29 0.52

r Software 5.42 4.78 0.10 0.09

t Hardware 6.17 11.25 0.21 0.39

y Media 1.66 2.58 0.09 0.14

u Telecommunication 7.23 5.82 –0.12 –0.09

j Service Economy 46.93 38.76 0.24 0.06

i Healthcare Services 13.60 11.88 –0.31 –0.27

o Consumer Services 11.06 8.66 0.22 0.17

p Business Services 8.83 3.85 0.30 0.13

a Financial Services 13.43 14.37 0.03 0.03

k Manufacturing Economy 32.59 36.80 0.35 0.46

s Consumer Goods 8.99 10.89 0.07 0.08

d Industrial Materials 14.19 10.73 0.04 0.03

f Energy 8.17 11.55 0.24 0.34

g Utilities 1.24 3.63 0.00 0.01

Not Classified 0.00 — 0.00 —

Stock Statistics

Portfolio Relative to S&P 500

Forward P/E Ratio 14.84 1.01

P/B Ratio 1.95 0.92

ROA 5.82 1.01

ROE 13.47 0.92

Portfolio Relative to S&P 500

5-Yr Proj EPS Growth % 10.97 1.16

Dividend Yield % 1.06 0.57

Average Market Cap $mil 11,334.64 0.26

Fees & Expenses

Average Mutual Fund Expense Ratio % 0.83

Expense Ratio of Similarly Weighted Hypothetical Portfolio % 1.39

Estimated Mutual Fund Expense $ 3,861.68

Total Sales Charge Paid $ 0.00

Regional Exposure% of Stocks

U.S. & Canada 70.66

Europe 18.34

Japan 3.68

Latin America 2.46

Asia & Australia { 3.84

Other 1.03

Not Classified 0.00

Diagnostics

Asset Allocation

Your portfolio is aggressive. An assetmix such as yours normally generateshigh long-term returns but can be veryvolatile. Financial planners typicallyrecommend these types of mixes forinvestors who have investmenthorizons longer than 10 years, needhigh returns, and are comfortable witha high level of risk.

Equity Investment Style

Your portfolio's stock exposure isspread evenly across the market andincludes a good mix of small, medium,and large companies, as well as a fairlyeven mix of conservatively priced valuestocks and high-flying growth stocks.For most investors, maintaining suchbroad-based market exposure is aprudent way to invest.

Sector Weighting

{Over Exposure}Under Exposure

Fees & Expenses

The mutual funds in your portfolio tendto have very low expense ratios. Thisis good, because expense ratios havebeen shown to be a major factor inmutual-fund performance over the longterm.

Regional Exposure

{Over Exposure}Under Exposure

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Holding Detail | marcelparcel Portfolio | April 01, 2010 - April 30, 2010

Morningstar Change % of Holding Personal Return %Name Ticker Rating in Rating Assets Value $ 1-Mo 3-Mo 1-Yr* 3-Yr* 5-Yr*

Harbor International Instl HAINX QQQQQ — 9.73 63,398.07 –0.98 5.90 43.24 — —

United Parcel Service, Inc. UPS QQQ 0 4.09 26,618.90 7.14 19.68 32.10 –0.61 –0.62

Dodge & Cox Stock DODGX QQQ — 3.58 23,349.83 1.04 10.11 45.32 –8.54 1.34

TIAA-CREF Mid-Cap Growth Retai ... TCMGX QQQ — 3.53 23,004.82 2.82 16.94 48.11 — —

Columbia Acorn Z ACRNX QQQQ — 3.39 22,104.07 3.79 17.32 49.83 –1.30 7.18

Fidelity Diversified Internati ... FDIVX QQQQ — 3.39 22,087.83 –1.21 4.60 33.95 –8.50 4.00

Meridian Growth MERDX QQQQ — 2.85 18,538.34 4.75 16.88 39.93 1.36 7.47

Buffalo Small Cap BUFSX QQQQQ — 2.84 18,513.88 1.27 16.26 38.94 0.73 6.95

Bed Bath & Beyond, Inc. BBBY QQQ 0 2.82 18,384.00 4.08 18.76 51.08 — —

Columbia Acorn International S ... ACFFX QQQQ — 2.77 18,027.70 2.46 9.96 43.77 –3.46 9.25

Vanguard Strategic Equity VSEQX 2.69 17,506.68 3.46 16.69 48.12 — —

Stryker Corporation SYK QQQQ 0 2.65 17,232.00 –0.12 10.63 — — —

Morgan Stanley Inst US Md Cp V ... MPMVX QQQ — 2.62 17,098.26 6.60 20.02 57.35 0.57 9.34

T. Rowe Price Equity Income PRFDX QQQQ — 2.62 17,090.60 3.05 13.31 43.92 — —

Scout International UMBWX QQQQQ — 2.56 16,691.75 –1.34 5.53 41.00 — —

Vanguard International Growth ... VWIGX QQQQ — 2.42 15,796.23 –0.86 6.76 42.03 — —

Eaton Corporation ETN h QQQ +1 2.37 15,432.00 0.97 26.00 76.16 — —

Cognizant Technology Solutions ... CTSH QQ 0 2.35 15,333.00 –0.68 17.06 106.17 — —

UnitedHealth Group, Inc. UNH QQQQQ 0 2.33 15,155.00 –8.32 –8.15 28.87 — —

PineBridge US Small Cap Growth ... PBSBX QQQ — 2.31 15,076.87 2.81 17.03 42.36 –5.21 5.39

Third Avenue Small Cap Value I ... TASCX QQQ — 2.31 15,038.57 3.03 10.18 38.60 — —

TELUS Corporation TU QQQ 0 2.17 14,124.00 –1.12 18.21 — — —

Columbia Value & Restructuring ... UMBIX QQ — 2.08 13,551.91 1.05 12.37 49.83 –6.05 4.02

Vanguard Mid Capitalization In ... VIMSX QQQ — 2.01 13,085.47 3.20 16.68 51.01 –3.52 5.58

American Century Heritage Inv TWHIX QQQQ — 2.00 13,060.39 2.99 19.28 41.59 — —

Kinetic Concepts, Inc. KCI QQQ 0 1.99 12,990.00 –9.89 4.87 74.88 — —

Sysco Corporation SYY x QQQ –1 1.94 12,616.00 6.12 12.68 — — —

T. Rowe Price Growth Stock PRGFX QQQQ — 1.89 12,332.95 1.49 12.91 38.94 — —

Janus T JANSX QQQ — 1.88 12,233.60 0.55 9.57 36.37 –2.74 4.01

DWS International S SCINX QQ — 1.68 10,947.38 –2.75 2.35 34.66 –9.48 8.48

SSgA S&P 500 Index Instl SVSPX QQQ — 1.59 10,382.04 1.24 11.04 38.63 –5.15 2.49

William Blair International Gr ... WBIGX QQQ — 1.51 9,838.10 0.26 8.53 45.31 –8.41 4.91

Longleaf Partners LLPFX QQQ — 1.50 9,747.93 5.15 16.71 46.66 — —

BankFinancial Corporation BFIN . — 1.48 9,660.00 3.87 1.15 –9.72 –15.30 —

Linear Technology LLTC QQQ 0 1.38 9,012.00 5.03 15.10 37.92 –7.06 —

DWS International S SCINX 1.32 8,599.79 –2.75 2.35 34.66 –10.79 2.91

Mairs & Power Growth Inv MPGFX QQQQ — 1.16 7,544.07 3.08 13.44 39.41 –0.71 4.31

Transocean, Inc. RIG QQQQ 0 1.11 7,232.00 –13.05 –14.66 7.17 — —

ADC Telecommunications, Inc. ADCT QQ 0 1.11 7,200.00 7.38 50.66 8.70 — —

Quanta Services, Inc. PWR . — 0.93 6,039.00 5.34 — — — —

Dodge & Cox International Stoc ... DODFX QQQ — 0.91 5,938.45 –0.79 6.80 47.40 –6.01 6.37

Perkins Mid Cap Value T JMCVX QQQQQ — 0.73 4,781.63 2.43 10.85 37.26 5.02 8.50

Vanguard Strategic Equity VSEQX QQ — 0.66 4,273.19 3.46 16.69 47.82 –7.92 2.24

T. Rowe Price Intl Gr & Inc TRIGX QQQ — 0.51 3,355.05 –1.19 5.62 39.23 –9.08 8.54

MFS Intermediate Income MIN QQQ — 0.22 1,464.82 –2.40 –0.68 12.71 — —

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Holding Detail | marcelparcel Portfolio | April 01, 2010 - April 30, 2010

*Annualized

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Analyst Digest | marcelparcel Portfolio | April 01, 2010 - April 30, 2010

Harbor International Instl HAINX |

QQQQQ

$54.40 x$0.82 | –1.48%

12-14-2009 | by Kevin McDevitt, CFA

Morningstar TakeWhile Harbor International's increasing concentration is a long-term positive, therisks here are real--as in the Brazilian real.

This fund isn't afraid to be boldly unconventional. Its excellent 2009 performanceowes in large part to its 11% weighting in Brazilian securities (versus less than 5% inJapan). Brazilian equities have been on fire this year and top-10 holdings PetroBrasand Itau Unibanco have both more than doubled. This Brazil weighting has given thefund a big edge over its peers in 2009, as its average rival has less than 2% in Braziland only about 7% in emerging markets overall. By contrast, this fund currently has17.4% of assets in emerging markets, which is not unusual.

Short term, the fund's sizable emerging-markets weighting invites volatility. Brazillooks particularly vulnerable given an influx of hot money and the government'sretaliatory capital restrictions. There is also a threat that the government could takegreater control of PetroBras through either a larger ownership stake or directresource control. But courting emerging-markets risk is nothing new for this fund,which once had Russia's Lukoil as its top holding. Not surprisingly, it has been morevolatile than most large-blend peers.

But such differentiation is welcome from a management team that has long-demonstrated a competitive advantage. In the past year, management has furtherconsolidated the portfolio, cutting total holdings from 90 to fewer than 70. Thisdecision was driven by a desire to focus more on the team's favorite holdings and toensure that every stock has an impact on performance. While this change couldpotentially add to volatility, it seems like a wise move. Seventy holdings provideplenty of diversification, and fewer names should save management from wastingtime and resources monitoring immaterial positions.

This fund could get hit hard in a sell-off, but that doesn't diminish its long-termappeal. Still, the fund is not a good fit for those leery of volatility.

Role in PortfolioCore. With strong long-term returns, limited volatility, low expenses, and a talentedmanagement team, this fund is one of the best core international offerings around.

StrategyManagement looks for reasonably priced large caps that have strong franchises orother competitive advantages. In addition, the team considers macroeconomicfactors and industry themes. Management also has a long investment horizon andrarely hedges the fund's currency exposure. The fund has a 2% redemption fee onshares held fewer than 60 days, and it uses an outside service to set fair-value pricesin certain situations.

ManagementHakan Castegren, who has led this fund since its 1987 inception, is the second-longest-serving manager in the foreign large-blend group. He was namedMorningstar International-Stock Manager of the Year in 1996 and 2007. His formeranalysts--Jim LaTorre, Howard Appleby, Jean-Francois Ducrest, and Ted Wendell--

were officially named co-portfolio managers in early 2009, but they have been fullyinvolved in the decision-making on the fund for years and are quite talented in theirown rights. The team plans to add a new analyst in 2010 to further strengthen thefund's bench.

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United Parcel Service, Inc. UPS |

QQQ

$69.14 h$4.73 | 7.34%Fair Value Estimate $78

Consider Buying Price $54.6

Consider Selling Price $109.2

Fair Value Uncertainty Medium

Economic Moat Wide

Stewardship Grade B

05-05-2010 | by Keith Schoonmaker

GrowthUPS compounded revenue by 9.0% annually during 2004-08. Growth slowed during2008 and 2009 because of the soft global economy. UPS extends its top line byexpanding global package volume, regularly raising prices, and acquiring deliveryfirms.

ProfitabilityUPS is highly profitable. The operating margin has averaged 11.6% for the past 10years--more than 1.5 times that of several competitors. UPS returns nearly 20% oninvested capital.

Financial HealthUPS deployed its balance sheet capacity to fund a $6.1 billion payment to withdrawfrom the underfunded multiemployer Central States pension plan in 2007. This marksa shift from low debt in the past, but UPS' ample cash flow easily covers payments.

The Thesis 05-05-2010United Parcel Service has crafted a wide economic moat by assembling a denseintegrated global shipping network that's unlikely to be matched by any but a fewglobal players. This substantial barrier to entry is buttressed by high customersatisfaction earned through conscientious drivers, reliability, and sophisticatedpackage-tracking tools. We expect UPS to continue to produce industry-leadingmargins and returns on invested capital for years to come.

UPS is the largest package delivery company in the world, delivering 15 millionpieces, on average, every business day. New entrants are unlikely to build such aglobe-spanning infrastructure and then incur the expense of trying to steal sharefrom established networks. DHL's recent results bear witness to the high price ofentering the U.S. package delivery market: After losing nearly $1 billion in thismarket during the prior year, DHL abandoned its domestic U.S. delivery business inearly 2009.

UPS is the most profitable of its peers, we think by funneling substantially morepackage volume through its efficient assets. Keys to its profitability are highutilization, an integrated organizational structure, efficient operations, and excellentdrivers. Although FedEx's FDX express and ground units together handle more than 6million average parcels daily, UPS moves more than double the volume through itssophisticated delivery machine. This enables UPS to cover the United States with ahighly integrated web, filling its trucks and facilities with a huge flow of parcels.

A critical aspect of UPS' competitive advantage lies in its use of integrated assets to

transport U.S. urgent (overnight and two-day) and ground shipments through thesame network. In comparison, FedEx uses duplicate networks of drivers and trucks toseparately handle ground and express shipping. In addition to the greater efficiencyof UPS' single system, clients appreciate the convenience of using the same driver tohandle both express and ground packages. UPS benefits from this bundling bybettering FedEx's yield by 20% on these U.S. express packages. Furthermore, UPS'drivers are already unionized employees, which means margins are unlikely todeteriorate from the need to increase compensation expense or abide by morerestrictive work rules. FedEx faces these potential shocks and incurs regular legalexpenses to maintain its status under the Railway Labor Act in express andindependent contractors in ground.

The firm has expanded into less-than-truckload shipping in the U.S. and iscontinuously extending its global reach. Its new air hub in Shanghai is authorized tohandle unlimited weekly flights, enhancing UPS' service of the Chinese market,where it already serves most significant locations.

ValuationWe are increasing our fair value estimate to $78 per share from $70 to reflect ournew expectation concerning the timing of economic recovery and volume expansion.UPS' performance is tied to the health of the global economy, and we believeshipping volume will not recover for several quarters. Over the long run, however, webelieve overall global parcel shipping market expansion and consistent priceincreases will enable UPS to grow at a compound annual rate of 8% during the nextfive years. The firm expects to expand international package shipping faster than thebroader market through internal growth and by adding assets. UPS generated animpressive 20%-plus return on invested capital during the past five years andproduced tremendous free cash flow of 5%-11% of sales. The firm reinvests heavilyand earns consistently high returns on its assets.

RiskOur fair value uncertainty rating is medium. Rapid changes in shipping demandduring 2009 demonstrate that the cone of uncertainty surrounding modelingestimates can quickly widen because of macroeconomic factors. UPS derives morethan one fifth of revenue from international sources, but it still relies on the U.S.market. The UPS driver team is unionized, but UPS recently minimized the risk ofservice disruption by signing a new labor contract well before the expiration of theprevious agreement.

StrategyEfficient and customer-friendly drivers, motivated by equity ownership of the firm,are a vital link in UPS strategy. The firm invests in new businesses, such as less-than-truckload and retail operations, and in international assets. UPS built a new hubin Shanghai and new Shenzhen service center. The firm spends heavily on technologyto benefit productivity and enhance the customer experience.

Management & StewardshipOverall, UPS has good corporate-governance policies, and management has doneright by shareholders. Chairman and CEO Scott Davis advanced from the CFO post totake the reins in January 2008. During 2009, Davis was paid a base salary of $1million and total compensation of $6.3 million. Much of this compensation was in theform of stock awards ($3.9 million) and option awards ($438 thousand). This packagedoes not strike us as egregious, given that UPS is the world's largest transportationcompany. It also generates best-in-class profitability on around $50 billion inrevenue. Davis' 2008 total comp was similar to 2009, on the same base pay. The firmconsistently generates cash and deploys it in investments in technology and indomestic and foreign assets, as well as in dividends and share repurchases. Whilean impressive 36% of outstanding shares are Class A stock owned by employees,retirees, and descendants of founders, Class A shares are somewhat troublesome fornonemployee investors, since each Class A share garners 10 votes, compared with 1

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vote per publicly held Class B share. Also, UPS has a poison-pill provision stipulatingthat after any investor accumulates 25% of outstanding voting power, voting stock inexcess of 25% is reduced in power to 1/100 of a vote.

ProfileAs the world's largest parcel delivery company, UPS uses more than 500 planes and100,000-plus vehicles to deliver on average 15 million packages a day to residencesand businesses. The U.S. package segment generates two thirds of consolidatedrevenue and three fourths of total margins. The growing international segmentdelivers to Europe, Asia, and the Americas. UPS also operates less-than-truckloadfreight delivery, freight forwarding, logistics services, and retail stores.

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Dodge & Cox Stock DODGX | QQQ

$103.45 h$1.25 | 1.22%

03-15-2010 | by Dan Culloton

Morningstar TakeThose who remember Dodge & Cox Stock's past may be fortunate enough to repeatit.

There's something familiar about this fund's situation. It still has a great long-termrecord. Its more than 7% gain for the decade ended March 12, 2010, crushes that ofits typical large-value peer as well as those of the S&P 500 and Morningstar LargeValue indexes. Still, the fund has seen $8.4 billion in outflows in the last three years.

The fund was unpopular at the turn of the last decade, too. When everyone wasclamoring for tech, media, and telecom stocks in 1999, this fund was focused onforgotten industrial stocks. Back then the typical large-value fund had more than afourth of its assets in information economy stocks while this fund had less than 7%.At the time, it preferred industrial-materials stocks. Many investors derided the fundas stodgy and sold it.

The rest is history. The technology bubble burst begetting another mania fueled byeasy money and real estate. This fund avoided the first bust, and misplayed thesecond, but still posted strong 10-year returns, albeit with more volatility.

Ten years from now, will the fund's returns be as strong? There's no guarantee. Evenwith the outflows, the fund is much larger than it was a decade ago and can't investin mid-cap stocks the way it once did. Still, it has advantages and has stayed true toits style. Fees are still low and most of its veteran managers remain, plying the sameagainst-the-grain approach. Indeed, the fund's positioning relative to its peers at thestart of this decade is as striking as it was at the beginning of the last one. As theaverage large-value fund's helping of health-care, tech, media, and telecom stockshas slipped from about 32% of assets in 2000 to 28%, this fund's stakes in thoseareas have gone from about 15% to nearly 55%. This isn't a top-down call. Tech andhealth-care stocks, such as Nokia NOK and Merck MRK, offer better growth for theirvaluations, the managers say. This contrarian stance could help the fund stand outagain.

Stewardship GradeWe like this fund's low fees, strong corporate culture, and clean regulatory record. Itreflects some of the industry's best corporate governance practices.

Role in PortfolioCore

StrategyThis fund's management team invests in mostly large-cap stocks that look cheap on arange of valuation measures. It favors companies with good management, dominantcompetitive positions, and good growth potential, but it usually doesn't getinterested until these stocks are under some sort of cloud. Because managementtakes such a long-term view, the fund's turnover is just a fraction of the large-valuecategory average.

ManagementThis fund has an experienced and deep management team. The Dodge & Cox equity

investment policy committee, which runs this fund, has nine members. The team issupported by a large squad of analysts and research assistants.

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Columbia Acorn Z ACRNX | QQQQ

$27.63 h$1.15 | 4.34%

12-10-2009 | by Christopher Davis

Morningstar TakeColumbia Acorn hasn't roared out of the gates this year but it still can beat thecompetition.

Relatively speaking, at least, this offering has looked a bit tepid. To be sure, its 33%gain for the year to date through Dec. 9, 2009, isn't anything to sneeze at, but it'smiddling by the standards of the mid-growth category. But that showing should beput into context. For one, it beat more than 80% of its rivals in 2008's bear market,albeit with a bone-jarring 39% loss. Two, the fund has fared similarly in buoyantenvironments like 2009's. In 2003, for instance, it finished in the middle of the mid-growth pack, despite a 45% gain for the year. Finally, it's worth noting the fund ismore than 4 percentage points ahead of its benchmark, the Russell 2500 Index, forthe year.

Although the fund still struggled in 2008's brutal market, it handily beat thecompetition that year for the same reason it has been sluggish this year. ManagersChuck McQuaid and Rob Mohn employ a moderate, valuation-conscious growthstrategy that helps shelter it in tough times. But it means that it has less exposure tothe more-speculative fare that many of its aggressive rivals favor. Such stocksusually fare best in the early stages of a market recovery, and 2009 has been nodifferent.

Over the long haul, however, the fund has delivered. Indeed, the 10-year record of itsZ shares (its oldest share class) is among the best in the mid-growth category. Yes,the fund is a lot bigger than it was a decade ago, and its size may prevent it fromreplicating that feat. But we still think it can outperform. McQuaid and Mohn arecapable stock-pickers who have the research backing of one of the biggest and mostexperienced analyst teams focused on small and mid-caps in the business. That themanagers and analysts continue to invest with long-term perspective further setsthem apart in a world obsessed with the short term. Nimbler Columbia Acorn SelectLTFAX continues to hold appeal for more-aggressive investors, but others will do justfine here.

Role in PortfolioSupporting Player. The fund's mid- and small-cap portfolio makes a good foil forinvestors' large-cap holdings.

StrategyComanagers Chuck McQuaid, Rob Mohn, and their colleagues use a combination oftop-down themes and fundamental research to put together this fund's sprawlingportfolio of about 400 holdings. The managers are far more price-sensitive than theirtypical mid-growth rival, and the portfolio usually has lower valuations and a muchsmaller technology weighting than the category norm. They have often favoredbusiness-services companies and financials.

ManagementIn September 2003, legendary manager Ralph Wanger relinquished his position ashead of the fund. His longtime comanager Chuck McQuaid is now at the helm, withRob Mohn joining as his comanager. Mohn has served as a manager on ColumbiaAcorn USA for several years and has delivered fine results.

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Fidelity Diversified International FDIVX |

QQQQ

$27.76 x$0.41 | –1.46%

01-11-2010 | by Christopher Davis

Morningstar TakeA recent misstep shouldn't undermine Fidelity Diversified International's long-termappeal.

This fund probably hasn't turned any heads lately. Judged against the foreign large-growth category, it looked positively poky in 2009. However, the fund has longstraddled the blend-growth divide--currently in the large-blend position in theMorningstar Style Box--so we don't expect it to keep up with racier rivals. Even so,its 31% gain, while good in absolute terms, merely matched the return of the MSCIEAFE Index. It's not that manager Bill Bower hasn't had any successes. Versus theEAFE, he's added value in nearly every major market sector as of late. He scoredespecially big in energy, with picks like Petrobank Energy and Resources up nearly200% in 2009. He also invested well in technology; for instance, he emphasizedsemiconductor-related stocks, whose demand he thought would recover from too-lowlevels during the financial crisis.

Those successes were undermined by Bower's misstep in financials, however. Likemany Fidelity managers, he seized upon analyst research arguing Japanese bankswere cheap and didn't face liquidity and balance sheet issues like their U.S. andEuropean counterparts. But Western banks were huge winners last year wheninvestors realized governments would ensure their survival. And Japan's banks hadto shore up their balance sheets by selling stock, depressing their share prices in theprocess.

There's good reason to expect better, however. Bower's strategy is distinguishedenough to set the fund apart from the competition. His broad but eclectic portfoliohas long included a healthy dose of emerging markets and diverges meaningfullyfrom the EAFE. Bower has delivered index-beating performance over the long haul,returning 6% annually since his March 2001 start, versus 4% for the index. This fundmay not be a world-beater, but veteran, successful management make it a solidchoice for a core holding.

Stewardship GradeThis fund has some good things going for it on the stewardship front, including lowfees and a generally attractive culture. However, other factors, including aninsufficiently independent board, keep its overall grade from being higher.

Role in PortfolioCore. True to its name, this offering is widely diversified across sectors and regions.It's as close to a complete foreign fund as you'll get.

StrategyManager Bill Bower runs a sprawling portfolio of more than 350 names, selectedwith a growth-at-a-reasonable-price approach. He focuses mainly on large-capstocks but also fishes in small- and mid-cap waters. He isn't afraid to deviate fromhis benchmark, so the fund sometimes sports small but noticeable stakes inemerging-markets stocks. Although sector weightings tend to move in line with thebenchmark, Bower sources his stock ideas broadly, often in line with big-picturethemes. Fidelity uses fair-value pricing when necessary, and the fund does not hedge

its foreign-currency exposure.

ManagementBill Bower took over here in 2001, succeeding longtime manager Greg Fraser, whobuilt a stellar record on the offering. Bower had a solid stint at Fidelity InternationalGrowth & Income (now Fidelity International Discovery FIGRX) and has only bolsteredthis fund's numbers. Bower draws from Fidelity's rich regional research staff, locatedaround the world, as well as a group of global sector analysts.

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Meridian Growth MERDX | QQQQQ

$37.95 h$1.84 | 5.10%

12-03-2009 | by Michael Breen

Morningstar TakeThis year might be one of Meridian Growth's most impressive yet.

This fund is trailing most of its mid-cap growth category peers for the year to datebut has nothing to hang its head about. First, it has gained 32.9% so far in 2009--solid in anyone's book. It also lost loads less than the Russell Midcap Growth Indexand nearly all its rivals in 2008's downdraft, so it couldn't simply rebound from a lowbase this year. And, this is one of the highest-quality portfolios in its group, full ofdebt-free firms with strong cash flows. Its debt/capital ratio of 28.9 is well below theS&P 500's, while its free cash-flow yield is nearly double. With speculative stockssoaring the most in this year's rally, the fund has faced a head wind, making itsstrong absolute performance impressive.

Delivering the goods is the rule rather than the exception here. The fund's returnsland in the category's upper echelons in every trailing period of three years or more,and it has outperformed in seven of the past 10 calendar years. The fund has alsobeen much less volatile than most of its rivals. A peek at its rolling three-monthreturns shows it has lost less than its peers in nearly every down period whilegaining nearly as much in up markets.

Consistent execution of a prudent approach keys the fund's success. Unlike many ofhis peers, Manager Rick Aster doesn't try to ride the hottest, new trends. He favorsestablished firms with dominant market positions that he can hold long term. In early2009 he scooped up Adobe Systems ADBE when its shares tumbled in the marketmalaise. He says the firm dominates its niche markets with its Acrobat, Flash,Photoshop, and Illustrator software products and was trading at a below-market P/E.Adobe has rebounded, gaining 71% so far in 2009. In mid-2009 he added SoleraHoldings SLH, a market leader in software for insurance-claims processing. Thefirm's historic databases give it a big edge that rivals can't easily replicate.

This tried-and-true fund continues to impress.

Role in PortfolioCore. This fund may not suit aggressive types, but others will find its moderatevolatility appealing. Tax efficiency hasn't been stellar, though, so consider holding itin a tax-sheltered account.

StrategyThis fund takes a kinder, gentler approach to growth investing. Manager Rick Asterlooks for small- and mid-cap names growing their earnings at least 15% a year. Hewon't pay up for that growth, however, which gives the fund price multiples belowthe mid-growth averages. Aster employs a buy-and-hold style and won't necessarilydump picks that have drifted into large-cap territory. He keeps a compact portfolio ofabout 50 holdings and often concentrates his picks in a handful of sectors.

ManagementRick Aster has been at the helm since the fund's 1984 inception. He is the founder ofthe fund's advisor, Aster Investment Management Company. In mid-2005, Asterbrought aboard a former Brandywine BRWIX analyst, Talal Qatato, to assist him withstock-picking.

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Buffalo Small Cap BUFSX | QQQQ

$25.45 h$0.55 | 2.21%

01-11-2010 | by John Coumarianos

Morningstar TakeBuffalo Small Cap showed that it can play offense as well as defense in 2009.

This small-cap growth fund looks for fast-growing companies, but it has a bias forthose that produce prodigious returns on invested capital. It doesn't simply wantearnings growth that requires so much capital expenditure that it doesn't lead tohigher returns. Managers Kent Gasaway, Robert Male, and Grant Sarris also look forcompanies with solid balance sheets. Indeed, while the fund's holdings sport returnson assets that are above the average small-growth fund's holdings, they also displaylower returns on equity. This means that the firms are carrying relatively low levelsof debt, because returns on equity are dramatically increased with debt.

This attention to balance sheets and financial health usually means the fund willperform relatively well when debt-laden companies stumble. Indeed the fund's 30%loss in 2008, though painful in absolute terms, characteristically put it in the topdecile of its category. However, although the financial health of its firms could haveboded poorly for the fund in 2009, when lots of companies with high levels of debtroared again, the fund managed a 38% gain, which placed it in the top half of itscategory.

Among the stocks that drove performance in 2009 were slot machine maker WMSIndustries WMS, casual dining chain Panera Bread PNRA, and orthodontic productmaker Align Technology ALGN. Casino-related stocks, casual eateries tapping intothe desire for healthier food, and medical-related business have been staples for thefund in addition to technology firms that one often finds in other small-growth funds.

Over the longer haul, the strategy of looking for profitable growth and tapping intodemographic trends has been successful, with the fund posting an impressive 11.4%annualized return for the decade through mid-January 2009. This fund remains a finesupporting player.

Role in PortfolioSupporting Player

StrategyUsing a growth-at-a-reasonable-price philosophy, the managers employ numerousthemes to direct stock selection, such as those related to demographic patterns andtechnological innovation. Firms with strong earnings and cash flow, competitiveproducts, and rock-solid balance sheets are fund favorites. Such stocks often trade ata premium, but management gets edgy when prices climb too high. Although itsinitial position in any one issue is small, it holds on to winners. Turnover is very low.

ManagementKent Gasaway and Robert Male have both comanaged the fund since its April 1998inception. Grant Sarris, a former small-cap manager with Waddell & Reed, has beenwith the fund since November 2003. Four analysts support Male, Gasaway, andSarris.

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Bed Bath & Beyond, Inc. BBBY | QQQ





Economic Moat None

Stewardship Grade C

04-09-2010 | by R.J. Hottovy, CFA

GrowthDuring the next three years, we forecast total average revenue growth of about7.5%, driven by mid-single-digit comparable store sales growth and about 60-70annual new store openings. Our growth expectations compare favorably with thelow-single-digit growth projections for the home furnishings industry, implyingmarket share gains.

ProfitabilityWe anticipate average operating margins of about 13.5% during the next threeyears, driven by increased fixed cost leverage tied to improving sales trends as wellas greater supply chain and distribution efficiencies for newer concepts. Our modelassumes 14% return on invested capital over the same period.

Financial HealthThe firm is in excellent financial health. Even with rapid expansion, it has been debt-free since 1996, using cash generated from operations to fund new store openings.The company has ample cash on hand and plans to buy back shares with excesscapital.

The Thesis 04-09-2010Bed Bath & Beyond has withstood turbulent macroeconomic and housing marketconditions relatively well. Some home furnishings retailers--especially those withhigher-ticket furniture products--have experienced a significant deceleration in salesvolume, but Bed Bath & Beyond's sales and profitability remain comparativelystronger. We are confident that the firm can navigate the cyclical softness betterthan its rivals, thanks to an exceptional business model that requires only modestcapital to generate solid returns. Given this and its ample store-growth prospects,consistent execution, and pristine balance sheet, we view Bed Bath & Beyond as oneof the top names in the home furnishings retail category.

A key factor in the firm's capital efficiency is its sales productivity. We expect BedBath & Beyond to generate about $240 in sales per square foot this year--roughly$7.3 million per store--which easily outpaces its direct rivals. Even though grossmargin rates are comparable with the industry at just over 40% of revenue, the firmgenerates superior returns on invested capital because of its exceptionally strongsales productivity. With relatively low operating expenses, we believe the firmshould continue to produce enough free cash flow to internally fund new storeopenings and other growth initiatives.

Bed Bath & Beyond's superior productivity can be partially explained by adecentralized structure in which store managers select 75% of the merchandisecarried in their stores. As a result, stores reflect regional tastes and preferences. Thisstructure is supported by an innovative central buying system that reduces the need

for distribution capacity. Since stores receive shipments directly from more than4,500 suppliers, the firm can operate its entire 1,000-store base with lowerdistribution costs than rivals.

Although it represents just 7% of the $106 billion home furnishings category, webelieve Bed Bath & Beyond is poised to take share from weaker rivals. Managementenvisions 1,300 domestic Bed Bath & Beyond stores, implying another 400 openingsbefore reaching saturation. However, we expect the next wave of growth to comefrom the more nascent brands--Christmas Tree Shops and buybuy Baby, in particular--which represent just over 100 stores combined. We also foresee significantinternational growth. Following its first Canadian store in 2007, the company enteredMexico in 2008 through a joint venture with Home & More, a privately held homefurnishings retailer operating two stores in Mexico City.

Despite its significant growth opportunities, market share gains may not come aseasily as they did in the past. While we believe Bed Bath & Beyond will benefit fromthe bankruptcy of Linens 'n Things and other defunct rivals, increased competitionfrom mass channel rivals may constrain returns on invested capital over an extendedhorizon.

ValuationWe are raising our fair value estimate to $47 per share from $39, as the firm'scurrent sales and operating margin trajectories are trending closer to the moreoptimistic scenarios in our previous model. Our new fair value estimate impliesforward fiscal-year price/earnings of 18 times, enterprise value/EBITDA of 8.4 times,and a free cash flow yield of 5.4%. We continue to forecast 2010 top-line growth inthe high single digits, owing to a 5% increase in square footage and low- to mid-single-digit comparable-store sales. However, we are cautious that the firm's currentsales momentum is partly the result of pent-up demand following several years of asluggish housing market, and we believe comparable-store sales will be weaker inthe back half of the year. Over a longer horizon, we continue to expect mid- to high-single-digit revenue growth, driven by low- to mid-single-digit comparable-storesales growth (partially the result of market share gains from defunct competitors) andmid-single-digit square footage expansion (roughly 60-70 consolidated new storeopenings per year with increasing contribution from newer retail concepts). Bed Bath& Beyond's operating margins surpassed our expectations for 2009, as fixed costleverage more than offset higher advertising and corporate overhead expenses. Weexpect positive operating leverage again in 2010, likely bringing operating margins tojust north of 13% for the year. Over time, we expect operating margins to improve tothe midteens, moderately ahead of previous estimates, owing to increasedeconomies of scale but partially tempered by increased mass-channel competition.

RiskThe U.S. housing market remains volatile, implying that demand for home-relatedproducts could remain weak over the near term. The home furnishing category ishighly competitive, with discounters, department stores, specialty retailers, anddirect merchants all vying for market share. There are also merchandising risks, giventhat store managers have the authority over so much of the assortment. A more rapidbuildout of the emerging concepts could weigh on profitability.

StrategyBed Bath & Beyond's goal is to take additional market share from department storeand specialty retail rivals. The firm has plans to expand the core Bed Bath & Beyondconcept to about 1,300 North American locations, and we expect acceleration ingrowth among the newer concepts in coming years. The firm aims to reacceleratestore openings in more stable economic conditions. There are also ampleinternational growth prospects.

Management & StewardshipIn general, we consider management to be excellent operators with a strong history

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of balancing rapid growth and profitability. Cofounders Warren Eisenberg andLeonard Feinstein are still involved with the day-to-day operations as cochairmen.CEO Steven Temares has been with the company since 1992. There has been verylittle management turnover, as senior executives average more than 20 years withthe firm. Cash compensation for executives is relatively low, but equity-basedcompensation is a bit excessive compared with the peer group. However, we findthis reasonable, given the firm's consistent success. The board consists of Eisenberg,Feinstein, Temares, and seven outside directors, so there appears to be sufficientindependence. Eisenberg and Feinstein owned 2.0% and 1.5% of the commonshares, respectively, as of January 2010, but have been steadily paring theirpositions during the past several months. However, we believe the board andexecutive officer's ownership stake--around 5% of the outstanding shares--is stillsufficient to align their interests with common shareholders. We disapprove of thestaggered board terms, certain change-of-control payouts, and a few related-partytransactions (buybuy Baby was purchased from Feinstein's sons), but generally findBed Bath & Beyond's stewardship practices to be fair for minority shareholders.

ProfileBed Bath & Beyond is a premier home furnishings retailer, operating more than 1,100stores in 49 states, Puerto Rico, and Canada. Stores carry an assortment of brandedbed and bath accessories, kitchen textiles, and cooking supplies. In addition toalmost 970 Bed Bath & Beyond stores, the firm operates 60 Christmas Tree Shops(gifts and housewares), 45 Harmon Face Value units (health and beauty care), and 30buybuy Baby stores (infant accessories).

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Columbia Acorn International Select ZACFFX | QQQQ

$24.62 h$0.54 | 2.24%

01-12-2010 | by Kevin McDevitt, CFA

Morningstar TakeColumbia Acorn International Select is a paradox: It's concentrated, yet conservative.

This fund's high-quality emphasis has helped it control risk more effectively thanmany better-diversified peers. Manager Chris Olson focuses above all on holdingcompanies with strong franchises and healthy balance sheets that can weathercyclical downturns. Such holdings have helped the fund earn below-average to lowrisk scores while owning 40 to 60 stocks. Olson rarely allows much cash to build,although the cash percentage did briefly hit double digits in summer 2008.

This attractive risk profile helped stem the fund's losses in 2008, as Olson foresawthe collapse in financials before many peers. After riding that sector to strong gainsthrough 2006, he started cutting exposure in 2007 as loan-to-deposit ratiosescalated. The portfolio's financials stake fell from 25.5% in 2006's fourth quarter to1.6% in at the end of 2008, far below the current 16.8% category average. Olsonreinvested the proceeds in health-care companies, which were far less likely torequire new capital. The fund's health-care weighting nearly doubled from the end of2007 to 22% by early 2009.

However, what helped the fund in 2008 held it back in 2009, as cheap money floodedback into financials and generally ignored health-care stocks. A dearth of emerging-markets exposure also hurt. Emerging markets represented just 3.3% of assetsheading into 2009. Unlike sibling Acorn International LAIAX, which invests moreheavily in emerging markets, this fund generally sticks to developed markets. Suchconservatism has hurt the fund in other liquidity-fueled rallies, such as in 2003 and2005--years in which it hit the category's bottom decile.

Despite lagging during these bull runs, the fund has been excellent under Olson, as itlanded near the category's top decile in three of his four years as lead manager.

Role in PortfolioSupporting Player. The fund should be used in combination with a mainstreamportfolio.

StrategyThis fund doesn't look like many others. Management favors firms with market capsof $5 billion to $10 billion--and buys some larger companies as well--so the fund'saverage market cap tends to be both much bigger than the foreign small/mid-growthnorm and far smaller than the foreign large-growth norm. The team looks for above-average growth rates, strong balance sheets, and good cash flows. It also pays a lotof attention to valuations, and it normally owns around 50 names. A 2% redemptionfee is imposed on shares held fewer than 60 days.

ManagementChris Olson became this fund's sole manager in December 2005, after Todd Narterstepped down from his comanager position and left Columbia Wanger AssetManagement. Olson handles stock selection in his areas of expertise--the UnitedKingdom and Ireland--as well as overall portfolio construction for the fund. He workswith nine analysts, who pick stocks in their areas of expertise. His analyst team

includes Zach Egan and Louis Mendes, who run successful Columbia AcornInternational.

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Vanguard Strategic Equity VSEQX | QQ

$17.06 h$0.69 | 4.22%

11-09-2009 | by Jonathan Rahbar

Morningstar TakeStay focused on the long run with Vanguard Strategic Equity.

The recent market rally has left this quantitative fund in the dust. Consequently, itstrailing returns have taken a hit, but 2009 hasn't been the only concern. From 2001 to2006, the fund's annual returns consistently finished in the top half of the mid-capblend category. Then, when the credit bubble began to burst in 2007, most fundsemploying quantitative strategies got hit hard.

Management here uses computer models to systematically review factors likevaluation and market sentiment to build a diversified portfolio with sector weightingsthat are in line with those of the fund's MSCI U.S. Small and Mid-Cap 2200benchmark. One flaw with the computer-driven approach is that the models areunable to make investment decisions based on business fundamentals. So, whenstocks became cheap from a valuation perspective, the fund was buying sharesinstead of looking at other potential risks, such as business sustainability. As aresult, the fund lost more than its peers in both 2007 and 2008, and it is poised to lagthe group again in 2009.

Still, there are good reasons why the fund stands a shot to post competitive resultsgoing forward. First off, the fund's holdings are among the most profitable in the mid-cap blend universe, when ranked by return on assets and return on equity. Whenmore normal market conditions return (compared with the intense price swings thatstarted back in mid-2007), these factors should give the fund a boost against fundsholding stocks with lower profitability metrics.

Additionally, in 2009, Vanguard brought on Sandip Bhagat, formerly of MorganStanley's quantitative strategies group, to run the firm's Quantitative Equity Group.While it's difficult to extrapolate on how this addition will affect the fund in the nearterm, we're optimistic that Bhagat and Vanguard CIO Gus Sauter will land thisoffering on more solid ground.

Stewardship GradeThis isn't Jack Bogle's Vanguard, but it's still a fine steward of shareholders' wealth.The family's mutual ownership structure helps it offer low fees and keep investorinterests paramount. A blemish free regulatory record, and loyal fund owners andemployees also help make this a trustworthy fund.

Role in PortfolioSupporting Player. With no exposure to the 300 largest U.S. companies, this fundwouldn't fit as a core holding in most portfolios. However, it could nicely fill thesmall- or mid-cap slot.

StrategyQuantitative models, designed by Vanguard's Quantitative Equity Group, call theshots at this fund. Management consults the models to construct a portfolio withmoderate valuations, strong earnings growth, and sector weightings similar to thoseof the MSCI U.S. Small and Mid-Cap 2200 Index. The models consider myriad factors,including revisions to analysts' earnings estimates and changes in insider ownership.

ManagementJames Troyer, a veteran member of the Vanguard QEG, has taken care of day-to-daymanagement of this fund since 2006. Troyer, who has been with Vanguard since1989, has long been responsible for the firm's quantitative research. Early in 2009,Vanguard hired Sandip Bhagat, formerly the director of Morgan Stanley's globalquantitative strategies group, to run QEG.

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Stryker Corporation SYK | QQQQ





Economic Moat Wide

Stewardship Grade C

10-14-2009 | by Julie Stralow, CFA

GrowthAlthough economic concerns will likely keep the 2009 growth rate below our long-term expectations, we think new product launches and procedure growth should helpStryker grow 12% compounded annually from 2009 to 2014. Acquisitions could addto that rate.

ProfitabilityThrough major cost-control efforts, operating margins in 2009 have risen past ourlong-term assumption of 23%. We think reform initiatives or looser purse strings atStryker could constrain margins in the long run.

Financial HealthStryker ended June 2009 with $2.4 billion in cash. With those substantial resourcesand ongoing cash flow, we expect it to return more value to shareholders or makeacquisitions in fast-growing niches.

Analyst Note 04-21-2010Stryker SYK turned in a mixed first quarter, with efficiency efforts offsetting a slightdisappointment in sales. While we may make an adjustment to our top-lineassumptions as a result, Stryker looks set to meet our full-year profit expectations,and we are maintaining our fair value estimate.

The company returned to double-digit growth in the quarter, which we view as a stepin the right direction; however, the magnitude of that growth looks inflated by acouple of factors. Sales grew 12% on a reported basis and 9% in constant currency.Also, these numbers include the Ascent acquisition that closed at the end of 2009and a one-time MedSurg order converting rental equipment into sales. Stripping outthose factors, Stryker grew only 6%, which looks weak against an easy comparableperiod.

The main culprits of this weakness were Stryker's instrument, spine, and Europeanbusinesses. Stryker's surgical equipment and surgical navigation tools declined 1%in constant currency because of instrument weakness. Stryker appears to be trying toimprove its quality controls, much like it has in the orthopedic business in recentyears, and it encountered some operational problems implementing these changes.As a result, Stryker hasn't been able to keep up with improving demand forinstruments. Since we don't expect those efforts to improve overnight, we'll probablyreduce our expectations for this business in 2010. Also, the U.S. spine business grewonly 5% year over year because of a product gap the firm hopes to fill primarily in thesecond half of 2010, when its new cervical plate offerings should have a meaningfulimpact on results. In hips and knees, European weakness remained a thorn inStryker's side, with flat hips and a 1% decline in knees this quarter on a constantcurrency basis. While the U.S. market appears to be rebounding with the economic

recovery, Europe continues to lag. Part of that may be related to government-controlled health-care systems, but some of it may be self-inflicted since Stryker isrestructuring its European operations, including its distribution relationships andsome product line cuts in certain geographies.

However, Stryker offset its weak growth with cost-control efforts, resulting in highermargins and actual profits than we were expecting. The operating margin rose justover 100 basis points in the quarter, to 25%, helping earnings per share grow 14%.While detrimental to sales growth, international product cuts may have contributedto improving profitability, as the firm has eliminated efforts to market legacyproducts in single geographic markets.

The use of Stryker's cash remains a topic of discussion. The firm ended the quarterwith cash of $3.9 billion and about $1 billion in debt on its balance sheet afterJanuary offering. The company could continue repurchasing shares under its $750million authorization, and acquisitions remain a key possibility as well.

The Thesis 10-14-2009Stryker excels in several orthopedic and medical equipment niches. We expect thefirm to continue launching innovative new products to help expand these niches andits own profitability even further in the long run.

Around 60% of Stryker's revenue comes from orthopedic implants where it is a top-tier provider of knees and hips and a growing provider of spinal implants. We thinkthe orthopedic industry is very attractive because of its high barriers to success, andStryker should be a key beneficiary of growth in surgical procedures to repair joints.Demographic trends in developed countries should drive solid volume growth for theindustry, as their populations age and suffer from the consequences of obesitytrends. Although we are enthusiastic about orthopedic volume growth prospects,some uncertainty about ongoing pricing levels does exist in the face of U.S. health-care reform initiatives. However, even in our most dire scenarios, we think Stryker'sreturns on invested capital should remain higher than capital costs primarily becauseof the positive characteristics of the orthopedic implant market.

The balance of Stryker's sales comes from tools and equipment to outfit surgicalsuites and regular hospital rooms. Stryker is particularly prolific in operating roomproducts, including cutting tools, medical video equipment, and irrigation devices.These tools often complement its orthopedic devices and greatly improve theefficiency of surgical procedures. Stryker is even a top provider of medical beds andemergency equipment, such as stretchers. Although not as fundamentally attractiveas implants and somewhat susceptible to economic cycles, these offerings oftenexpand at faster rates than Stryker's orthopedic implant products. In the long run, wethink that trend could continue, assuming the company expands as expected ininternational markets.

Also, with its cash-rich balance sheet and admirable free cash-flow generation,Stryker remains in the enviable position of having many avenues to return value toshareholders. Stryker could significantly boost its dividend or repurchase shares atattractive prices to bolster investor returns with its substantial cash resources. Also,with many smaller firms hurting for cash, we wouldn't be surprised to see Strykeracquire smaller companies at a large discount to what they could be worth to a long-term shareholder either. Depending on the acquisition target, Stryker could use itsbig cash position to invest in new technology in fast-growing niches, boosting itsgrowth potential.

ValuationWe're keeping our fair value estimate for Stryker at $72 per share. After double-digitgrowth in 2008, we expect Stryker's sales to be about flat in 2009, as foreigncurrency exchange rates constrict growth and both its orthopedic implant andmedical equipment businesses come under some economic pressure. Beyond 2009,we expect sales growth to rebound to about 12% compounded annually through

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2014. Specifically, we assume the orthopedic business grows 10% compoundedannually during those years, which reflects solid growth from knees and hips andacceleration in the spine business as new product candidates are launchedsuccessfully. We assume the MedSurg business follows the growth trends of theorthopedic business with a little boost from international expansion, causing 13%compound annual growth in that segment from 2009 to 2014. Our fair value estimatealso depends on operating margins staying around 23% through 2014 and earningsper share increasing about 11% during that period. We discount our assumptions at9.5%.

RiskEconomic concerns have disrupted Stryker's medical equipment segment, andcaregivers may delay purchases in this segment--especially of big ticket items--untilthis outlook improves. Also, many highly motivated and resource-rich firms competewith Stryker. If it does not stay near the top of the innovation curve, it risks losingcustomers to those rivals. In the longer term, third-party payers may need to reducepayments for procedures in order to afford the expected uptick in procedure volumes.If payment cuts trickle down to Stryker and it can't make comparable cost reductions,those cuts could damage Stryker's returns on invested capital.

StrategyStryker hopes to arm hospitals and surgeons with the tools needed to successfullytreat patients. Its broad product set includes orthopedic implants, operating roomequipment, and medical furniture. By interacting with many departments in thehospital, Stryker aims to become a top supplier to medical caregivers. It also aims toacquire new businesses to ramp up growth and diversify sales.

Management & StewardshipAlthough we think Stryker's stewards employ fair practices, outside shareholdersshould be aware of how little control they may have on Stryker's strategic direction.Stephen MacMillan heads the firm's executive team, while Stryker's former, long-time CEO John Brown chairs the board, which we think remains incredibly insulated.Even though the majority of the board pass U.S. independence standards; we thinkthe average tenure on the board, a director's consulting relationship with Stryker,and the founding family's board seat and voting power override that litmus test. Theboard's interests may not be naturally aligned with most shareholders' interests.Also, though we're glad variable compensation, such as bonuses and stock-relatedrewards, make up the vast majority of executive compensation, we'd prefer to seethose rewards based on returns on invested capital or free cash flow rather thanearnings per share, which can be easily manipulated and may not be a true measureof value creation. We do applaud Stryker's disclosure surrounding compensation andfinancial performance, however, and we find Stryker's annual orthopedic marketreport especially valuable.

ProfileStryker develops, manufactures, and markets medical devices and equipment for useprimarily in orthopedic procedures. The firm generates most of its revenue fromreconstructive implants, such as knees and hips, but serves a variety of otherorthopedic niches, including spine. Stryker also offers a wide range of operatingroom equipment and tools used for orthopedic and other procedures. Hospital bedsand stretchers account for a portion of Stryker's sales, too.

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Morgan Stanley Inst US Md Cp Value IMPMVX | QQQ

$33.93 h$2.21 | 6.97%

04-30-2010 | by Katie Rushkewicz

Morningstar TakeMorgan Stanley Institutional US Mid Cap Value still makes sense.

This fund will be renamed once Invesco's purchase of Morgan Stanley's retail fundlineup is completed in early June. Besides a new name, not much else is expected tochange. The team, led by Tom Copper and John Mazanec, will move to Invesco andwill continue picking stocks as they have since taking over the fund in 2003.

That bodes well for shareholders. The fund has posted a solid record during theteam's tenure, gaining nearly 11% per year since late 2003 and landing in thecategory's top quintile. The team embraces unloved companies whose stock pricesare depressed because of temporary challenges. The managers are willing to bepatient with turnaround stories as long as they see a catalyst for change. Often theirpatience pays off, as has been the case with Estee Lauder EL, which has thrived afterhiring a new CEO and improving cost efficiencies.

The managers pride themselves on performing diligent stock-by-stock researchalongside the large-value managers who run Van Kampen Growth & Income ACGIX.Because they get to know their companies well, they're comfortable keeping acompact portfolio of 40 stocks. At times, their stock-picking can lead to buildups incertain sectors or industries depending on where they're finding value. Currently, thefund has a cyclical tilt, with industrials names such as Goodrich GR and Pentair PNRdominating the top holdings.

That's paid off during the rally; the fund's 62% gain during the trailing year throughApril 28 lands in the category's top decile. The managers have been taking someprofits, selling technology stocks such as Teradata TDC after their valuations ran up,but the fund remains well positioned for a continued economic recovery.

The fund has a lot working in its favor, so shareholders shouldn't be worried aboutthe upcoming move to Invesco. It could even be an advantage if cost efficiencies leadto lower fees.

Stewardship GradeThis fund is supported by a weak corporate culture that can, at times, struggle to putshareholder interests ahead of business incentives. That said, its compensationstructure does aim to align managers’ interests with those of their investors.

Role in PortfolioSupporting Player. Like most mid-cap funds, this one works best as a secondaryholding in investors' portfolios.

StrategyThe fund's management team holds a compact portfolio of beaten-down companieswith catalysts for change. The managers are willing to hold on to winners and tomake significant sector bets in their attempt to beat the Russell Midcap Value Index.

Management

Jim Gilligan, the longtime lead manager of this fund's management team, steppeddown on Jan. 1, 2009. Tom Copper, who has been on the team since 2003, took overas lead manager for the mid-cap strategy. John Mazanec, formerly of Wasatch SmallCap Value WMCVX, joined in mid-2008 and supplements Copper's efforts here.Mazanec and Copper also have the team's large-cap stock-pickers at their disposal,including Thomas Bastian, James Roeder, Mark Laskin, Mary Jayne Maly, and SergioMarcheli.

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T. Rowe Price Equity Income PRFDX |

QQQQ

$23.00 h$0.73 | 3.28%

03-23-2010 | by Harry Milling

Morningstar TakeA seasoned stalwart, T. Rowe Equity Income is an easy choice.

Much of the fund's deserved praise stems from its reliably solid returns throughoutits nearly 25 years. It usually loses a bit less than its large-value peers in bearmarkets, and it usually outperforms a bit in market rallies. This success stems fromthe expertise and consistent approach of its veteran manager Brian Rogers, who hasbeen at the fund's helm since its inception in late 1985. He tends to anchor the fundin the nation's behemoths to provide the fund's dividend yield. Perennial top holdingslike ExxonMobil XOM and AT&T T also keep the fund's volatility down.

Generally, yield is a secondary consideration, though, and it's beneath the S&P 500's.The top holdings may be a bit mispriced based on future cash flows, but Rogers'priority is to seek price appreciation in more beaten-up stocks of established firmswith temporary difficulties.

The guts of the fund consist of marquee names such as Bank of America BAC, PfizerPFE, and Lockheed Martin LMT that have strong competitive advantages but becamebargains after their growth ran aground. Typically, Rogers has bought and sold hisvalue plays several times before, and he knows the businesses and managementswell, so he is confident buying them in their darkest hours. For example, he tripledhis position in Bank of America in 2009's first quarter when its stock was in thesingle digits, and many were concerned about its survival. It has since more thandoubled in price.

His savvy with these established but beaten-up names comes from his accumulateddepth of investment experience. But Rogers also has added to returns on the marginswith less well-known names suggested by T. Rowe's renown analyst staff. Here, too,price appreciation takes precedence over yield.

With this fund, you are in the hands of an accomplished investor who is also open tothe using ideas of others for the sake of shareholders.

Stewardship GradeThis offering looks good on the stewardship front, benefiting from a top-rateinvestment culture, low fees, strong manager ownership, and a spotless regulatoryhistory.

Role in PortfolioCore. Given this fund's valuation-sensitive, dividend-focused strategy, conservativeinvestors should be happy here. Consider pairing it with a growth-oriented offering.

StrategyThis fund employs a true-blue approach to value investing. Longtime manager BrianRogers looks for companies trading cheaply relative to their historic price multipleswhile also being mindful of dividend yield. The backbone of the fund are blue-chipbehemoths that may not be huge bargains but provide yield nevertheless. The realpriority is price appreciation, though, and he seeks that by buying down-and-outmarquee names, which are found in a variety of sectors, including industrials, health

care, technology, and wherever the price is right.

ManagementBrian Rogers has managed this fund since its 1985 inception. He is backed by T.Rowe Price's deep bench of analysts. In January 2004, Rogers became T. RowePrice's chief investment officer, and he also serves as the chairman of the company'sboard. He says he invests a large portion of his assets in the fund.

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Scout International UMBWX |

QQQQQ

$29.41 x$0.42 | –1.41%

12-11-2009 | by Gregg Wolper

Morningstar TakeFor most investors, 2009 probably seems very out-of-the-ordinary, but for ScoutInternational it has been a typical year.

Of course, that doesn't mean the year has been uneventful. With markets tumbling inearly 2009, the fund lost 16.2% in just the first two months of the year. With marketsrallying since then, it has powered ahead, and as a result the fund has a 35.3% year-to-date return through Dec. 7, better than roughly 70% of the foreign large-blendcategory. If the fund finishes the year with a gain of that magnitude or more, it wouldbe its highest annual return in its 16-year history.

So how can such an extraordinary yearly performance be described as typical?Because manager Jim Moffett has done the same thing he's been doing since thefund started, and because the results are similar to those of most years if onecompares them with peers rather than simply looking at the absolute number.Moffett uses a patient, low-turnover style, locating mid-caps and large caps that hethinks can benefit from some larger trend he has identified, while keeping theportfolio broadly diversified in the interest of risk control. Though he usually keepsthe fund fully invested, he's also willing to hold substantial cash stakes on occasion;that helped keep the fund's losses milder than most in 2008 and early 2009. But bymidyear 2009 he was fully invested again.

Moffett does make changes and doesn't match index weightings. He says he haskept an overweighting in technology stocks, for example, because he thinks there'stremendous pent-up demand. He mentions Infosys INFY, Taiwan SemiconductorManufacturing TSM, and Hon Hai in that regard, but says a favorite is Nidec NJ,which makes small motors used in computers and autos. In financials, meanwhile, hehas made some shifts, selling some that have risen sharply to buy or add to others hethinks have a more solid foundation.

This fund has consistently outperformed since its inception and seems likely tocontinue to do so.


StrategyJames Moffett combines top-down country and sector analysis with bottom-up stockselection. He often looks for positive macroeconomic trends to determine countryweightings. He favors firms with strong balance sheets and stable long-term growthpotential and prefers market leaders that can benefit from demographic trends. Hedoes not invest directly in China. The fund will use fair-value pricing when it deems itappropriate and imposes a 2% redemption fee on shares sold within two months ofpurchase. It doesn't hedge its currency exposure.

ManagementLead manager James Moffett has directed this fund since its inception in 1993. Heworks with comanager Gary Anderson and a small group of in-house analysts underthe leadership of director of research Michael Fogarty, who was a comanager on this

fund from 2003 to 2007. Michael Stack, who arrived at UMB in early 2006 as acomanager on this fund, is now devoting more time to new sibling UMB ScoutInternational Discovery UMBDX, though he still contributes to this fund as well.

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Vanguard International Growth InvVWIGX | QQQQ

$17.22 x$0.20 | –1.15%

12-15-2009 | by Courtney Goethals Dobrow

Morningstar TakeVanguard International Growth continues to impress.

Foreign large-blend funds are enjoying a strong run in 2009, and this fund is doingbetter than most. The category is up 30% for the year through Dec. 10, but this fundis turning in a top-decile performance and is topping its typical peer by 10 percentagepoints and the MSCI EAFE Index by even more.

Three solid subadvisors with complementary approaches run the portfolio. JamesAnderson of Baillie Gifford runs about 42% of the portfolio, looking for companieswith strong balance sheets that can capitalize on big, structural economic changes.Virginie Maisonneuve of Schroder Investment Management manages roughly 45% ofassets and focuses on quality growth and valuation, combined with macroeconomicand thematic viewpoints. Greg Aldridge and Graham French of M&G InvestmentManagement manage about 8% of the portfolio with an emphasis on companieswith strong competitive advantages. The remaining assets are in cash.

The fund's emerging-markets stake has been a boon lately. At 21% of assets, it'salmost triple the category average. Emerging markets have been on a tear this yearand are a big reason this fund is crushing its rivals. Anderson says emerging marketshave held up better than in past downturns due to firms' stronger balance sheets. Helikes innovative Chinese tech companies such as Internet search firm Baidu BIDU,which is up more than 200% this year. One of Maisonneuve's investing themes alsocenters on emerging markets. She says U.K. grocer Tesco is well-positioned to servegrowing populations in developing countries. The three teams have proven adept atnavigating a variety of market environments. Expect them to navigate the eventualslowdown in emerging markets with the same skill.



StrategyVirginie Maisonneuve of Schroder Investment Management looks for quality growthand valuation, combined with macroeconomic and thematic viewpoints. The fund'ssecond subadvisor, Baillie Gifford, likes companies with strong balance sheets thatcan capitalize on big structural economic changes. Its third subadvisor, M&GInvestment Management, focuses on high-quality companies.

ManagementRoughly 45% of assets are run by Schroder Investment Management. RichardFoulkes, who had overseen that money since 1981, retired Oct. 31, 2005, passing themantle to Virginie Maisonneuve and Matthew Dobbs. Dobbs has been number two

on the fund since 1999 and also runs Vanguard International Explorer VINEX. JamesAnderson of Baillie Gifford Overseas was added in 2003 and manages about 42% ofthe portfolio. Graham French and Greg Aldridge of M&G Investment Managementwere added to the lineup in February 2008, and they currently manage 8% of theportfolio.

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Eaton Corporation ETN | QQQ





Economic Moat Narrow

Stewardship Grade C

04-22-2010 | by Rick Tauber, CFA, CPA

GrowthEaton's revenue grew almost 14% annually for the five years ended in 2008 butshrunk about 23% in 2009 as the brunt of worldwide economic contraction hit. Wethink the company can grow sales in the mid- to high single digits organically overthe next several years.

ProfitabilityEaton's profitability is good, as it generated mid-teens ROICs from 2004-08 beforedipping to 6% in 2009. We expect ROICs to return to double-digits over the next fiveyears and remain at higher levels due to its strong business positioning.

Financial HealthEaton enjoys solid financial health with modest financial leverage and strong freecash flow generation. Management recently lowered its debt/capital target to themid-20% range from mid-30%, extended its next debt maturity to 2012, and typicallycovers its interest expense over 10x with operating cash flow.

The Thesis 04-22-2010We believe that Eaton is poised for a powerful recovery from the cyclical bottom in2009, stemming from expansion into developing markets and an economic recoveryin core businesses. Over the long run, we think the firm's advanced technologies andhigh switching costs should lead to solid economic profit generation.

Eaton is a diversified manufacturer of electrical components and systems across abroad number of end markets, but is importantly focused on the common theme ofproviding power solutions. Thus the firm has been successful at expanding itsbusiness well beyond its central focus of supplying to car and truck manufacturers,but hasn't drifted too far outside of its core competencies.

Eaton benefits primarily from a solid installed base of products, which leads to highswitching costs and therefore solid long-term profitability. As such, we think the firmhas carved a narrow economic moat. From providing valves and transmissions acrossa broad array of auto and truck platforms, which typically produce units for severalyears, to providing steering and fluid distribution systems on the new F-35 fighter,Eaton has established strong competitive positions, which also lead to follow-onservice and aftermarket sales.

Eaton has taken these positions a step further by expanding into new technologiesand new geographies. International sales have grown from 20% of the total in 2000to 55% in 2009 (including 22% to developing markets, up from 8%). On the newtechnology front, Eaton has successfully expanded from core valves to valveactuators, which have much higher vehicle content and result in lower emissions andbetter fuel economy. Moves into supplying transmissions for hybrid trucks and valves

for wind farms are other examples of the company's ability to expand into growthmarkets while leveraging off its core competencies.

Eaton has also used acquisitions as another key ingredient in its transformation, andhas spent 8.5% of sales over the past 5 years to purchase outside firms. Eaton nowserves a wide swath of industrial markets, including aerospace, energy, agriculture,and construction.

However, Eaton's growth does not come without challenges. Players such as ParkerHannifin PH in many of Eaton's subsectors provide robust competition. Further, whileEaton has broadened its scope of businesses across early- to late-cycle industries,there is still meaningful underlying cyclicality here which has caused operatingresults to fluctuate. After achieving mid-teen ROICs from 2004-08, ROICs declined to6% in 2009.

Still, we think Eaton will ramp up profits quickly and once again generate ROICsapproaching the teens, due to operating leverage combined with near-term growthopportunities.

ValuationWe are changing our fair value estimate to $71 per share from $63, based on strongtop-line growth over the next two years combined with expanding margins. Overallwe forecast revenues to grow over 9% in each of 2010 and 2011 before drifting backto a long-term rate of 4%. We forecast double-digit top line growth in what webelieve are the firm's early to mid-cycle segments of auto, truck, hydraulics, andinternational electrical for the next three years due to a combination of recoveries inthese end markets, increased penetration, and new fast-growing applications forEaton's products. We expect the firm's aerospace and domestic electrical segments,which we believe are late cycle, to suffer small revenue declines in 2010 beforegenerating modest sales growth thereafter as these markets are still under pressure.We also expect operating margins to ramp up from 3.7% in 2009 to a peak of near11.0% in 2013 before settling at a longer-term margin of about 9.0% thereafter. Ourestimates do not include the impact of acquisitions, which are likely to occur but arenot highly predictable in timing and impact on valuation.

RiskEaton remains a fairly cyclical business, despite recent diversification within theindustrial space. Large end markets such as truck, auto, and aerospace may notrecover as expected and result in weaker performance. The company's growingexposure to emerging markets such as China and Brazil adds operational andgeopolitical risk. Further, the company has historically been acquisitive and lookslikely to pick up the pace of acquisitions, which always entails the risk of paying toomuch along with compromising the balance sheet.

StrategyEaton expects to continue to develop leading technologies to capture market shareacross all segments, but will likely focus on growing its electrical, hydraulics, andaerospace units. The auto and truck segments are expected to largely grow with theunderlying markets but also generate very strong cash flow, some of which is likelyto be reinvested in the growth segments.

Management & StewardshipSandy Cutler has been CEO since 2000, a director since 1993, and with the company(or its predecessor) since 1975. He is also chairman of the board, which has 11members as of April 2010. All except Cutler are independent, and board elections arestaggered. Besides Cutler, the rest of the management team has held variousexecutive positions since the early 2000s. We like the depth of the managementteam and the independent board, although we prefer a CEO who is not alsochairman. The board changed certain compensation policies to address the 2009downturn, which we applaud, including a reduction of executive management

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salaries and the elimination of annual incentive payments for 2009. Total executivecompensation remains 80-90% performance-based, which we feel alignsmanagement with shareholders, but we don't like that the compensation split wasrecently switched to 75% cash and 25% equity from 50%/50%. We'd also prefer tonot see EPS as a performance benchmark. That said, we like that management anddirectors own over 2% of outstanding stock. Eaton also has a long history of dividendgrowth, based on a target of growing EPS by 15% per year and dividends in a likeamount. The dividend was maintained throughout the recession, and may grow onceagain as earnings recover. The company has periodically repurchased shares, butlargely uses share repurchases to balance out stock grants or options exercised.Eaton has also been a serial acquirer over the years, but has also opportunisticallydivested businesses. Overall, we feel this has been a successful strategy inreshaping the business, and that management has been prudent is its use of debtand equity to make acquisitions. There is good discipline in maintaining a solidbalance sheet along with returning cash to investors and growing the business.

ProfileEaton provides power management solutions to diversified industrial customers,including electrical systems, hydraulics components, aerospace fuel systems, andtruck and auto powertrain systems. Products include UPS systems, hydraulic pumps,cylinders, clutches, and circuit breakers. The company sells to both OEM andaftermarket customers, and generates over 50% of its sales outside of the U.S.

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Cognizant Technology SolutionsCorporation CTSH | QQQ






Stewardship Grade B

05-03-2010 | by Swami Shanmugasundaram

GrowthDuring the last five years, revenues have increased rapidly at a CAGR of 41%.However, we expect revenue growth to decelerate during the next five years due tosluggish economic conditions. We model a CAGR of 17% during our forecast horizon.

ProfitabilityCognizant is very profitable with operating margins averaging in the high teens overthe last five years. Going forward, we expect the company's margin to declineslightly due to wage inflation and employee attrition.

Financial HealthCognizant's maintains a strong balance sheet with more than $1.4 billion in cash andno debt. With Cognizant generating solid free cash flows that averaged 10% ofrevenue over the last five years, we expect the company to remain unleveraged inthe future.

Analyst Note 05-04-2010Driven by the continued improvement in the demand environment, Cognizant CTSHreported strong first-quarter results. As it has over the last few years, the companyonce again managed to outpace its other Tier 1 competitors. Based on its projectpipeline and solid execution skills, we expect Cognizant to stay ahead of its peersduring the coming quarters.

Cognizant delivered first-quarter revenue of $960 million, representing 6.3%sequential and 28.7% year-over-year growth. The company's strong showing wasaided by solid performance from all its industry segments. Manufacturing andHealthcare led the pack, with 41% and 33% year-over-year growth. Revenue fromthe company's Financial Services segment, which, at 42% of revenue is its largest,grew by 20.3%--its most robust growth rate in the last six quarters. The FinancialServices segment's relatively strong performance can be attributed to the recentspurt in IT spending triggered by regulatory compliance and M&A-related integrationprojects. With most of the large integration projects typically expected to last for 18to 24 months, we believe this is not a one-off item, and we expect to see somestrong performance from this vertical in the next few quarters.

Among the service lines, Application Development maintained its growth momentumand registered a 30% year-over-year increase in revenue. Application Development isconsidered discretionary by clients, and its higher growth rate is a good sign thatbusiness is slowly getting back to normal for IT service providers. Revenue fromApplication Maintenance, which mostly involves non-discretionary services, grew28% on a year-over-year basis. It's more than a year since revenue from discretionary

services outpaced the growth from that of non-discretionary services.

Cognizant's adjusted operating margin during the quarter stood at 19.1%, which iswell within the company's targeted 19% to 20% range. The benefits of higherutilization and improved productivity from a higher proportion of fixed-price projectswere offset by currency headwinds and lower price realization. The dip in thecompany's price realization levels was primarily due to growth in lower price pointBPO projects.

Overall, it was a solid quarter performance from Cognizant, in our view. We believethe company is well-positioned to benefit from the pick-up in the demandenvironment.

The Thesis 05-03-2010Cognizant Technology Solutions, the youngest of the Tier 1 Indian IT service firms,was fast to get off the blocks and has increased revenue in excess of 50% annually,on average, during the last five years. Cognizant's consistent performance and fastgrowth is driven by its high-quality consultative approach and deep clientpartnerships. The company is an active player in a large and rapidly growing ITservices market and possesses the highest growth profile among its Tier 1 peers.

Although Cognizant is a United States-based company, its business model closelyresembles that of its Indian counterparts. However, to distinguish itself fromcompetitors in an increasingly crowded field, Cognizant chose to build a U.S.-basedmanagement team to gain the trust of U.S. customers while delivering the costsavings of the offshore model. This strategy of using American nationals and Indianswith extensive exposure to U.S. business culture for key customer-relationship roleshas helped Cognizant outperform its older peers. This customer-centric focus alsohelped Cognizant build a significant competitive advantage as it straddles the best ofconsulting and outsourcing.

Cognizant derives a significant portion of its revenue from its largest clients, whogenerally form long-term relationships with the company. Much of Cognizant'sgrowth thus far has been through repeat business from its existing client base, andwe believe this trend will continue. Cognizant's geographic breadth, domainexpertise (financial services, health care, manufacturing, and so on), and a widerange of horizontal service offerings (enterprise resource planning, business processoutsourcing, testing, IT infrastructure services, and so on) not only act as catalysts forgrowth, but also shield the company from feeling the pinch of a global economicslump or weakness in any particular part of its business.

We believe that Cognizant's ability to capture market share should continue for theforeseeable future for a couple of reasons. First, Cognizant's strategy to reinvest theexcess profits generated during this high-growth period to extend its range of serviceofferings and increase the employee bench strength while maintaining stableoperating margins of 19%-20% should benefit the company in the long run. Second,Cognizant's reinvestments in the past have enabled the company to build a criticalmass of technological expertise, industry-specific knowledge, and business acumen.This huge reserve of skilled labor should enable Cognizant to scale up its offerings ina short period with minimal effort. As the outsourcing market matures, offshoringservices are gaining more traction in the broader IT services market. Even thoughmany countries have emerged as attractive offshore destinations, India remains thepreferred destination. This provides Cognizant, one of the dominant players in theIndian market, an excellent opportunity to expand further and garner significantmarket share.

Cognizant's growth is also aided by a positive industry tailwind. Historically,outsourcing has been aggressively pursued by companies in a weak economy. Thecurrent economic downturn might force clients to turn more toward outsourcing toreduce their operating costs. This increase in business should offset any weakness indiscretionary projects. Overall, we believe that Cognizant, with its world-classmanagement team, strong recurring revenue base, and maintenance revenue

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streams, is well-positioned to weather the current economic slowdown.

ValuationWe are raising our fair value estimate for Cognizant to $47 per share from $40. Theincrease is to account for time value of money and improved demand environment foroffshore IT services. As the global economy gradually recovers from a recession, weexpect companies to increase their spending on IT spending, particularly ondiscretionary and transformational projects. Additionally, the demand for offshorebased cost-reduction projects is expected to remain stable. Being a Tier 1 serviceprovider with global reach and a comprehensive portfolio of services, we expectCognizant to benefit from this increased demand trends. Overall, our forecastassumes revenue CAGR of 17% during the next five years. We estimate Cognizant'soperating margin to decline slightly in the future, primarily driven by rising employeeattrition and increasing wage inflation. We expect operating margins to average17.5% during our forecasting period, which is 100 basis points less than its last fiveyear average of 18.5%.

RiskCognizant, like other IT service providers, is exposed to higher customerconcentration; the company's top 5 and 10 customers contribute around 20% and30% of revenues, respectively. Given the higher switching costs and sticky nature ofclient-vendor relationships, it is unlikely that clients will switch service providers butthe risk of client defection does exist. Cognizant is also subjected to cyclicaldownturns in technology spending--any weakness in the economy may forcecustomers to cut their IT spending, hurting Cognizant's growth prospects. The Indiangovernment has granted tax subsidies on Indian software exports, and as thesesubsidies get phased out by 2011, Cognizant's low tax rates should rise.

StrategyThe core of Cognizant's strategy is its focus on the "fourth generation" of offshoreoutsourcing, which is aimed at capturing the best of both worlds--offshoreoutsourcing and local consulting. Fourth-generation outsourcing combines thetraditional offshore model with industry and technical expertise, culturalcompatibility, and local consulting capability. Additionally, by establishing a strongerfootprint in Europe, Cognizant is diversifying from its dependence on the U.S. market,which currently accounts for about 80% of its revenue.

Management & StewardshipWe believe that stewardship at Cognizant is good. Cognizant is led by CEO FranciscoD'Souza, who took over in 2007 when Lakshmi Narayanan moved into the vicechairman role. D'Souza had been COO since 2003 and previously led Cognizant'sNorth American division. D'Souza is a Cognizant veteran who has been with the firmsince its inception in 1994, and we believe he provides the firm with solid leadership.D'Souza's compensation of $5.6 million in 2009 was in line with others in theindustry. John Klein, an independent director with Cognizant since 1998, was electedto serve as chairman of the board in December 2003. We are pleased that asubstantial portion of the total management compensation is based on the creationof measurable shareholder value. Executives and directors collectively own 2% ofCognizant's outstanding shares, a sufficient stake, given the size of the company, inour opinion. From an operational and strategic point of view, we believe themanagement team is among the best in the industry. Cognizant could improve itsStewardship Grade by eliminating its staggered board structure and antitakeoverprovisions.

ProfileBased in Teaneck, N.J., Cognizant is a leading provider of offshore softwaredevelopment, maintenance, testing, and packaged implementation services. It wasstarted in 1994 as a part of Dun & Bradstreet and was spun out in 1996. Cognizantserves clients primarily in North America and Europe with a focus on the financial,health-care, and retail/manufacturing/logistics industries.

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UnitedHealth Group, Inc. UNH |

QQQQQ

$30.31 x$2.36 | –7.22%Fair Value Estimate $50

Consider Buying Price $35

Consider Selling Price $70



Stewardship Grade C

03-25-2010 | by Matthew Coffina

GrowthWe project 3.5% compound annual operating revenue growth but flat operatingincome over the next five years. We expect share repurchases to enable earnings pershare growth in the mid-single-digits.

ProfitabilityWe project 5.7% average operating margins excluding investment income over thenext five years and returns on invested capital well in excess of UnitedHealth's costof capital.

Financial HealthUnitedHealth is in good financial health, with more interest income than interestexpense and a 32% debt/capital ratio. The company generates several billion dollarsof free cash flow annually.

Analyst Note 04-21-2010UnitedHealth's UNH first-quarter results were excellent, and management raised itsfull-year earnings-per-share outlook to a range of $3.15-$3.35, in line with ourexpectations. We are maintaining our fair value estimate and believe UnitedHealth'sshares remain undervalued at less than 10 times expected free cash flow for 2010.

In light of the recently-passed health-reform legislation, management seemed almostembarrassed by UnitedHealth's stellar performance, at one point in the call statingthat "our results are what they are, and that's what we have to report." The companytried to focus attention on consumer- and politician-friendly subjects like effortsaround diabetes management, a partnership with Sesame Street to encourage low-income families to eat healthy, and a study suggesting ways to save state Medicaidprograms $366 billion over 10 years.

But there was no way to hide a 27% year-over-year increase in first-quarter earningsper share. The biggest driver of this result was operating margin expansion, to 8%from 6.9%. While operating costs improved slightly, a 110-basis-point improvementin the consolidated medical cost ratio to 81.3% was the real key to marginimprovement. An unusually large reversal of overestimated past medical costscontributed to this result, as did the early and surprisingly light 2009-10 flu season.

UnitedHealth's stock barely budged on the positive earnings release, and we think abig reason is that investors are spooked about the effect of health reform'simposition of a minimum medical cost ratio starting in 2011. UnitedHealth'scommercial medical cost ratio was 79.1% in the first quarter, down from 81.5% inthe prior-year quarter. In 2011, per the reform legislation, plans will have to pay a

rebate to customers such that their MCR cannot be lower than 80% for small-groupand individual policies and 85% for large-group policies. Combined with Medicarereimbursement headwinds over the next few years, UnitedHealth looks at risk forsome serious margin contraction.

While we do project margin contraction in the coming years, we think the marketmay be overestimating the severity. First, the first-quarter results were unusuallystrong due to seasonality and the prior-period reserve developments. About 32% ofthe projected full-year EPS already came in the first quarter, and we project the full-year consolidated medical cost ratio to be closer to 83%, which includes some veryhigh-margin, unregulated specialty benefits business. More importantly, we don'tthink the government's minimum MCR will be directly comparable to the ratioreported by UnitedHealth. For example, the company will likely to be able toreclassify some administrative costs as medical costs (like those related to medicalmanagement or health IT), and taxes will be excluded from revenue when calculatingthe government's ratio. Additionally, once the exchanges are established we thinkUnitedHealth's selling costs may fall substantially.

The Thesis 03-25-2010UnitedHealth's scale endows the firm with significant competitive advantages. Withunderwriting and regulatory concerns fading to the background, we thinkUnitedHealth will continue churning out free cash flow and creating value forinvestors for the foreseeable future.

We think UnitedHealth's scale results in a narrow economic moat for severalreasons. The firm's 32 million medical members allow it to spread out fixedadministrative costs and negotiate large discounts with health-care providers. Thecompany's extensive database of claims improves underwriting and can be used toidentify the most effective health-care providers. Finally, UnitedHealth's industry-leading position across geographies and product lines--including commercialinsurance, Medicare, Medicaid, data services, pharmacy benefit management, andspecialty benefits--reduces its risk and allows management to be opportunistic aboutits allocation of effort and capital.

Since premiums are collected months before claims have to be paid, health insuranceis largely a self-financing business. This allows UnitedHealth to generate massivefree cash flows and earn healthy returns on capital. At the same time, the need forlarge provider networks deters new entrants. Continued strong performance dependsprimarily on the various managed-care organizations all raising prices in line withever-increasing medical costs. We think pricing will be rational over the long runbecause thin margins and high customer switching costs mean that it usually isn'tworthwhile for an MCO to undercut its competitors on price. Underwriting misstepsin 2008 were quickly corrected so that the same problem didn't recur in 2009, whichwe see as a strong indication of UnitedHealth's pricing power.

Health-care reform remains an important issue affecting UnitedHealth's future. Eventhough the Democrats managed to enact comprehensive reform without anyRepublican support, we expect the legislation to be only marginally negative forUnitedHealth. While the firm will be hurt by lower Medicare reimbursements andprovisions regulating the percentage of premiums that must be spent on medicalcare, it will also benefit from a reduction in the number of people without insurance,new investments in health IT, and expansions of the Medicaid program.

ValuationWe are maintaining our $50 fair value estimate, as we believe our model alreadyaccounts for the impact of the final reform legislation. We expect MedicareAdvantage reimbursement rates to approximate parity with the cost of originalMedicare within the next few years. In our base-case scenario, we project thatUnitedHealth's operating revenue (which excludes investment and other income) willincrease at a 3.5% annual rate during the next five years. We project that thecompany's operating margin (excluding investment income) will contract from 6.7%

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in 2009 to 5.6% by 2014, due to a combination of slow revenue growth (which makesadministrative cost leverage challenging) and a deteriorating medical cost ratio(because of business mix, regulatory, and competitive pressures). We estimateUnitedHealth's cost of equity at 10.5%.

RiskUnitedHealth is in the difficult and sensitive business of trying to restrain health-carespending growth, which often leads to negative publicity and potentially expensivelawsuits. Government actions could have significant, sudden, and unpredictableeffects on UnitedHealth's business, including changes to Medicare or Medicaidfunding and policies, the creation of a national health insurance plan, or laws thatrestrict the premiums UnitedHealth can charge or mandate the benefits it mustprovide. Competition could lead to deteriorating underwriting practices in theindustry.

StrategyUnitedHealth has focused on expansion to obtain scale and has a long history ofacquisitions. We think the company is likely to continue acquiring complementarybusinesses.

Management & StewardshipWe are encouraged by UnitedHealth's stewardship of late, despite a poor historymarked by an option-backdating scandal and excessive executive compensation. Wethink governance issues are mostly in the past, and we give the company a fair mark.As part of a legal settlement, former CEO Bill McGuire was forced to surrender stockoptions and other compensation valued at more than $600 million. This large sumrepresents only a fraction of McGuire's total compensation during his 15-year tenure,which highlights the egregious nature of former compensation policies. Former COOStephen Hemsley became CEO in 2006 after joining the company in 1997. His totalcompensation in 2008 was just $3 million--well below levels at peers. GivenUnitedHealth's poor results in that year, we think this is a good sign that the board isserious about basing pay on performance. We appreciate UnitedHealth's efforts tokeep administrative costs in check over the past year, and we believe the companywas proactive in its participation in the health reform debate.

ProfileUnitedHealth provides health insurance and related services to more than 70 millionAmericans. Products include risk-based health insurance, non-risk-based planmanagement for self-insured employers, Medicare, Medicaid, and SCHIP plans,pharmacy benefit and disease management, and database and consulting services.Subsidiaries include UnitedHealthcare, Ovations, AmeriChoice, OptumHealth,Prescription Solutions, and Ingenix.

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Third Avenue Small Cap Value Insti ClTASCX | QQQ

$19.41 h$0.65 | 3.46%

12-17-2009 | by Bridget B. Hughes, CFA

Morningstar TakeThird Avenue Small-Cap Value has been a bit out of sync with the market--notunusual here.

Over the past three years, a period that encompasses the market's ups and downsassociated with the financial crisis, this fund lands about in the middle of the small-blend category. Its three-year annualized loss of 6.75% through Dec. 16, 2009, is justa bit worse than that of the S&P Small Cap 600 Index.

Those relationships, however, are deceiving, in a way, considering the main driversof the fund's performance. Although it performed relatively well in 2008, when itlimited its loss to about 35%, it wasn't the kind of standout performance expected ofa conservative stock-picking approach--not because manager Curtis Jensen heldsome of the ugly financials or had been loaded up with energy stocks that camecrashing down, but rather, in part, because of its Japanese holdings. In 2009, thestory is largely the same in that its Japanese stocks continue to be a drag on returns.But the fund hasn't sunk to the very bottom of the category--its 23% gain sits behindabout two thirds of its peers'--despite its cash hoard and portfolio of generally betterfinanced companies.

The point being, the fund marches to the beat of its own drummer, and does sobecause of its unique portfolio. Consider the fund's recent (but not first) forays intodistressed debt. Jensen says the portfolio currently has 6% of assets in suchinstruments; he bought them because he felt he could get equitylike returns higherup a company's capital structure. (He also says that such opportunities are harder tocome by as high-yield markets have rallied hard this year.) The fund still has 7.5% ofassets in Japan, currently fully hedged out of the yen. The fund's top holding,Lanxess, is a German chemicals firm, though it has global operations. It's not yourtypical small-blend fund.

It is a good one, though. The fund requires shareholders to be as patient as Jensenis, but it has proved its mettle over the long haul.


StrategyCurtis Jensen does things just a bit differently at this fund than firm founder MartyWhitman does at sibling Third Avenue Value TAVFX. He still tries to invest incompanies with strong balance sheets at less than half of what he thinks they'reworth. This usually means purchasing companies at a significant discount to netasset value, or less than 10 times peak earnings. Like Whitman, Jensen uses a tax-efficient, buy-and-hold strategy. But at this fund, he focuses mostly on small caps.Jensen will also buy distressed debt from time to time, but it's not as big a focus asit can be on Value.

ManagementCurtis Jensen became this fund's sole manager when comanager Marty Whitmanstepped down in mid-2001. Jensen has been on the fund since its inception,

however, and shares Whitman's commitment to value investing. Whitman remains atthe firm, and Jensen continues to work closely with him.

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TELUS Corporation TU | QQQ






Stewardship Grade B

11-09-2009 | by Imari Love

GrowthWe only expect mid-single-digit revenue growth. EBITDA growth will probably fallshort of that pace as the firm rolls out Telus TV. Over the long term, we project flatEBITDA growth for its wireline segment.

ProfitabilityTelus has the top operating margins in its sector and should continue to remainrelatively profitable given its strategy and high-quality product base. However, we doexpect margins to weaken because of competition and buildouts.

Financial HealthTelus operates in a net debt/EBITDA range of 1.5-2 times. The firm announced it isbuying back an additional 8 million shares, and it has raised its annual dividend forfive consecutive years.

Analyst Note 02-16-2010There were no major surprises in Telus' TU fourth-quarter earnings release. Revenuefell 0.4% year over year in the quarter, pushing 2009 group revenue to CAD 9.6billion, right in line with our estimate. Fourth-quarter wireless revenue grew 3.1%from the year-ago period (1.6% for the full year), thanks to solid subscriber growth,which offset another quarter of average revenue per user and usage declines.Wireless EBITDA margins fell nearly 6 percentage points from the year-ago quarter,to 35.3%, thanks to customer smarthphone migration and network conversionpromotions. It will probably take Telus a few more quarters before wireless marginsbegin to rebound.

With all the talk about iPhones and 3G network overlays, it's easy to forget that 50%of the firm's revenue still comes from the wireline division. Wireline revenue fell3.6% last quarter (down 2.3% for the full year), because there wasn't data growth tooffset the declines in local voice (5.9% in 2009) and long distance (11.6%). There isstill upside here, however, if Telus television growth continues to impress. Telus'television subscriber growth was 118% last year, and it has had considerablesuccess with bundled offers. If the TV product continues to improve, Telus has achance to end the wireline margin erosion that it saw in 2009 (down 3.4 basis pointsto 31%).

All in all, group EBITDA margins fell 2.8 percentage points to 36.3% in 2009. In 2010,we believe the firm can hold margins stable despite the growing pains that comewith a major network transition. Management reiterated its full-year guidance of2%-5% revenue growth and 0%-6% EBITDA growth (both in line with ourprojections). That said, we think the second half of the year will be better than thefirst. While many of the 2009 operational indicators were mixed, Telus was able toincrease its free cash flow and dividends while keeping its debt stable. We remain

bullish on the firm's (and the sector's) long-term outlook.

The Thesis 11-09-2009Although we see some chinks in its armor, Telus is fundamentally strong enough tohold up in an increasingly competitive Canadian telecom sector, in our opinion.

Telus has managed to build a strong competitive position in a three-player oligopoly,evidenced by its high average revenue per user (ARPU) and low churn rates that havehistorically been the best in Canada. This performance, in part, is driven by qualityservices such as its customer-sticky Telus Spark & Mike push-to-talk product lines,which produce strong network effects. Additionally, with wireless penetration in thehigh 60s, there are still plenty of subscribers to add.

Despite the sector's penetration upside, we are seeing some red flags throughoutTelus' model that hint of tougher times ahead. The combination of increasedcompetition and a weakened economic environment is beginning to hurt the firm'spricing dynamics. ARPU is no longer increasing, and while better usage will largelyoffset these declines, the firm needs to find new ways to grow. To that point, thefirm recently launched a cable television offering, which should open the door fornumerous bundling and cross-selling opportunities. Subscriber growth seems to haveleveled off around 9% and churn rates are setting new highs, so the firm's ability tooffer a quality diversified product is key to sustaining a long-term competitiveadvantage.

A sustainable edge will be necessary because last summer's wireless spectrumauction has once again opened the door for new competition. From 1997 to 2004,Microcell proved to be a disruptive force in the sector as an aggressive, unprofitablefourth entrant. Before Rogers RCI bought out Microcell, pricing was cut andcompetition was more intense. Coupling this with the fact that cable TV operatorsare now competing with Telus on the wireline voice side through voice over Internetprotocol, the near-term outlook is cloudy at best.

However, the environment today is far different than it was a decade ago, whenpenetration rates were much lower, operators were building out their networks, andthe telecom and technology industries were going through an unprecedented rise andfall. Today, it will be much more difficult for new entrants to wreak havoc, given thequality of the incremental subscriber additions, the installed base of the currentoperators, and the high up-front costs of a launch. To ready itself for the war on newentrants, Telus joined forces with Bell Canada BCE to launch a new high-speed HSPAnetwork, that will not only offer higher speeds but also allow the firm to finallysupport GSM-based handsets such as the iPhone. The network overlay will alsoallow it to close the roaming gap with Rogers, since GSM is the most commonly usedstandard worldwide. Five years ago, Telus was Canada's ARPU/AMPU (averagemargin per user) leader; this network upgrade gives it an outside shot to regain itscrown.

ValuationOur fair value estimate is $37 per share. We use a conversion rate of CAD 1.07 per$1 as of Nov. 9. A 10% increase in the Canadian dollar would increase our fair valueestimate to $40, while a 10% decrease would lower it to $34. Given the change inthe competitive landscape and the weakened economic backdrop, we projectrevenue per wireless subscriber to decline during the next few years. Subscribergrowth should also continue to slowly erode from its current 10%, driving wirelessrevenue to accelerate in the mid- to high-single-digit range during the next five years.We project wireless earnings before interest, taxes, depreciation, and amortizationto increase at the same pace as revenue for this year and next year. On the wirelineside, data growth will be mostly offset by the losses in the voice segment. Here, weproject revenue to increase in the low-single-digit range, while EBITDA for thesegment is relatively flat. We project an 11% rise in capital expenditures for 2009over last year.

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RiskLast year's advanced wireless services auction adds uncertainty to the near-termoutlook for all of the major Canadian wireless operators. The fact that incumbentswill be required to share towers with new entrants significantly reduces startuplaunch costs. Wireless number portability might not necessarily cause major movesin market share rates, but it might push up the cost of retaining subscribers. Also,cable operators entering the voice market increases the risk on the wireline side.

StrategyTelus has always focused on profitability instead of market share. The firm does thisthrough signing customers to extended contracts (one or three years) and managingits current customers to optimize their contribution potential. Although based in thewestern part of the country, Telus has done a good job of expanding into centralCanada.

Management & StewardshipSince CEO Darren Entwistle arrived from Cable & Wireless eight years ago, he hasdone a good job of increasing shareholder profits through efficiency and cost cuts. Heis the only company executive on Telus' board. Chairman Brian Canfield spent morethan 50 years with Telus or its predecessors, including four years as chairman andCEO of BC Telecom. The Chartered Accountants of Canada recently named Telus thebest company in Canada (across all industries) in terms of corporate reporting.Another positive point is that Telus has some of the highest amounts of seniormanagement compensation at risk. Overall compensation, including stock optiongrants, is reasonable. In February 2007, the firm adopted a majority voting policy,which makes it easier for shareholders to replace board members.

ProfileTelus is a leading telecom company in Canada with more than 6 million wirelesssubscribers (the smallest of the three main carriers with 27% share), 4.2 millionwireline network access lines, and 1.2 million Internet subscribers, 86% of which arehigh-speed subscribers. Wireless is now 48% of revenue and 54% of earnings beforeinterest, taxes, depreciation, and amortization. Its network covers 95% of Canada'spopulation.

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Columbia Value & Restructuring ZUMBIX | QQ

$45.22 h$0.56 | 1.25%

03-05-2010 | by Michael Breen

Morningstar TakeThe more Columbia Value & Restructuring stays the same, the more it appears to bechanging.

This portfolio's calendar-year returns almost always land near its category's top orbottom, giving the false impression that it is constantly changing. It isn't. ManagerDavid Williams has built one of the best long-term records in the group by makingand sticking with successful bets on firms that initially faced near-term challenges.Turnover is glacial, with nearly 70% of the portfolio's names having been held for atleast five years; 30% have been around for at least a decade. The market may reactnegatively to Williams' picks in the near term, but over time it has rewarded them:The fund has gained an average of 11.7% annually over the past 15 year--tops in thecategory.

Not surprisingly, nothing's changed lately here. Williams has tweaked a few existingpositions, but hasn't made any big buys or sells. He continues to believe rising U.S.government deficits and spending will ultimately constrain the domestic economyand cause inflation. So, the portfolio remains anchored in materials and energystocks, which together account for nearly half of assets--double the categoryaverage. Williams thinks both areas are cheap compared with their long-term assetvalues, benefit from the global economy, and can fare well if inflation occurs. In2009, he also grabbed some new convertible debt from Citicorp C, Wells Fargo WFC,and Ford F as they cleaned up their balance sheets. He says they have attractiveyields and carry little credit risk.

Because it's often out of step with its peers, the fund looks risky, but it isn't. It hashad less down months than its typical peer and the Russell 1000 Value Index over thepast decade and a half, although its average monthly loss is a hair worse. But aglance at the fund's rolling three-month returns shows it landing in the category'sbest quartile more than 50% of the time.

There's no reason to think this fund can't continue beating the pack by breaking fromit.

Role in PortfolioCore. However, investors should note that the fund is more wide ranging than thetypical large-cap core offering. It includes large-cap, mid-cap, value, and growthstocks to varying degrees.

StrategyManager David Williams looks for companies that he thinks can improve their bottomlines through reorganizations, consolidations, management turnover, or acquisitions.He isn't afraid to make significant sector bets, and the fund tends to hold some out-of-favor growth companies. He also buys smaller companies than many of his rivals,so the fund's median market cap is a fraction of the category average.

ManagementStock-pickers don't come much more talented than David Williams, who hasmanaged the fund since its 1992 inception. Guy Pope and J. Smith joined him in early

2009.

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Vanguard Mid Capitalization IndexVIMSX | QQQ

$18.41 h$0.64 | 3.60%


Morningstar TakeVanguard Mid Capitalization Index is worth considering even though you may becoming late to the party.

The stock market's sharp recovery in 2009 has been led by mid-cap stocks, so it's nosurprise that this mid-cap index fund has been on a roll. The fund's 32% gain for theyear to date through Nov. 12 has beaten 70% of its peers. That's thanks to the indexthe fund tracks: The MSCI U.S. Mid-Cap 450 Index offers diversified mid-capexposure without a lot of bells and whistles.

The MSCI index has 450 mid-cap stocks spread over 10 sectors, so in the fund, risk ismanaged by individual positions being small--the largest is less than 1%--and no onesector dominating. Meanwhile, the fund's turnover is kept low by the index's use ofbuffer zones around its capitalization cutoffs, which limit the frequency with whichstocks go in and out of the index. The stock needs to be in the upper or lower bufferzones for four consecutive semiannual reviews before it's kicked out.

However, the index isn't perfect, and its construction can detract from performance.Unlike some indexes, this MSCI index does not have strict operating history criteriafor its components. Instead, it focuses more on a stock's trading volume and numberof shares available to be traded to ensure the stock's liquidity. Consequently, morestocks with spotty financials can get into this index, and that can hinder the fund'sreturns relative to its mid-cap blend category peers' when investors are particularlyrisk-averse.

Still, the fund's broad coverage of the mid-cap sector has delivered solid returns longterm. Moreover, it has a razor-thin expense ratio of 0.22%, and its low turnover helpskeep the fund tax-efficient by curbing capital distributions. Both factors shouldprovide some comfort during periods when the fund's returns lag peers.

If you're looking for a one-stop shop for mid-cap exposure, consider this.


Role in PortfolioSupporting Player. The fund is a good way to diversify a large-cap-heavy portfoliowithout taking on risk from volatile small-cap stocks.

StrategyThe fund tracks the MSCI U.S. Mid-Cap 450 Index. Unlike indexes that follow theS&P Mid-Cap 400 Index, this fund doesn't screen for firms with limited operationhistories. However, MSCI employs a more sophisticated methodology than the S&P,and this fund should more closely approximate the group norm. It also uses bufferzones to limit the migration of stocks between market-cap bands, which should helplimit turnover, promote tax efficiency, and keep trading costs low.

ManagementDonald Butler is the manager here. He has been with Vanguard since 1992 and hehas worked on this fund since its May 1998 inception. Butler also handles the day-to-day management of Vanguard Extended Market Index VEXMX and VanguardInstitutional Index VINIX.

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American Century Heritage Inv TWHIX |

QQQQ

$17.94 h$0.59 | 3.40%


Morningstar TakeAmerican Century Heritage has history on its side, but it needs the markets on itsside as well.

This fund is following up a weak performance in 2008 with a lackluster 2009. In lastyear's horrible market, it lost 46.2%, which put it behind about two thirds of the mid-growth category. Through November 13 this year, the fund has gained 31.6%, but ina strong rally it again sits a bit below the midpoint of the category. Thisunderperformance stands in contrast to the fund's showing during the previous threeyears, when it landed in the top decile for three straight years.

Momentum factors play a substantial role in this fund's approach, so it might seemodd that the fund isn't shining as stocks have soared most of this year. Is the culpritthe first part of the year, when markets were still tumbling? No, it had only anaverage loss during that period. Rather, it has fallen short during the rally because,as managers David Hollond and Greg Walsh point out, they don't own the riskiesttypes of stocks, including those with substantial amounts of debt or high levels ofuncertainty about their future. Such stocks have been the best performers in the rally.

In addition, Hollond and Walsh made the portfolio more defensive during the bearmarket, rendering it even less likely to outperform when stocks took off. (In October,though, they said they've grown more optimistic about the economy, and thereforehad increased the fund's holdings in the technology, materials, and consumer-discretionary sectors.) Moreover, they say their models rely on market trends stayingin place consistently, and that this year's trends are not doing so.

This fund's record is strong overall in the 5.5-year period since it adopted its currentstrategy. However, it's clear it won't outperform all the time, and its dependence onconsistent market trends does raise the possibility that it will struggle more often inthe future if those trends don't regain the consistency the managers need.

Stewardship GradeThis offering's advisor has made some improvements on the stewardship front, butsome important concerns remain.

Role in PortfolioSupporting Player.

StrategyManagement looks for companies with sustainable earnings and revenueacceleration, but it doesn't set minimum, absolute levels of growth. As a result, thefund sometimes holds names with relatively low growth rates or some with negativebut improving earnings outlooks. The fund also pays close attention to otherquantitative and technical measures, such as relative strength.

ManagementIn February 2007, David Hollond took charge when his predecessor, David Rose, leftafter a two-year stint at the helm. Hollond comanaged sibling American Century

Vista from 2004 to February 2008, having joined that fund's team in 1998 as ananalyst. Meanwhile, Greg Walsh was promoted from analyst to comanager ofHeritage in early 2008. He has been a member of the Heritage team since 2003.Glenn Fogle, Vista lead manager, had been a comanager on this fund as well butstepped aside in February 2008 to focus on Vista. Three dedicated analysts provideresearch support for Heritage.

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Kinetic Concepts, Inc. KCI | QQQ






Stewardship Grade B

11-19-2009 | by Julie Stralow, CFA

GrowthBooming V.A.C. sales and the LifeCell acquisition kept KCI's annualized sales growthat 20% during the past five years. As V.A.C. comes under more pressure, we expectannualized mid-single-digit growth through 2014 and limited growth thereafter.

ProfitabilityProfits should increase faster than sales through 2012, as KCI wrings out operatingefficiencies. After that, operating profits may fall as V.A.C. sales decline, but netprofits actually may increase slightly, primarily as interest expenses decline withdebt repayment.

Financial HealthKCI financed the $1.7 billion LifeCell deal mostly with debt. We think it can handlethe higher financing costs, given expected cash flows, but this transaction definitelyraises the stakes for KCI in terms of executing on its strategy.

Analyst Note 04-27-2010Kinetic Concepts KCI reported first quarter results that were disappointing to themarket, but put it on target to meet our full-year cash flow expectations for the firm.We'll dig in further, but at first glance, we don't anticipate adjusting our fair valueestimate.

Revenue grew 3% year over year (up 1% in constant currency) to $486 million. Theregenerative medicine segment, which sells LifeCell products to repair soft tissue,led the charge with 19% growth in the quarter, to $79 million. The Strattice shortagethat plagued KCI during recent quarters appears to be over, allowing the firm to meethigh demand for this tool used primarily in breast reconstruction and hernia repair.The firm's therapeutic support system business continued to decline by 1% reported(5% in constant currency), to $74 million, which was somewhat disappointing giventhe easy comparable period and the uptick we saw in that business last quarter.

However, KCI's largest segment--V.A.C.--overshadowed the others, with only 1%growth on a reported basis (but down 1% in constant currency) to $333 million, asthe North America region saw its first year-over-year decline. KCI's managementteam noted competitive and economic pressures constraining that business. Giventhe March court ruling and the potential for an injunction or licensing fees imposedon competitor Smith & Nephew SNN in the U.S., we could see the competitivepressures ease slightly for KCI there in the near future. Also, we'd note that theJapanese launch should start ramping up during the next several quarters, so wecould see some improvement in the segment's worldwide trends.

KCI's results looked solid on a cash flow basis, turning in $59 million of free cashflow during the first quarter. We think those cash flows could increase going

forward, as investments for geographic expansion should pay off in future periods.Also, from a credit perspective, we were glad to see the firm repay $75 million of itscredit facility early. That activity should help the firm save on interest payments inthe long run, reducing total obligations for the firm.

The Thesis 11-19-2009Kinetic Concepts owns the negative-pressure wound therapy market. However, withnew competitive entries and key patent expirations inching closer, we think KCI'snarrow moat would benefit from diversification, and the LifeCell acquisition lookslike a good step in that direction.

KCI's Vacuum Assisted Closure (V.A.C.) product set has revolutionized the waycaregivers treat deep, complex wounds by introducing negative pressure to closewounds quicker and remove exudate and infectious particles. A quicker healingprocess benefits patients, health-care providers, and payers by letting patientsresume daily activities sooner and by reducing the total costs associated withtreating each patient compared with traditional methods. Each V.A.C. device consistsof a negative-pressure generator and foam dressings, and V.A.C. devices can vary byuser interface and delivery features.

Because V.A.C. devices still account for about 70% of total firm sales, productconcentration risk looms large. Further, new competitors, including Smith & NephewSNN, are vying to disrupt KCI's virtual monopoly in negative-pressure wound therapy.Smith & Nephew's initial entry into foam dressings in early 2009 is especiallyworrisome; in the past, we'd assumed KCI's key patents would keep competitorsfrom offering such a direct copycat until at least late 2012. Although KCI is pursuinglegal action, we think a positive outcome for KCI is far from certain; possible legaloutcomes range from an injunction against Smith & Nephew's product, a monetarysettlement benefiting KCI, or unfettered competition. Although KCI has been holdingits own, at this point, unfettered competition appears most likely in the near and longterm.

To counteract these forces, KCI has taken steps to diversify its revenue streams.Although KCI still aims to enter Japan with V.A.C. products in 2010, its largestdiversification effort, so far, has come from the mid-2008 acquisition of LifeCell,which makes tissue-regeneration products. LifeCell products generated $242 millionof sales in 2008 and increased 27% year over year. We think LifeCell's new Stratticeproduct holds great potential, especially internationally, and KCI's establishedinternational distribution network could help with Strattice's marketing efforts. Wealso think LifeCell's focus on United States surgeons should help KCI with productlaunches for deeper wounds in surgical applications. So overall, the LifeCellacquisition serves to diversify KCI's revenue and expand the potential of new productlaunches by utilizing merged resources more effectively than they could be used asseparate entities.

ValuationWe're raising our fair value estimate for KCI to $42 per share from $37 primarily toreflect cash flow generated in recent quarters. Our fair value estimate depends onKCI increasing sales about 4% in 2009 and then about 3% compounded annuallythrough 2014. On the bottom line, we think earnings per share will increase about6% during that time frame. Our long-term valuation assumptions are sensitive toseveral factors. First, starting in late 2012, we think key V.A.C. patent expirations willinvite even more competition for V.A.C., resulting in legacy V.A.C. sales declines,rather than just deceleration. However, with growth in other wound-managementand regenerative medicine products, such as LifeCell's Strattice, we think total saleswill increase slightly to about $2.4 billion in 2017 from $2.3 billion in 2012. Also,during the next few years, we expect operating margins to rise to 23%, but weexpect margin declines because of increased competition for V.A.C. starting in late2012. We think operating margins will settle around 19% in the long run. Despitethis expected long-term operating margin decline, lower interest expenses (as KCIpays off its debt holdings) should help earnings per share rise slightly even after

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2012's margin contraction.

RiskUncertainty surrounds the long-term competitive environment of KCI's top revenuegenerator, V.A.C. Greater competitive threats have emerged since KCI lost its legalbattle with BlueSky Medical and Smith & Nephew purchased BlueSky. Third-partypayers have increased their scrutiny of V.A.C.'s costs, too, which could constrainpricing in the long run. Even if KCI surpasses these hurdles, looming V.A.C. patentexpirations should encourage tougher competition in that product set. Given theserisks to V.A.C., KCI was forced to diversify by purchasing LifeCell. If LifeCell productsdon't expand as we expect, KCI's returns would suffer.

StrategyKCI aims to be a leading provider of wound-therapy products. The companypioneered negative-pressure wound therapy and plans to keep competitors at baythrough product innovation and clinical evidence. KCI innovates in its therapeuticsurface segment, too, adding new products to reduce bedsores and move patients.KCI is also diversifying into tissue regeneration with the LifeCell acquisition.

Management & StewardshipWe give KCI a B Stewardship Grade. In general, we think KCI's financial disclosuresare very candid and timely. We particularly appreciate its comprehensive financialstatements and segment data each quarter. KCI recently completed a majormanagement transition after Cathy Burzik joined the firm in 2006 as president andCEO; most top managers joined the firm after Burzik. Although we think it is too earlyto tell if this team can generate long-term shareholder value, we admire the firm'sinitiatives under Burzik, so far. In particular, we appreciate the additional focus ondeveloping next-generation V.A.C. devices, investing in a tax-advantaged Irishmanufacturing facility, and diversifying with an acquisition. These activities couldhelp KCI withstand the storm that is brewing around V.A.C.'s earnings stream. We'realso glad that KCI splits its CEO and board chairman positions, so Burzik must answerto someone besides herself should those tactics fail. Ron Dollens, former GuidantCEO, serves as KCI's chairman.

ProfileKCI develops and manufactures medical devices and equipment, and it operates anextensive distribution and service network worldwide. The firm derives most of itssales from V.A.C. systems for the treatment of deep, complex wounds. It also sellstherapeutic beds and surfaces to prevent complications in a variety of patients,including the critically ill and obese. The LifeCell acquisition adds tissue regenerationproducts to the mix.

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Sysco Corporation SYY | QQQ





Economic Moat Wide

Stewardship Grade B

04-13-2010 | by Erin Swanson, CFA

GrowthAlthough Sysco has produced 7% annual sales growth on average during the pastfive years, we expect that weak economic trends and slow restaurant traffic willresult in a sales decline in fiscal 2010 before returning to 5% growth by 2013.

ProfitabilityDespite the high level of fixed costs in the food-service industry, the economies ofscale inherent in Sysco's expansive distribution network should enable the firm togenerate operating margins of more than 5% in each of the next five years, leadingto an average return on invested capital of 19%.

Financial HealthWe aren't concerned about the amount of financial leverage on Sysco's balancesheet. At the end of fiscal 2009, total debt/capital amounted to around 0.42, andoperating income covered interest expense 16.1 times. Over the next five years, weforecast debt/capital to amount to average 0.39 and earnings before interest andtaxes to cover interest expense more than 12 times.

Analyst Note 05-03-2010Sysco's SYY third-quarter results support our thesis that with an extensivedistribution network and a focus on driving further efficiency improvements, thisleading North American food-service distributor will generate solid cash flows. Ourfair value estimate remains intact.

Third-quarter underlying sales were essentially flat with the year-ago period, ashigher case volume was offset by continued food cost deflation of 0.8%. Fooddeflation has eased relative to the second quarter of fiscal 2010, when the firmreported food cost deflation of 3.5%, and we expect that more moderate levels offood inflation will return. We forecast a 0.8% sales decline for fiscal 2010. In ouropinion, lower procurement and delivery costs are resulting from Sysco's scale,which is solidifying its position as the low-cost provider in this high-fixed-costindustry. Efforts to reduce supply-chain complexity by more efficiently routingdeliveries and building redistribution centers led to a 20-basis-point increase in theoperating margin, to 4.8% in the quarter. We are also encouraged that through thefirst nine months of the fiscal year, Sysco's free cash flow amounted to 3% of sales.

The Thesis 04-13-2010Sysco is the leading food-service distributor in the United States and Canada, witharound 17% share of this estimated $200 billion market. Although food distributing isgenerally a low-margin, capital-intensive business, economies of scale have allowedSysco to consistently post returns on invested capital in excess of our estimate of thefirm's cost of capital. Through more than 150 acquisitions since its founding about 40years ago, Sysco has developed a wide-reaching distribution network over which to

spread high fixed costs that no other competitor has been able to replicate.

The firm distributes more than 400,000 traditional food and nonfood products,serving 400,000 customers in various industries and has expanded into otherprofitable niche segments, such as health care, education, and lodging. In an effort tosolidify customer relationships, Sysco has made it a priority to consult with clients onhow they can drive sales and minimize costs (an advantageous undertaking, giventhat about 80% of its sales are derived from smaller customers).

Despite being a low-cost operator, Sysco is keenly focused on trimming additionalcosts from its already-lean operating structure. For instance, Sysco is working toimprove its supply chain by more efficiently routing deliveries, as well as buildingseveral redistribution centers. The firm is already realizing some initial benefits fromthese efforts. In fiscal 2009, Sysco's diesel gallon usage fell 7%, while the number ofcases delivered per trip increased 2%--a notable accomplishment. in our opinion.Further, we contend that by taking complexity out of the organization and loweringits cost structure, a whole new window of potential customers should open forSysco, as management intends to more effectively compete for large accounts onprice--a previously unprofitable endeavor. We contend that this is an appropriatestrategy that should drive new customer growth.

Even with these competitive advantages, Sysco is not without its share ofchallenges. As price-conscious consumers rein in their spending in this difficulteconomic environment, Sysco's volumes will probably suffer, particularly in therestaurant sector. Further, the firm is exposed to highly volatile food costs, whichcould weigh on sales and profitability. Although we expect sales volumes to remainsoft over the near term, we believe Sysco's expansive distribution network willenable it to remain the dominant North American food distributor, generating strongcash flows and outsize returns for shareholders over the longer term.

ValuationOur fair value estimate is $35 per share, which implies forward fiscal-yearprice/earnings of 19 times, enterprise value/EBITDA of 10 times, and a free cashflow yield of 4.0%. We expect soft consumer spending (because of continued highunemployment levels) will weigh on the firm's near-term sales, and we forecastsales will slip about 1% in fiscal 2010 compared with the year-ago period. Longerterm, we forecast that Sysco will benefit as consumer spending picks up, resulting in5% annual sales growth by 2013. In our view, the firm's constant focus on improvingits cost structure will enable Sysco to offset volatile input costs. By fiscal 2014, weforecast an operating margins of 5.2% (about 10 basis points above fiscal 2009).Through 2014, we expect return on invested capital to average 19% compared withour 8.8% cost of capital assumption, providing support to our opinion that Syscomaintains a wide economic moat.

RiskIf global economic headwinds persist and food inflation picks up, Sysco's financialresults could be pressured. Furthermore, given that two thirds of sales result from therestaurant industry, the firm depends on the strength of consumer spending, whichhas been weak, partly as a result of high unemployment. Because input costs (suchas food and fuel) are a significant component of Sysco's cost structure, highcommodity costs can also weigh on results.

StrategySysco is attempting to expand its business through the addition of new customers,further penetration of existing accounts, and acquisitions. Beyond this, Sysco intendsto lower procurement and delivery costs as well as the cost structures for itscustomer base. One of the firm's current initiatives is to build several redistributioncenters to lower inventory levels and cost of goods sold.

Management & Stewardship

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Bill DeLaney, 53, assumed the role of CEO in 2009. With his more than 20 years atSysco, we believe DeLaney's experience will prove to be a huge asset to this food-service distributor, particularly given the more challenging economic environment thefirm is facing. In our opinion, executive compensation appears reasonable, withabout 80%-90% of management's annual pay based on the firm's performance. Wecommend executive management for taking a 5% reduction in its base pay in 2008 inlight of the challenging economic environment. We believe this is a strong signal tothe rest of its managers how committed the firm is to maintaining strict expensecontrol. DeLaney earned $1.5 million in salary, bonus, and stock awards in fiscal2009; however, because he mostly served as CFO in fiscal 2009, we expect hiscompensation will increase in his new role. In fiscal 2009, former chairman and CEORichard Schnieders, 61, earned $3.3 million in salary, stock, and option awards.We're pleased that Sysco is now operating with different individuals holding the CEOand chairman positions. Manuel Fernandez, 63, was appointed as Sysco'snonexecutive chairman in June 2009. Since 2000, Fernandez has served as amanaging director for SI Ventures, a venture capital firm, and as chairman emeritusof Gartner, an information technology research and consulting company. The boardconsists of 11 members, 9 of whom are independent. We'd like to see directorselected on an annual basis, rather than the current three-year staggered structure.

ProfileSysco operates as the largest North American food-service distributor, controlling17% of the market. The firm distributes more than 400,000 food and nonfoodproducts to 400,000 customers, including restaurants, health-care and educationalfacilities, and lodging establishments. From its founding in 1969 through the end offiscal 2009, Sysco acquired 150 companies or divisions of companies to expand itsfootprint. Nearly 100% of the firm's sales are derived in North America.

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T. Rowe Price Growth Stock PRGFX |

QQQQ

$29.22 h$0.53 | 1.85%


Morningstar TakeT. Rowe Price Growth Stock is not scared to have a point of view.

This fund was started in 1950, pursuing a classic growth strategy of investing inincreasingly profitable firms. While the overall strategy hasn't changed, the fund ismore prone to opportunistic sector bets under its new manager, Rob Bartolo, whotook the helm in October 2007. Bartolo is well-schooled in T. Rowe's investmentprocess, having been a telecom analyst and a sector-fund manager before this. Thatprocess centers around relying on T. Rowe's renown analyst pool to find firms thathave large market opportunities and strong competitive advantages to exploit them.

Many of his top holdings are also favorites with his peers, such as Apple AAPL,Google GOOG, and Amazon.com AMZN, but he argues that these firms have long-term growth prospects to support a high valuation. Still, he'll make shorter-term betsif there is an opportunity for a price pop. For example, at the end of 2009, heanticipated that the economic recovery will create a growth spurt in a raft of cyclicalfirms, such as transport firms FedEx FDX and PACCAR PCAR and oil sands producerSuncor Energy SU. These stock-by-stock opportunities tend to center within sectors,and the fund is more prone to outsized sector bets than it was before. For example,the fund's exposure to financials is almost triple that of the Russell 1000 GrowthIndex's. The same was true with health-care stocks in 2008.

These large sector bets also stem from Bartolo's favoring his strengths, such astelecom stocks, while decreasing exposure to areas with which he's less familiar,such as international stocks. It's not clear whether the greater risk that the sectorbets may have given the fund will improve its edge over peers. In the less than threeyears since Bartolo became manager, it has handily beaten its category, yet it's nolonger beating the Russell 1000 Growth Index as it had before his tenure.

We admire Bartolo's conviction, but it has yet to strengthen the fund's advantage.

Stewardship GradeOn most fronts, this fund is strong on stewardship, benefiting from a top-rateinvestment culture, low fees, a manager with skin in the game, and a spotlessregulatory history. With a more-independent board of directors, it would score evenmore highly.

Role in PortfolioCore. Given its broadly diversified portfolio of large-cap stocks, seasonedmanagement, and moderate expenses, this offering has the makings of a solid coreholding. The fund's returns have been closely correlated with those of the S&P 500Index, so investors will want to avoid overlap with other S&P 500-like funds. Still, itsgrowth-oriented style may make it too volatile for the most conservative investors.

StrategyNew manager Rob Bartolo has continued to employ the same valuation-consciousapproach used by his predecessor, Bob Smith. Like Smith, he also will invest adecent chunk of the portfolio overseas. The portfolio remains better diversified thanmost large-growth funds, but investors should expect a slightly more aggressive

edge. Bartolo is more comfortable with fast growers than his predecessor. He alsosays he's more apt to let his winning picks run.

ManagementIn October 2007, Rob Bartolo replaced longtime manager Bob Smith. Prior to comingaboard, Bartolo comanaged T. Rowe Price Media & Telecommunications for abouttwo years. Bartolo is not as experienced as Smith, but he was a skilled media andtelecom analyst and has impressed in his brief tenure at Media & Telecom.

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Janus T JANSX | QQQ

$27.37 h$0.27 | 1.00%

04-23-2010 | by Andrew Gogerty

Morningstar TakeJanus Fund has long-term appeal.

This large-growth offering has a leg up on many of its peers--even before getting toits portfolio. Its modest expense ratio gives it a head start on the competition, and itsproposal to add a performance fee adjustment to the management fee would furtheralign Janus' and comanagers Jonathan Coleman and Dan Riff's interests with long-term shareholders'. Riff and Coleman already have indicated their personalalignment, each investing more than $1 million in fund shares.

That appeal is coupled with one of the more staid ways to access the firm's researchheft. By design, the team looks to keep a notable balance in the portfolio, meaninginvestors can expect to see blue-chip stalwarts such as IBM IBM, Coca-Cola KO, andColgate-Palmolive CL rubbing elbows with growth standards Apple AAPL, CiscoCSCO, and Oracle ORCL. And while the fund maintains a noticeable non-U.S. stake--currently 19% of assets--it is well below that seen at in-house alternatives. Eventhen, firms with global brands and distribution access, such as consumer productsmaker Reckitt Benckiser RBGPY and health-care concern Roche RHHVF, dominatethat stake. That profile will keep the fund's performance record from going to theextremes, while allowing Coleman and Riff's best ideas do the heavy lifting.

Coleman and Riff took over during the calm before the storm in late 2007. Asexpected, the fund fell back to the pack in 2008 but still lost less than its peers andspared investors the brunt of the market's swoon that hit other large-growthofferings--even some of this one's siblings. In 2009, the fund again outperformed, asan overweighting to energy and technology combined with strong stock selectionpushed gains forward. Its predicable profile offers a stability to long-termshareholders looking to step into the growth space without jumping in.

Stewardship GradeThis fund's stewardship has improved. The investment staff has stabilized, managerownership is high, and fees are reasonable.


StrategyColeman and Riff strive for a healthy balance between risk and reward. They stressbalance sheets and high returns on invested capital, and rely heavily on Janus' teamof shared research analysts to contribute ideas for the portfolio.

ManagementManager David Corkins, who has managed this fund since February 2006, resignedfrom Janus in November 2007. Jonathan Coleman, Janus' co-CIO, took the reignshere along with Dan Riff in November 2007. Coleman moved up the market-capladder after a successful stint at mid-cap sibling Enterprise JAENX. Riff alsomanages a portion of Janus Long/Short JALSX.

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DWS International S SCINX | QQ

$43.93 x$1.37 | –3.02%

12-05-2009 | by William Samuel Rocco

Morningstar TakeDWS International continues to evolve.

This foreign large-blend fund has seen more than its share of manager turnover inthe 2000s. Over the first nine years of the decade, it lost several comanagers, and itexperienced three lead-manager changes: in the spring of 2002, in the fall of 2005,and in the summer of 2008, when Michael Sieghart took the helm.

The management turnover hasn't let up in 2009. Joseph Axtell, who also came onboard last summer and served in an oversight role, left his comanager position inJuly. Nikolaus Poehlmann took over as lead manager in October, while UdoRosendahl became a comanager at the same time. Michael Sieghart will give up hiscurrent position as a comanager and leave the firm at the end of 2009.

Not surprisingly, this fund's strategy has evolved in the 2000s. It began the decadewith a fairly bold and theme-based growth strategy, but switched to a moderateblend style after the first lead manager change in 2002. The fund has followed arather mainstream, growth-at-a-reasonable-price discipline since then, but the leadmanagers have varied in how they have executed it. (Sieghart did so in a reservedway and significantly reduced the emerging-markets and mid-cap exposure heinherited.) The exact manner in which Poehlmann will implement this growth-at-areasonable-price approach won't be clear until after he runs the fund for some time.

Poehlmann has had success as a comanager of several offshore funds that focus onfinancials, Italian stocks, and large-cap European companies, respectively. But thisfund's overall record since it switched to a moderate blend approach in the spring of2002 is uninspiring, and while Poehlmann may well make some adjustments, he issticking with the overall approach that has been in place for several years. Thatuninspiring record, along with all the manager turnover, raises serious issues at thistime.

Stewardship GradeThis fund has made some improvements on the stewardship front, and its plusesinclude oversight by a highly independent board of directors. But the fund could besupported by a stronger corporate culture, and its parent's regulatory history isn'tvery strong.


StrategyNew lead manager Nikolaus Poehlmann employs essentially the same strategy as histwo immediate predecessors. Specifically, he shares their preference for companiesthat trade cheaply relative to the cash flow they generate and the returns oninvestment they earn, and he shares their commitment to diversifying the portfolio byowning companies in different stages of their life cycles. It remains to been seenwhether Poehlmann will execute this approach in a slightly different manner than hisimmediate predecessor (who implemented the strategy in a modestly differentmanner than his own predecessor).

ManagementNikolaus Poehlmann took the helm of this fund in October 2009, thereby becoming itsfourth lead manager in the 2000s. He's supported by comanager Udo Rosendahl (whoalso came on board in October 2009) as well as comanagers Mark Schumann andAndreas Wendelken. Michael Sieghart, who served as lead manager for roughly 14months before Poehlmann, remains part of the fund's management team, but he willdepart at the end of 2009.

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SSgA S&P 500 Index Instl SVSPX |

QQQ

$19.53 h$0.31 | 1.61%

10-02-2009 | by Ryan Leggio

Morningstar TakeSSgA S&P 500 Index is a decent choice for those who want to track the S&P 500.

For those looking to track the investment results of the market-cap-weighted S&P500 through an open-end mutual fund, this is one of the better choices. The SchwabS&P 500 Index SWPPX, our new Analyst Pick, is half the price, though (0.09% versus0.18% here). For most investors it may not make sense to switch funds because ofthe added commission costs and tax implications.

Expenses are not the only consideration, however, as investing in the S&P 500 is notthe only option for those who want passively managed large-cap domestic-equityexposure. On one end of the spectrum is the even larger-cap iShares S&P 100 IndexOEF. This portfolio sports a greater percentage of companies with economic moatsthat Morningstar stock analysts think are durable and has a greater slug of consumerstaples companies (14.5% versus 11.5%) but less in consumer discretionary stocks(6.5% versus 9%). There's also the Schwab 1000 Index SNXFX, a more diversifiedversion of the S&P. But that index has similar sector weightings and still a fairlylarge average market capitalization ($26.5 billion versus $35 billion here). Theseattributes have meant that the fund has more closely tracked the S&P 500 than theS&P 100. We expect the same going forward, so investors looking for more small-and mid-cap exposure should look to funds like Schwab Total Stock Market IndexSWTSX, which, though it still lands in the large-blend category, sports a smalleraverage market cap ($20.2 billion).

There's also the question of value. Many managers tell us the S&P 500 is nowtrading near its fair value. That could mean it's not in as precarious a position as itwas before it plummeted in 2000 and 2007. It may not be the bargain it was in March2009 when the trailing 12-month dividend yield approached 3.5% (now 2.5%) for thefirst time since 1991. That said, it does what it says it will, and at a decent price.

Role in PortfolioCore. Investors seeking diversified, low-cost exposure to large-cap stocks will be finehere.

StrategyThe fund's goal is to replicate the returns of the S&P 500 Index by buying all stocks inthe index. Management buys futures contracts to minimize the effect of the fund'scash stake and to keep the fund exposed to the index.

ManagementJames May has managed the fund since 1995. He also runs GE Institutional S&P 500Index GIDIX.

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William Blair International Growth NWBIGX | QQQ

$19.22 h$0.03 | 0.16%

01-11-2010 | by Courtney Goethals Dobrow

Morningstar TakeWilliam Blair International Growth is getting back on track.

Veteran manager George Greig started 2009 in a big hole after this fund lost 52.0%the previous year and lagged most of its rivals. He says he thought emerging marketsand industrials would be safe harbors in 2008. They weren't. But he stayed thecourse and those areas rebounded strongly in 2009, helping lift the fund to a 42.3%gain, ahead of three fourths of its peers. Greig has since pared back this stake byreducing the fund's emerging Asia stake on valuation concerns. Emerging Asia hadsoaked up 24% of the portfolio in July 2009, significantly more than the typical peer.

Greig often breaks from the pack. For example, a big emerging-markets stake iscommon as he buy firms from almost anywhere around the globe as long as theyhave strong earnings growth prospects, expanding margins, and good management.Market-cap allocations can also differ significantly from the benchmark's and thetypical peer's.

The team is taking a prudent stance. Team member David Merjan says that in Marchthey saw signs that the downturn was ending but weren't fully convinced therecovery was real. They stayed cautious by adding to sectors like health care andconsumer staples while keeping financials and materials underweight versus thebenchmark. The latter two sectors recovered strongly in the rally, and Merjan saysthese underweights held the fund back a bit.

This fund has the occasional misstep but gets it right more often than not. Itsemphasis on high-quality growers, mixed with tactical bets most peers won't make,gives it appeal. The damage caused by 2008 has hurt the fund's near-term record, butit still handily beats the category and the MSCI EAFE Index over the past decade. Andit has delivered eight top or near-top quartile calendar-year returns since 1999.

Role in PortfolioCore. This wide-ranging foreign large-growth offering can be used as a stand-aloneinternational fund or as a complement to a mainstream foreign large-value offering.

StrategyManager George Greig looks for companies with good growth prospects, high returnson equity, and low debt. He also considers qualitative elements such as corporateculture and strength of management. Greig isn't solely a top-down investor, but heoften uses themes such as Asian economic growth to help drive his stock picks. Asizable emerging-markets stake is not uncommon here. Greig looks across themarket-cap range for his picks, and multinationals often rub shoulders with tiny,unknown names in this portfolio. William Blair instituted a fair-value-pricing policyon this fund in 2003.

ManagementGeorge Greig is on his second stint with this offering. He helped launch the fund in1992 and has done well since returning in 1996. Before joining William Blair, he wasa founding partner of PBHG.

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Longleaf Partners LLPFX | QQQ

$26.96 h$1.21 | 4.70%


Morningstar TakeAnyone who thinks a fund following a value strategy must be tame hasn't seenLongleaf Partners.

This fund has had quite a ride in recent years. It suffered far more during the recentbear market than most large-value and large-blend funds did: Its cumulative loss ofabout 65% was roughly 10 percentage points worse than the S&P 500 Index and thetwo category averages. Hefty amounts of money in two energy firms didn't help.Then, from the start of the stock market revival on March 10, 2009, through April 1,2010, the fund has soared. Its gain of 106% beats those of the index and bothcategory averages by 25 to 30 percentage points. Those same energy firms, plusLiberty, played big roles this time. In each period, this fund's return was much closerto the diversified emerging-markets category average than those of the U.S. large-cap groups.

What to make of this roller-coaster ride? Although the extreme levels of the numbersare shocking, it's not surprising to see this fund performing well outside the norm, forits portfolio never looks like those of other funds. It's very compact and can devotelarge stakes to individual companies. Moreover, managers Mason Hawkins andStaley Cates prefer firms with real or imagined problems that they can get for pricesfar lower than they think the firms are truly worth. A current example is Mexicancement giant Cemex CX, whose debt issues and reliance on construction marketsscared off many investors. Hawkins and Cates, however, had confidence that itsstrong management and dominant position would help it weather the storm.

Their courage and confidence is not always well-placed, as with former holdingSprint Nextel S, among others. Shareholders here must be prepared to hold onthrough rough periods that can last a while. The managers have been at this fordecades, though--the fund began in 1987--and over the very long term it pays off.

Stewardship GradeWith a top-rate culture, independent board, and management with skin in the game,this fund shines.

Role in PortfolioSupporting Player. The fund could be a core holding for patient investors with long-term horizons. However, it does not offer broad market exposure and, with itsconcentrated, deep-value approach, can lag substantially at times.

StrategyThis fund takes value seriously. Its comanagers look for companies that trade atdiscounts of 40% or more to the team's estimates of their intrinsic value, usingdiscounted cash-flow analysis, asset values, or sales of comparable firms todetermine the latter. The managers place much importance on the ability of acompany's management to run the business on an operational level and to effectivelyallocate capital. They often take sizable positions, and the fund typically holds 20-25names. The turnover rate is typically very low.

ManagementMason Hawkins and Staley Cates of Southeastern Asset Management have been at

the helm since 1987 and 1994, respectively. They also run Longleaf Partners Small-Cap LLSCX and Longleaf Partners International LLINX. Hawkins and Cates work witha small group of in-house analysts. The team members keep all of their own investedassets in this fund and its siblings.

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Linear Technology LLTC | QQQ





Economic Moat Wide

Stewardship Grade B

12-10-2009 | by Brian Colello, CPA

GrowthLinear has not achieved exceptional revenue growth in recent years, mainly becauseof the firm's decision to avoid chasing high-growth markets that are less profitablethan the firm's corporate average. We expect sales to improve in fiscal 2010, and inthe longer term, Linear should achieve moderate revenue growth as it maintains itsstrong position as a leading supplier to a broad array of end markets.

ProfitabilityLinear has routinely generated stellar annual operating margins in excess of 40%.We anticipate that Linear will continue to deliver excellent profitability for investors,particularly if it maintains its current strategy of focusing on high-margin businessesand avoiding competitive end markets that lead to lower margins.

Financial HealthLinear has a significant debt balance of $1.3 billion as of September 2009, as thefirm took on debt to fund a stock buyback program in 2007. However, we don't expectLinear to have a problem servicing this debt. The firm has a cash balance of $0.9billion and routinely generates free cash flow that can be used to service interest andprincipal payments.

Analyst Note 04-14-2010Linear Technology LLTC reported fiscal third-quarter results that exceeded ourexpectations. Analog chip sales were $311 million for the March quarter,representing a 21% sequential increase and a 55% increase from the firm's dismalMarch 2009 quarter at the height of the credit crisis. Linear saw healthy chip salesacross all of its end markets. However, it saw particular strength in the computer endmarket, driven by notebook and tablet devices. We suspect that Linear received a bigboost from Apple's AAPL iPad launch; EE Times reported that two of Linear's power-management chips are included in each device, and Linear hinted that new customerdesign wins contributed to its sales growth. Profitability was also stellar this quarter.The gross margin improved 190 basis points to 77.9%, while the operating marginwas an exceptional 49%.

Linear painted a rosy picture for the June quarter, expecting a 7%-10% increase fromMarch's strong revenue results. The company again anticipates healthy growthacross all end markets. We expect Linear's revenue to receive another shot in thearm from the iPad, and we wouldn't be surprised if this design win allowed the firmto grow at a faster pace than its analog peers in the short term. However, Linearremains focused on the industrial and telecom infrastructure markets, and we don'texpect it to make a huge shift into consumer-related markets anytime soon. The firmhas stepped aside from the consumer market in recent years, as shorter product lifecycles and pricing pressure from device makers have led to lower margins andprofitability for consumer-related chipmakers. Linear has been clear that it intends to

selectively compete for design wins (in the consumer market and elsewhere) where itcan maintain its high-margin profile. The firm's healthy growth and profitability thisquarter imply that Linear's design win with Apple and the iPad met this profile.

The Thesis 12-10-2009Linear Technology is a highly profitable firm that specializes in high-performanceanalog (HPA) semiconductor design and manufacturing. We think the firm'sdisciplined strategic focus and chip design expertise should enable Linear to deliverexcellent profitability for investors for years to come.

Linear is a leading designer and manufacturer of HPA chips. HPAs are used inproducts that require extreme precision and reliability, such as devices in theindustrial, automotive, military, and satellite industries. Because HPAs make up onlya small portion of the total cost of these products, buyers in these end markets tendto make purchasing decisions based on performance rather than price. HPA designexpertise is not easy to come by, so firms that have spent years developingproprietary designs have an advantage over new entrants. Meanwhile, HPA designsdo not rapidly evolve and do not rely on leading-edge manufacturing techniques, soLinear's chips tend to have long product lives and low capital requirements. All ofthese factors lead to high profitability in the HPA space, and Linear's returns haveoutpaced its peers' over the past decade. The firm's HPA expertise and ability toretain its top engineering talent are the source of Linear's wide economic moat.

On top of Linear's strong chip design capabilities, the firm has maintained adisciplined approach to its product portfolio that has made Linear one of the mostprofitable companies we cover. Linear's HPA know-how could be applied to a host ofadjacent end markets and products. However, the firm will only compete for a designwin if it can ensure a strong return on investment. If Linear has to concede on priceor recognizes that analog chips in a given segment are becoming commoditized,Linear will walk away from the business. In contrast, Linear's main rival in the HPAindustry, Maxim Integrated Products MXIM, has shifted attention toward higher-growth, yet less profitable, consumer-related businesses.

Linear's strategy has made the firm a cash-generating machine, as the firm routinelygenerates operating margins in excess of 40%. We expect Linear to match theseoutstanding results going forward, as we don't see the company losing its footholdon the high-end HPA market any time soon. However, there are negatives withLinear's strategy as well. By forsaking lower-margin businesses, such as the handsetmarket, Linear has less of a presence in some high-growth industries. In contrast,many of Linear's rivals are focused on these end markets today, and Linear wouldhave to play catch-up if it ever wanted to break into these segments down the line.Similarly, Linear's decision to stay out of high-volume chip segments leaves thecompany less diversified than many of its peers. In turn, the firm's HPA chip sales areparticularly tied to the health of a handful of industries, such as the automotive andmilitary end markets.

ValuationOur fair value estimate for Linear is $33 per share. We project revenue growth of 8%in fiscal 2010 (year ending June 2010), as Linear's sales should begin to recover fromthe 18% revenue drop experienced in fiscal 2009. In the longer term, we projectaverage revenue growth of 7% from fiscal 2011 to fiscal 2014 as Linear's chip designexpertise should allow the firm to remain a preferred chip supplier to a wide array ofend markets.

Linear's profitability has been exceptional in recent years, and we expect this trendto continue as we project operating margins in the high-40% range during our five-year forecast period. We also anticipate that Linear will maintain its healthy dividendpolicy. Although Linear competes in the cyclical semiconductor industry, we think thecompany's track record of generating stellar operating profits on a regular basiswarrant a fair value uncertainty rating of medium.

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RiskLinear's greatest risk is the firm's exposure to the highly cyclical semiconductorindustry. The firm does not outsource production, so Linear is on the hook for thefixed costs associated with running chip manufacturing facilities. Linear also earns asignificant portion of its chip sales from the industrial and automotive end markets,so continued weakness in these sectors could spell trouble for the firm. Finally,Linear competes in the fragmented analog chip segment and faces several rivals withstrong balance sheet positions and extensive product portfolios.

StrategyLinear has maintained a focused strategy through the years. The chipmakerselectively chooses markets and products where the firm can attain strongprofitability. Similarly, the company avoids competitive markets that may be highgrowth but result in lower margins for the firm. Linear also understands theimportance of retaining its key engineering talent and keeping its proprietarymanufacturing secrets to itself, stating that the firm is unlikely to outsource much ofits production to third-party foundries. Linear also does not intend to make bolt-onacquisitions, instead preferring to generate growth organically.

Management & StewardshipLothar Maier has been CEO of Linear since January 2005. Before joining Linear,Maier spent 16 years at Cypress Semiconductor CY in a variety of roles. Maiersucceeded cofounder Robert Swanson, who remains on staff as chairman of theboard. We like that Linear has maintained a separation of the chairman and CEOroles, which we think better protects minority shareholders. Executive compensationalso appears reasonable, as Maier earned $3.6 million in 2008. However, neitherSwanson nor Maier own more than 1% of shares outstanding, and we would preferto have Linear's leaders control a bigger stake in the company. The firm also stillfaces litigation, filed in 2007, that alleges stock option backdating within thecompany from 1995 through 2002.

ProfileLinear Technology designs and manufactures standard high-performance analogintegrated circuits for a diverse customer base spanning industrial, automotive,communications, and high-end consumer electronics. The firm offers more than 7,000types of products to more than 15,000 original-equipment manufacturers globally.Most of its products support functions like power management, data interface, andconversion. More than 70% of its revenue comes from international markets.

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Mairs & Power Growth Inv MPGFX |

QQQQQ

$70.55 h$2.42 | 3.55%

03-19-2010 | by William Samuel Rocco

Morningstar TakeLittle has actually changed at Mairs & Power Growth--and that's a good thing.

Bill Frels and Mark Henneman did make some portfolio moves in the latter part of2009. They trimmed a few large caps that were sizable holdings and that had donewell in last year's surge, such as Emerson Electric EMR and Target TGT. They alsopurchased or added to a few smaller caps that have the strong industry positions andother attributes they seek. For example, they bought Badger Meter BMI becausethey're keen on its technology and growth prospects. And they added to this fund'sstake in the electronic-sign manufacturer Daktronics DAKT, which was beaten upbecause of concerns about its short-term outlook, because they like its cash flowsand business mix. But the moves were modest in number and moderate in natureoverall, so the turnover rate was just 3% here in 2009.

A single-digit turnover rate is nothing new here, while most large-blend offeringshave 70% to 90% turnover rates. The fund consistently stands out from its peers inother respects as well. Frels and Henneman have never been shy about buyingsmaller stocks that meet their standards, so this fund's average market cap isnormally less than half the group norm. They let the fund's sector weights fall wherethey may and own 40 to 50 names. Thus, the fund is usually far more focused bysector and issue than most of its rivals.

This patient and distinctive strategy has paid off over the short, mid, and long runs.Several of the managers' picks have thrived of late--including top-holding 3MCompany MMM--so this fund has posted superior gains over the past 12 months. Theskippers' stock selection has been similarly good in many markets in the past, so thisfund also boasts topnotch three, five, 10-, and 15-year returns.

The fund's consistency and other strengths make it a fine option for investors whoare at ease with the risks that come with its concentration and other atypical traits.

Role in PortfolioThe fund's multicap approach, concentrated portfolio, and preference for Minnesota-based companies are unique enough to likely warrant a supporting role. But given itslow volatility and blend characteristics, investors would not be too far afield incontemplating it as a core holding.

StrategyManager Bill Frels and the investment team at Mairs & Power buy what they know.They look for well-managed companies with strong market share in their industries,and they keep the portfolio in fewer than 50 companies, most of which are located inor around the firm's home state, Minnesota. Once a stock is added to the fund, itusually stays. The turnover rate is microscopic.

ManagementWilliam Frels succeeded longtime manager George Mairs III in June 2004. Frels hasbeen a comanager here since December 1999 and has delivered strong results atMairs & Power Balanced since 1992. Mark Henneman was named as a comanageron the fund in January 2006.

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Transocean, Inc. RIG | QQQQ


Consider Buying Price $58


Fair Value Uncertainty High


Stewardship Grade A

03-26-2010 | by Stephen Ellis

GrowthTransocean has increased revenue 34% annually (on average) since 2004. We expectthe firm's backlog of over $30 billion to provide a stable source of revenue, and helpthe firm achieve modest revenue growth during the next few years.

ProfitabilityThe company more than quadrupled its operating margin since 2003, to nearly 43%in 2008, in part because of one-time gains. We expect Transocean's operatingmargin to average 37% during the next five years, as higher operating expensesshould limit further margin expansion.

Financial HealthWe're forecasting that Transocean's debt load will be around $9 billion at the end of2010. We think its debt/capital ratio will be 28%, and its EBITDA will stand at 11times its interest expense. The firm's backlog provides ample free cash flow to coverthe near-term debt maturities coming due in 2010, 2011, and beyond. We remainunconcerned about the company's financial leverage.

Analyst Note 04-30-2010Commenting on the Deepwater Horizon explosion in the Gulf of Mexico, White Housesenior advisor David Axelrod said on Good Morning America that "no domesticdrilling in new areas is going to go forward until there is an adequate review of whathappened here and what is being proposed elsewhere." Our interpretation: This is anonissue for producers and service companies in the near term. Axelrod's wordsseem to indicate that while President Obama does not plan on continuing themoratorium on drilling in previously restricted areas, no new drilling in these areaswill be approved until the cause of the Deepwater Horizon explosion is understood.This has minimal, if any, impact on energy companies, as there won't be new drillingin previously restricted areas for years. The danger is that if this suspension on newdrilling activity is applied to all domestic offshore activity, and not just activity in newareas, then most Gulf of Mexico-focused exploration and production and servicecompanies will face near-term pressure as drilling plans are delayed until a review ofthe incident.

The Thesis 03-26-2010In our opinion, Transocean is the best-positioned driller to capitalize on numerousdrilling technology breakthroughs, as well as higher oil and gas prices. These haveled to strong secular trends supporting high levels of offshore exploration anddevelopment well into the next decade. Because Transocean owns the world'slargest offshore drilling fleet, it will collect billions from customers eager to exploitlarge discoveries under the sea floor.

Transocean controls one of the world's largest deep-water fleets, which it contracts

to oil and natural gas companies worldwide. In 2008, Transocean's revenue wasfairly evenly divided among its deep-water, midwater, and jackup operations.However, we estimate that by the end of 2010, Transocean's deep-water businesswill account for more than half of its revenue. A limited supply of deep-water vesselshas led to day rates topping $630,000 a day, and contract lengths stretching out up toa decade. Rig demand from Brazil's pre-salt regions, where tens of billions of barrelsof oil have been found, promise to keep the supply of rigs tight for several years,which should allow Transocean to extract considerable economic rents.

In our view, the source of Transocean's moat lies in its deep-water expertise, whichhelps insulate it from the more volatile shallow-water rig markets. Given thatoffshore operating costs can top $1 million per day, Transocean's extensiveexperience at limiting downtime is extremely valuable. Unfortunately, the company isstill vulnerable to the cyclical nature of its industry, as the current downturn shows.Transocean is stacking rigs due to lower customer demand, as well as seeing higherlevels of contract defaults. For the jackup and midwater markets, the majority of rigsthat are being delivered over the next few years do not have a contract, which meansconsiderable downward pressure on day rates in the near term. However, the deep-water market is more resilient, thanks to huge demand from customers such asPetrobras PBR.

The biggest long-term threat to Transocean, in our view, is the rise in importance ofnational oil companies such as Petrobras, which control the majority of the world'sreserves, could mean weaker long-term bargaining power for Transocean. Ratherthan risk overpaying for rigs on the global world market, Petrobras is seeking to buildmany of its needed rigs and associated infrastructure in Brazil, and then contract therigs to Brazilian contractors. We think the challenge will prove to be too much forBrazil's nascent rig-building industry, and it will eventually have to outsource the rigconstruction to more experienced shipyards and drilling contractors. Otherwise, thenational oil company runs the risk of badly mismanaging the region's productionpotential. On the flip side, if Petrobras is successful, other national oil companiesmay follow its lead, which would limit the opportunities for Transocean in some ofthe world's largest deep-water markets.

ValuationOur fair value estimate for Transocean is $116 per share. We believe the jackup andmidwater rig markets will suffer from rig oversupply in 2009 and 2010 as there areover 100 rigs being delivered over the next few years without a contract in place. Inthe jackup market, nearly 90% of the rigs delivered over the next few years do nothave a contract. We expect Transocean will continue to stack rigs as they roll offcontracts to help arrest the decline in day rates for the rigs, which have alreadyfallen 30%-50% in some cases. For the least-capable class of jackup rigs, we expectto see day rates below $100,000 a day in 2010. In turn, we believe typical mid-waterday rates will fall to $300,000 a day in 2011 from over $400,000 a day in 2008, asmore mid-water rigs roll off their long-term contracts.

However, we think the deep-water rig market will continue to perform relativelybetter, with day rates stabilizing in the near term at $500,000-$550,000 per day, asmany of the industry's rigs currently under construction are contracted for years ofwork upon delivery. The long-term contracts and strong market fundamentals shouldlead to Transocean's deep-water revenue increasing to 51% of its revenue by 2013,up from 35% of its revenue during 2008. Deep-water rig availability is still extremelylow across the industry during 2010-2012, which places the drillers in a relativelystronger contract negotiating position for any new contracts. Over the long term, webelieve Transocean's operating margins will settle around 36%, as by the end of ourexplicit five-year forecast we think the supply picture for deep-water rigs will haveimproved from the current extremely tight levels. As a result, we believeTransocean's pricing power will diminish slightly.

RiskThe primary risk facing Transocean is that oil and natural gas prices could fall

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substantially, which would depress day rates for noncontracted vessels. In addition,if a Transocean vessel fails to perform as specified, lucrative contracts can becanceled. Also, further industry consolidation could limit Transocean's control overthe deep-water market as its fleet size advantage in deep-water vessels would bereduced.

StrategyTransocean's aim is to be the best deep-water operator worldwide. To achieve thatgoal, the firm has focused on building both its reputation as a skilled operator, andits fleet size of drillships and semisubmersibles. The firm has differentiated itselffrom others in the industry by its strong operational processes in safety,environmental concerns, and delivering new ships.

Management & StewardshipTransocean's executive team is headed by CEO Robert Long, who has been with thefirm since 1976. Long stepped down in early 2010, and has been replaced by thecompany's former president, Steven Newman. We think Long's 2008 compensationwas reasonable, at $8.6 million, with other executives receiving compensation in the$1 million to $2.5 million range. The firm's relative model of compensation, whichfocuses on total shareholder return and cash-flow return on equity when comparedwith peers, sets a tougher standard than setting an absolute target. The companyplaces an emphasis on the long term by granting options contingent on performancerelative to peers over two years. We like the fact that directors and executives arerequired to own multiples of their compensation in stock, aligning their interests withthose of shareholders. To improve its governance, Transocean could remove directorclasses. Overall, we think Transocean's stewardship practices are excellent.

ProfileTransocean is an offshore drilling company. Its fleet of 138 vessels includesdrillships, semisubmersibles, and jackups, which operate in technically demandingenvironments, such as Brazil, Nigeria, and Italy. It contracts primarily with some ofthe largest global exploration and production companies. In November 2007,Transocean completed a merger with offshore driller GlobalSantaFe in a $53 billioncash and stock transaction.

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ADC Telecommunications, Inc. ADCT |

QQ





Economic Moat None

Stewardship Grade C

01-19-2010 | by Joseph Beaulieu

GrowthWe expect long-term growth averaging 3%-5% annually, approximately in line withthe rate of telecom infrastructure spending.

ProfitabilityWe expect gross margins to remain in the low 30% range, as the company's newerproducts carry lower margins than its legacy products, and as the company'scustomers have substantial bargaining power. We think non-GAAP operating marginswill creep back to the high-single-digits.

Financial HealthADC's balance sheet is in decent shape, with around $500 million in cash andequivalents, and $650 million in debt coming due in nearly equal installments in2013, 2015, and 2017. The debt consists of low-interest-rate convertible bonds due2013 through 2017. We expect EBITDA to cover interest expense 3-4 times during thenext five years.

Analyst Note 02-09-2010After reviewing ADC's ADCT first-quarter results, we are leaving our fair valueestimate unchanged. Although revenues fell by nearly 11% year-over-year, cost-cutting efforts led to substantially higher gross margins (34.7% versus 29.5% in theyear-ago quarter), and lower operating expenses allowed the firm to slash itsoperating loss to $4.1 million versus $24.5 million a year ago.

We think the firm is on track to hit our full-year revenue estimate of $1.1 billion, andour gross and operating margin targets remain reasonable. However, much dependson the firm returning to year-over-year growth in the second half of the year. Asmanagement is only providing revenue estimates on a quarter-by-quarter basis, wewon't get too far ahead of ourselves. But if the first quarter is a true indication, itappears that the difficult write-downs and cost cuts of 2009 are paying off.

The Thesis 01-19-2010Although ADC Telecommunications has taken many steps to navigate the changingtelecom market and the current recession, our view is that the company's weakposition relative to its customers and the commoditylike nature of the bulk of itsproducts will limit long-term opportunities for growth and profitability.

ADC operates three business segments. The bulk of revenue (about 80%) isgenerated from its connectivity unit, which sells equipment that physicallyinterconnects telecommunications networks, including cabinets, cables, connectors,cards, and patch panels. ADC's network solutions business (about 10% of sales) sells

equipment that extends the reach of wireless phone networks. Finally, ADC has aservices business (about 10% of revenue) that helps carriers design and build theirnetworks.

Demand for ADC's equipment is primarily driven by carrier investment in networkupgrades. ADC has relationships with nearly all of the top 100 global carriers, andthe company is positioned to benefit as carriers expand their networks. Although thecompany's customer base is broad, it is important to note that nearly half of revenuescome from its 10 largest customers, and the combination of AT&T T and Verizon VZrepresent a third of the total.

Moreover, telecommunications infrastructure spending is increasing at a slow pace,and even when the current downturn is over, we'd be surprised to see spending (atleast in the areas that ADC competes) grow faster than the mid-single-digits.Because ADC has the largest telecom carriers covered, its growth options are toexpand into new areas through acquisitions or into new product lines. Thesestrategies carry substantial risks and uncertain benefits.

The most significant opportunity for ADC during the next several years stems from apush by carriers to install fiber optic networks closer to customers. U.S. carriersVerizon and AT&T --and other carriers worldwide--have been upgrading theirnetworks to increase bandwidth, accelerating demand for fiber-related equipment.Because the bulk of ADC's product lines are used in the "last mile" (connecting theedge of the carriers' networks to homes or offices), these types of projects presentbig opportunities. However, we believe that the latest Verizon and AT&T networkexpansion projects are winding down, so ADC may be forced to depend on othercustomers for additional projects. The size and the limited numbers of these types oflarge-scale initiatives tend to attract a lot of competition. This gives the carriersplenty of leverage to negotiate on price.

The bargaining power of ADC's customers is reflected in the firm's financialstatements. Gross margins run in the low 30s, which is typical for commodityhardware. Operating margins are mired in the low-single-digits, and returns oninvested capital have rarely met our estimate of the firm's cost of capital.

ValuationOur fair value estimate remains at $6. Over the long term, we expect ADC's salesgrowth to match the low-single-digit rate of telecom infrastructure spending. Weanticipate operating losses for the next two years as sales decline amid therecession, outpacing ADC's ability to cut operating expenses. Longer term, we expectthe company's non-GAAP (generally accepted accounting principles) operatingmargin--which excludes amortization expenses from purchased intangibles--to returnto the high-single-digits.

RiskCapital spending by telecom carriers on network equipment is cyclical and ofteninfluenced by political and regulatory issues. ADC's operating results have becomeincreasingly volatile because of carrier consolidation and increased exposure toproject-based capital spending like fiber rollouts. ADC has significant customerconcentration; its 10 largest customers account for half of revenues, and AT&T andVerizon represent about a third of revenue. Intense competition and pricing pressureare a constant threat to profitability in this industry.

StrategyADC is attempting to consolidate fragmented equipment markets in China, India, andother emerging countries. The company believes it can improve profitability as itgains scale, and by shifting production to newly acquired manufacturing facilities inlow-cost regions. ADC makes bolt-on acquisitions to expand geographically and tostrengthen its product offering.

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Management & StewardshipRobert Switz has served as ADC's CEO since 2003. His long tenure at the companyincludes a 10-year stint as CFO and an executive role as the head of ADC's formerbroadband access and transport group. Switz's promotion to CEO coincided with agradual pickup in industry demand following several challenging post-bubble years.His CEO tenure to date has been marked by a wide-scale restructuring resulting in aleaner and more narrowly focused company. James Mathews was named CFO inApril 2007. Mathews previously served as vice president and controller at ADC afterjoining the company in December 2005. Before joining ADC, Mathews served inseveral financial leadership positions at Northwest Airlines, Delta Air Lines DAL, andCARE USA, the world's largest private relief and development agency. Executivecompensation looks slightly higher at ADC than at similar firms. However, the firm'sbonus compensation is tied to clear performance metrics, including sales growth,operating income, and free cash flow. We believe executives' interests are alignedwith those of shareholders.

ProfileADC Telecommunications manufactures network infrastructure equipment used bytelecom carriers, cable providers, broadcasters, and large enterprises. Its productsconsist primarily of network-connectivity equipment, including cabinets, cables,connectors, cards, and patch panels. The company also sells equipment to extend thereach of wireless phone networks.

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Dodge & Cox International StockDODFX | QQQQ

$32.65 x$0.38 | –1.15%


Morningstar TakeDodge & Cox International has more going for it than 2009's gaudy gains.

This fund has had a banner year in 2009. Through Nov. 27, it's up 43.9%, more than95% of its foreign large-value rivals and more than 14 percentage points ahead ofthe MSCI EAFE Index.

One key has been exposure to the powerful rally in emerging markets. The managershave typically invested much more in such regions than most peers, and that hasoften paid off. That was especially true in 2009, with Brazil, China, and otheremerging markets showing gains of more than 100%. This fund had 21% of itsportfolio invested in emerging markets at the end of March--just after the global rallytook off--and still had 21% in the end-of-September portfolio (meaning it trimmedsome in the meantime.) A stake of just half that amount is typical for rival funds.Another reason for this year's huge gain: A very low stake in consumer staples,where the managers don't see growth prospects as great as those availableelsewhere.

Comanager Diana Strandberg says the emerging-markets exposure is even greaterthan it seems, because some holdings based in Europe, such as telecom firmMillicom and U.K.-based bank Standard Chartered, are really emerging-marketsplays. The greater growth prospects there make such opportunities worthwhile, shesays. Meanwhile, she says health care remains a favorite area because the manyconcerns about pharmaceutical firms, in particular, have pushed their valuations toattractive levels even though they have many strengths.

This year's success is reassuring after 2008's stumble. In that year, the fund lost47%, landing in the category's bottom quartile, owing largely to very poor choices inthe financials arena. Until then, though, the fund had enjoyed a long history ofsuccess, making it unlikely the fund's methods had lost their effectiveness. Thisyear's showing, while not canceling out last year's travails, offers support for thatbelief.

Stewardship GradeThis fund incorporates many of the industry's best practices for stewardship: It'sbacked by a strong fundholder-focused corporate culture, it charges a low fee, and ithas a clean regulatory history.


StrategyThis fund's management team invests in stocks that it considers undervalued on arange of variables. It favors companies with good management, dominantcompetitive positions, and good growth potential. Because management takes such along-term view, turnover is generally low. Management will hedge part of the fund'scurrency exposure at times, though it's not a common tactic. It uses fair-value pricingwhenever it thinks such an approach is warranted.

ManagementThis fund is run by the Dodge & Cox International Investment Policy Committee. Themembers of this nine-person team have been at Dodge & Cox for an average of 19years. Several members also serve on the committee that runs Dodge & Cox StockDODGX. In addition, all the firm's analysts are involved to a certain extent with thisfund because they cover sectors on a global basis.

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Perkins Mid Cap Value T JMCVX |

QQQQQ

$21.46 h$0.55 | 2.63%

11-09-2009 | by Andrew Gogerty

Morningstar TakePerkins Mid Cap Value remains one of our best ideas, but temper your expectations.

Janus subsidiary Perkins Investment Management employs the same high-quality,valuation-focused strategy across the firm's three offerings. It's tough to find a value-leaning manager that doesn't say it focuses on strong cash flows, solid balancesheets, and proven management teams, but this fund's portfolio metrics, like itssiblings', back up the team's claims. Its 7% net margin is higher than the 4.4% mid-value norm, while its 32% debt/capital ratio is less than the 38% category average.Thus, the portfolio is tilted toward profitable stocks that take on less leverage thanmost.

As expected, the fund outperformed the group and the Russell Mid Cap Value Indexthrough the market's bottom for the year to date through March 9, 2009, while its57% gain since then through Nov. 6 trails the index's 80% rally and the category's71%. In total, the fund remains in line with both proxies so far this year.

Despite its relative success this year and during the 2008 swoon, investors shouldtemper their expectations. As this year's rally has shown, valuation and financialquality take center stage for comanagers Tom Perkins and Jeff Kautz. The fundmaintains a significant financials stake, but it wasn't loading up on troubled banksafter the 2008 crash. Rather, the team was picking through to find the best balancesheets such as insurer Allstate ALL and Everest Re RE, which were trading cheaplyrelative to peers and on an earnings and book value basis. The team also addedBecton Dickinson BDX because of its stable cash-flow profile, low debt, anddiversified portfolio rather than loading up on low-quality stocks that have fueled therecent rally.

This temperament, combined with the managers' focus on compounding returns overtime rather than topping the charts on a year-in, year-out basis, is a key asset to thisfund's appeal. Those with similar patience will be duly rewarded.


StrategyManagement hunts for stocks trading at or near their historic lows and begins withan analysis of the downside risk, then turning to the upside potential. Firms makingthe list typically have strong cash flow, little to no debt, and proven management.Investors can expect to see both high-dividend payers as well as fallen growthstocks--if those companies meet the other criteria. The portfolio typically contains120-150 stocks, and individual positions are generally capped at about 3% of assets.

ManagementJanus controls an approximate 80% stake in this fund's subadvisor, PerkinsInvestment Management. Manager Tom Perkins has run this fund since its August1998 inception. Comanager Jeff Kautz was promoted to his current role in February2002 after spending five years as an analyst at the firm. The managers are part of thefirm's larger team that manages siblings Large Cap Value JAPAX and Small Cap

Value JSIVX in a similar style.

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T. Rowe Price Intl Gr & Inc TRIGX |

QQQ

$12.41 x$0.15 | –1.19%

12-07-2009 | by Karin Anderson

Morningstar TakeT. Rowe Price International Growth & Income is in a state of flux.

Raymond Mills, this fund's manager since 2002, will be passing the baton to T. RowePrice newcomer Jonathan Matthews in July 2010. Matthews will be charged withmaintaining the fund's valuation-sensitive, dividend-focused style. Investors canexpect the same well-diversified basket of 150 to 170 holdings, and Matthews willrely on the firm's growing and seasoned squad of foreign analysts. Still, Matthews'lack of experience running a diversified fund is a major concern. He joined the firm inAugust 2008 and his experience running money was limited to the energy sleeves oftwo Pioneer institutional accounts. Mills acknowledged that a decent amount oftransition time has been built in so that Matthews can build up portfoliomanagement expertise in other areas.

When the transition is complete, Mills will turn his full attention to T. Rowe PriceOverseas Stock TROSX, a foreign large-blend fund which he has skippered forroughly two years. The announcement of the management change coincides with thisfund's middling seven-plus-year record under Mills' watch. Since January 2002, thefund's 8% average annual gain just edged out the results of the foreign large-valuecategory mean and the MSCI EAFE Index, which were both up 7% per year onaverage. Mills' contrarian streak has led to some individual misses recently,including Royal Bank of Scotland RBS. He recently sold that position, acknowledgingthat he didn't like the firm's decision to buy ABN AMRO in 2007 but held on anywaybecause he still felt the firm was significantly undervalued. The fund's heavyexposure to cyclical fare also contributed to the fund's peer-trailing 45% loss in2008.

In the end, competition in the foreign-large cap arena is stiff, and the selection of anunproven manager is a major red flag. Investors looking for a core foreign offeringshould pass on this fund.

Stewardship GradeOn most fronts, this fund is strong on the stewardship front, benefiting from a top-rate investment culture, moderate fees, and a spotless regulatory history. Ifmanagement invested more and if the fund had a more-independent board ofdirectors, it would score even more highly.

Role in PortfolioCore. The fund has a broadly diversified portfolio largely invested in establishedcompanies in developed countries.

StrategyBottom-up fundamental research provided by the firm's squad of global analystsdetermines stock selection but is complemented here by a quantitative scoringsystem. Quantitative models are used to score stocks based on quality factors suchas earnings upside and dividend potential and also to evaluate country and industryconditions. The portfolio is broadly diversified. The fund does not hedge currencyexposure, so it benefits from a falling dollar.

ManagementRay Mills has managed this fund since January 2002, but a new manager is set totake over in July 2010. Jonathan Matthews joined the firm in August 2008 as anenergy analyst covering Europe and Russia, and he previously ran the energy sleevesof two institutional accounts at Pioneer. Mills will turn his full attention to T. RowePrice Overseas Stock TROSX, a foreign large-blend fund which he has skippered forroughly two years.

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