Morningstar Advisor - February/March 2012 - (Page 71)

Principia returned a list of 34 names. The list showcases what types of stocks held up best in 2011’s volatile market: Nearly all of the funds that made it through our screen emphasize mega-caps, dividend-payers, or both. Here are a few of the most compelling offerings in the screen’s output. BBH Core Select BBTEX T. Rowe Price Dividend Growth PRDGX Although its dividend isn’t as robust as Vanguard Dividend Growth’s, this offering deserves a seat at the table with other top dividend-focused funds. An emphasis on companies with a history of growing their dividends—and not just stocks whose dividend yields are currently high—helps it avoid value traps. Manager Tom Huber further ensures quality by focusing on firms with solid management and growth prospects. For the year to date, picks like Pfizer PFE, Accenture ACN, and ExxonMobil XOM have held it in good stead, and performance over the whole of Huber’s tenure has also been impressive. The list also included two of Morningstar’s perennial favorites; here are some snippets from our Analyst Reports: Vanguard Dividend Growth VDIGX This valuation-conscious fund’s recent emphasis on companies with steady growth characteristics has put it in the sweet spot of recent market action. With big overweightings in consumer defensive and health-care stocks, the fund has benefited from investors’ appetite for companies that will continue to crank out earnings regardless of the economic climate. Meanwhile, the managers have downplayed hard-hit cyclical and energy names relative to the fund’s peer group. The fund has more to show for itself than its recently strong performance: With a longtime emphasis on high-quality names trading at reasonable valuations, it has a history of holding up well when stocks are trending down. Its 2008 loss was among the smallest in the largeblend group. Parnassus Equity Income PRBLX is in companies with positive free cash flow, defensible business models, and powerful brand names, such as Automatic Data Processing ADP in payroll processing and Johnson & Johnson JNJ in health care. Such stalwarts often trade at lofty multiples that reflect their strengths, but Kilbride tries to buy when they are under a cloud. The fund, for example, has added to Microsoft MSFT, Wells Fargo WFC, and Northrop Grumman NOC this year. Sequoia SEQUX This fund is less concentrated now but no less effective. For years Berkshire Hathaway BRK.B made up a fourth or more of its portfolio, perhaps making it appear that much of the fund’s outperformance had been driven by that single stock. Not that there was reason to complain, but it wasn’t clear how much credit the fund’s managers deserved. The fund has continued to deliver, though, even as it has become less dependent on Berkshire. As part of a broader diversification effort, comanagers Bob Goldfarb and David Poppe have cut Berkshire to 10% of assets from 37% in 2004. If anything, Berkshire has been a slight drag on returns over the past 15 years. The fund has beaten the performance of Berkshire’s stock over that stretch by about 40 basis points annualized through September 2011, while crushing the large-blend average by nearly 4 percentage points annualized. Christine Benz is Morningstar’s director of personal finance. This socially conscious offering’s passel of dividend payers—which skittish investors have recently gravitated toward—has held it in good stead lately. Like the BBH managers, Parnassus’ Todd Ahlsten favors companies with strong brand names that are selling at reasonable valuations, and stocks like Procter & Gamble PG and CVS Caremark CVS have handily outperformed more-cyclical names thus far this year. Ahlsten also has a solid record of protecting shareholders’ capital on the downside: The fund’s upside/downside capture ratio statistics show that it has historically gained slightly less than the S&P 500 in up markets but has more than made up that ground during downturns. This fund keeps its investment universe small by focusing on companies that have long histories of generating enough cash and earnings to support rising dividends. That trait reduces its opportunity set to a few hundred stocks and weeds out more-speculative businesses. Indeed, the fund’s average holding sports a wide moat rating, according to Morningstar stock analysts, as well as above-average returns on equity and belowaverage debt. By these measures, it’s a higher-quality portfolio than those of most domestic-equity funds. The fund’s clear marching orders allow manager Don Kilbride to focus on the smaller set of stocks that meet his criteria. The fund holds fewer than 50 stocks, virtually all of which pay dividends. Some, such as business database giant Oracle ORCL and recent addition PNC Financial Services PNC, only recently initiated or recovered from cutting their dividends. All of them have the business models, financial strength, and management commitment to increase dividend payments over time. Most of the fund’s money MorningstarAdvisor.com 71 http://www.MorningstarAdvisor.com

Table of Contents for the Digital Edition of Morningstar Advisor - February/March 2012

Morningstar Advisor - February/March 2012
Contents
Contributors
Letter From the Editor
Make a Difference Stories, Not Debates
How Concerned Are You About Europe?
Analytical and Independent
What to Ask When a Fund Manager Leaves
Past, Present, Future
Have Financials Gotten Cheap Enough?
Four Picks for the Present
Investment Briefs
Tactical Funds Miss Their Chance
Specialty Retail: Ad Hoc Opportunity
How Europe Is Making Its Crisis Worse
Impact on U.S. Economy Will Be Minimal
European Banks: Bargains or Value Traps?
Don’t Count the Euro Out Yet
Europe on the Brink
GoodHaven Realizes Its Vision
How Index Trading Increases Market Vulnerability
Nonlisted REITS: Handle With Care
Safety Picks for the Many Moods of Mr. Market
On the Prowl for Large- Blend Index-Beaters
Our Favorite Mutual Funds
50 Most Popular ETFs
Undervalued Stocks With Wide Moats
The Math That Matters

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