Mutual Fund Advice
- Thread starter JMoney
- Start date
I recently bought Excelsior Energy (UMESX) on March 17 and already up 9.25%. Morningstar 4*; 1.10% exp ratio; no front or back load; YTD, 3yr and 5yr are 13.03, 44.12 and 18.22 respectively.
Good luck!
SC
Good luck!
SC
Excelsior Energy & Nat Resources UMESX See Fund Family Data
Morningstar's Take | 03-30-2006
by Sonya Morris, CPA
We like Excelsior Energy & Natural Resources, but lingering regulatory issues at its advisor keep us from giving it our wholehearted endorsement.
This fund boasts an experienced manager who has executed his strategy well. Michael Hoover crafts this portfolio through a combination of top-down sector forecasts and bottom-up fundamental analysis. While he invests broadly across various natural-resource segments, energy typically plays a fairly prominent role. That's certainly the case now, given Hoover's bullish view on the sector. In fact, he's so optimistic about energy that he has positioned the fund aggressively by loading up on smaller stocks because they typically outperform dominant industry players when the sector is in favor. At present, mid- and small-cap stocks comprise 47% of the portfolio, compared with 35% for its typical rival.
That positioning could juice this fund's returns if the sector continues to thrive. But the opposite is also true: If the sector loses its momentum, the fund's outsized small-cap stake could cause it to suffer more than its peers. This offering's 2001-2002 campaign provides a case in point. Because it held a sizable stake in mid- and small-cap stocks, it experienced a more dramatic downturn than most of its rivals.
Shareholders who held on during those lean years have been rewarded for their discipline, as this fund has delivered competitive long-term returns. However, because of this offering's potential for volatility, it should be kept to a small portion of an investor's portfolio. Due to its strong recent performance, current shareholders may need to pare back their allocation to this fund. Furthermore, given unresolved regulatory issues at U.S. Trust, this fund's advisor, we still don't think shareholders or new investors should send this fund--or any Excelsior offering--new money.
See Previous Analyst Reports
Year Total Return (%) +/- Category
YTD 8.20 -0.21
2006 --- ---
2005 45.69 7.58
2004 34.27 7.05
2003 32.81 -0.10
Data through 03-31-2006
Fund Family Score for Domestic Stock: 2.9
Number of Funds Scored: 7
U.S. Trust Corporation, advisor to the Excelsior funds, recently disclosed that an internal investigation found evidence that four institutions were permitted to conduct market-timing in eight of Excelsior's funds. Though U.S. Trust has found no evidence of portfolio managers trading for their own account or otherwise facilitating these arrangements, the firm has declined to release the names of the funds involved pending the completion of its investigation. It should be noted that the timing deals were forged under the watch of U.S. Trust's previous management team (much of which was replaced following the firm's acquisition by Charles Schwab). U.S. Trust plans to issue a report to the public in coming weeks that will provide further details on the wrongdoing that occurred, including the names of the funds involved. In the interim, we recommend that investors cease investing new monies in Excelsior funds.
Role in Portfolio
Specialty. As with all sector funds, this offering's narrow focus and above-average volatility make it appropriate for only a small portion of an investor's portfolio.
Morningstar Rating
4*
Kudos
This fund is led by a seasoned manager who has done a good job navigating the energy sector's peaks and valleys.
Solid long-term track record.
Risks
Excelsior has said that it allowed some investors to market-time some of its funds, but it has yet to tell shareholders which ones.
A focus on smaller stocks can boost volatility.
Although expenses are below average, they rose last year even though assets increased.
Strategy
Manager Michael Hoover looks for attractively valued companies that will prosper from his forecasts of energy prices. Although the fund is energy-focused, Hoover uses non-energy-related natural-resources investments as a means to hedge his energy bets. He divides the natural-resources sector into four groups: integrated oil firms, oil and gas exploration and production firms, energy-service firms, and nonenergy natural-resources firms. He allocates fund assets to each of these groups based on his broad outlook for natural resources.
Management
Michael Hoover started as U.S. Trust's energy analyst in 1989 and took over management of the fund in 1995, making him one of the longest-serving managers in the natural-resources category.
Inside Scoop
The fund's manager looks for attractively valued companies that will prosper from his forecasts of commodity prices. Although the fund is energy-focused, management uses non-energy-related natural-resources investments as a means to hedge the fund's energy bets.
Morningstar's Take | 03-30-2006
by Sonya Morris, CPA
We like Excelsior Energy & Natural Resources, but lingering regulatory issues at its advisor keep us from giving it our wholehearted endorsement.
This fund boasts an experienced manager who has executed his strategy well. Michael Hoover crafts this portfolio through a combination of top-down sector forecasts and bottom-up fundamental analysis. While he invests broadly across various natural-resource segments, energy typically plays a fairly prominent role. That's certainly the case now, given Hoover's bullish view on the sector. In fact, he's so optimistic about energy that he has positioned the fund aggressively by loading up on smaller stocks because they typically outperform dominant industry players when the sector is in favor. At present, mid- and small-cap stocks comprise 47% of the portfolio, compared with 35% for its typical rival.
That positioning could juice this fund's returns if the sector continues to thrive. But the opposite is also true: If the sector loses its momentum, the fund's outsized small-cap stake could cause it to suffer more than its peers. This offering's 2001-2002 campaign provides a case in point. Because it held a sizable stake in mid- and small-cap stocks, it experienced a more dramatic downturn than most of its rivals.
Shareholders who held on during those lean years have been rewarded for their discipline, as this fund has delivered competitive long-term returns. However, because of this offering's potential for volatility, it should be kept to a small portion of an investor's portfolio. Due to its strong recent performance, current shareholders may need to pare back their allocation to this fund. Furthermore, given unresolved regulatory issues at U.S. Trust, this fund's advisor, we still don't think shareholders or new investors should send this fund--or any Excelsior offering--new money.
See Previous Analyst Reports
Year Total Return (%) +/- Category
YTD 8.20 -0.21
2006 --- ---
2005 45.69 7.58
2004 34.27 7.05
2003 32.81 -0.10
Data through 03-31-2006
Fund Family Score for Domestic Stock: 2.9
Number of Funds Scored: 7
U.S. Trust Corporation, advisor to the Excelsior funds, recently disclosed that an internal investigation found evidence that four institutions were permitted to conduct market-timing in eight of Excelsior's funds. Though U.S. Trust has found no evidence of portfolio managers trading for their own account or otherwise facilitating these arrangements, the firm has declined to release the names of the funds involved pending the completion of its investigation. It should be noted that the timing deals were forged under the watch of U.S. Trust's previous management team (much of which was replaced following the firm's acquisition by Charles Schwab). U.S. Trust plans to issue a report to the public in coming weeks that will provide further details on the wrongdoing that occurred, including the names of the funds involved. In the interim, we recommend that investors cease investing new monies in Excelsior funds.
Role in Portfolio
Specialty. As with all sector funds, this offering's narrow focus and above-average volatility make it appropriate for only a small portion of an investor's portfolio.
Morningstar Rating
4*
Kudos
This fund is led by a seasoned manager who has done a good job navigating the energy sector's peaks and valleys.
Solid long-term track record.
Risks
Excelsior has said that it allowed some investors to market-time some of its funds, but it has yet to tell shareholders which ones.
A focus on smaller stocks can boost volatility.
Although expenses are below average, they rose last year even though assets increased.
Strategy
Manager Michael Hoover looks for attractively valued companies that will prosper from his forecasts of energy prices. Although the fund is energy-focused, Hoover uses non-energy-related natural-resources investments as a means to hedge his energy bets. He divides the natural-resources sector into four groups: integrated oil firms, oil and gas exploration and production firms, energy-service firms, and nonenergy natural-resources firms. He allocates fund assets to each of these groups based on his broad outlook for natural resources.
Management
Michael Hoover started as U.S. Trust's energy analyst in 1989 and took over management of the fund in 1995, making him one of the longest-serving managers in the natural-resources category.
Inside Scoop
The fund's manager looks for attractively valued companies that will prosper from his forecasts of commodity prices. Although the fund is energy-focused, management uses non-energy-related natural-resources investments as a means to hedge the fund's energy bets.
For small cap, which I would deem risky, I would go with Keeley Small-Cap. Symbol kscvx. Excellent history, and very well managed.
Otherwise, it depends on what sector you like, and whether you think the market will go higher. If you want to be ultra long-term aggressive, you could go into a leveraged fund that will move with the market either way, but the reutrns will be exagerrated. There are even leveraged bear funds out there.
Otherwise, it depends on what sector you like, and whether you think the market will go higher. If you want to be ultra long-term aggressive, you could go into a leveraged fund that will move with the market either way, but the reutrns will be exagerrated. There are even leveraged bear funds out there.
Doughboy said:
That is a good small cap fund that I have researched in the past, but do not own at this time. Might want to keep in mind that mid/small caps have been on a run since the tech bubble and the large blue chippers' evaulations are starting to look very tempting, especially if you factor in dividends which many more large companies pay out then compared to thier smaller counter-parts. Either way good fund if you want small-cap exposure.
Keeley Small Cap Value KSCVX
Morningstar's Take | 02-22-2006
by Andrew Gogerty
Keeley Small Cap Value deserves a spot in an investor's portfolio.
This fund's dominance over its small-blend peers stems from manager John Keeley Jr.'s experience in looking under rocks that others pass over. He focuses on companies emerging from bankruptcy, spin-offs, and those that are converting to public ownership. His tenure in this niche and active role in monitoring a firm's progress during restructuring is what sets this fund apart. These stocks are usually not in an index and garner less attention, allowing Keeley to capitalize on mispricings. In mid-2005, for example, the fund added Chaparral Steel CHAP, a spin-off from Texas Industries TXI. He noted that the firm generated positive cash flow and was trading well below book value. This move has paid off, as the stock's gains have driven recent returns.
Keeley's willingness to stray from the norm further defines this fund's appeal. Technology and health-care stocks make up just 2% of assets, compared with its typical peer's 23%, because he perceives a short-term focus of their products and threat of government regulation, respectively. Keeley will also make active sector bets. He has pared back the fund's exposure to financial stocks to 10% of assets, down from 25% at the start of 2004, saying that rising interest rates are a significant headwind for the sector.
There are risks to Keeley's approach, but they don't overwhelm the case for the fund. Its sector allocation may vary dramatically over time and a misplaced bet could lead to heightened volatility. A downturn in takeover or spin-off activity in the market could also leave the fund out of step with its peers. But we think Keeley's experience, his focus on cash flow generation and balance-sheet strength, and the fund's small position sizes help offset these concerns. Moreover, Keeley has remained true to this discipline regardless of market's environment, and his significant investment is an outward sign he is committed to the fund's success.
See Previous Analyst Reports
Year Total Return (%) +/- Category
YTD 14.60 2.49
2006 --- ---
2005 16.12 9.44
2004 32.94 14.29
2003 39.31 -4.03
Data through 03-31-2006
Fund Family Score for Domestic Stock: NA
Number of Funds Scored: NA
Role in Portfolio
Supporting Player
Morningstar Rating
5*
Stewardship Grade
A good citizen overall.
Kudos
Strong long-term risk/reward profile.
Manager is substantially invested in the fund.
Risks
When its battered picks are slow to turn around, the fund can languish.
Sector concentrations can increase volatility and dampen returns if they backfire.
Expenses could be lower given the fund's asset growth in recent years.
Strategy
Corporate restructuring is Keeley's key focus. He invests a bulk of the fund's assets in the stock of companies with robust cash flow that have recently been spun off from other companies, emerged from bankruptcy, or that trade below book value. He tends to shy away from tech and health-care stocks, and the companies in the portfolio have been takeover or acquisition targets from time to time.
Management
John Keeley Jr. founded the fund's advisor, Keeley Asset Management, in 1982 and has managed this fund since its 1993 inception. He has a substantial investment in the fund and is supported by four stock analysts.
Inside Scoop
This fund focuses on newly spun-off units of other businesses, companies emerging from bankruptcy, and those trading below book value. Manager John Keeley also likes beaten-down firms going through turnarounds. It's not a well-followed corner of the market, but this fund has delivered great returns investing in this space.
Morningstar's Take | 02-22-2006
by Andrew Gogerty
Keeley Small Cap Value deserves a spot in an investor's portfolio.
This fund's dominance over its small-blend peers stems from manager John Keeley Jr.'s experience in looking under rocks that others pass over. He focuses on companies emerging from bankruptcy, spin-offs, and those that are converting to public ownership. His tenure in this niche and active role in monitoring a firm's progress during restructuring is what sets this fund apart. These stocks are usually not in an index and garner less attention, allowing Keeley to capitalize on mispricings. In mid-2005, for example, the fund added Chaparral Steel CHAP, a spin-off from Texas Industries TXI. He noted that the firm generated positive cash flow and was trading well below book value. This move has paid off, as the stock's gains have driven recent returns.
Keeley's willingness to stray from the norm further defines this fund's appeal. Technology and health-care stocks make up just 2% of assets, compared with its typical peer's 23%, because he perceives a short-term focus of their products and threat of government regulation, respectively. Keeley will also make active sector bets. He has pared back the fund's exposure to financial stocks to 10% of assets, down from 25% at the start of 2004, saying that rising interest rates are a significant headwind for the sector.
There are risks to Keeley's approach, but they don't overwhelm the case for the fund. Its sector allocation may vary dramatically over time and a misplaced bet could lead to heightened volatility. A downturn in takeover or spin-off activity in the market could also leave the fund out of step with its peers. But we think Keeley's experience, his focus on cash flow generation and balance-sheet strength, and the fund's small position sizes help offset these concerns. Moreover, Keeley has remained true to this discipline regardless of market's environment, and his significant investment is an outward sign he is committed to the fund's success.
See Previous Analyst Reports
Year Total Return (%) +/- Category
YTD 14.60 2.49
2006 --- ---
2005 16.12 9.44
2004 32.94 14.29
2003 39.31 -4.03
Data through 03-31-2006
Fund Family Score for Domestic Stock: NA
Number of Funds Scored: NA
Role in Portfolio
Supporting Player
Morningstar Rating
5*
Stewardship Grade
A good citizen overall.
Kudos
Strong long-term risk/reward profile.
Manager is substantially invested in the fund.
Risks
When its battered picks are slow to turn around, the fund can languish.
Sector concentrations can increase volatility and dampen returns if they backfire.
Expenses could be lower given the fund's asset growth in recent years.
Strategy
Corporate restructuring is Keeley's key focus. He invests a bulk of the fund's assets in the stock of companies with robust cash flow that have recently been spun off from other companies, emerged from bankruptcy, or that trade below book value. He tends to shy away from tech and health-care stocks, and the companies in the portfolio have been takeover or acquisition targets from time to time.
Management
John Keeley Jr. founded the fund's advisor, Keeley Asset Management, in 1982 and has managed this fund since its 1993 inception. He has a substantial investment in the fund and is supported by four stock analysts.
Inside Scoop
This fund focuses on newly spun-off units of other businesses, companies emerging from bankruptcy, and those trading below book value. Manager John Keeley also likes beaten-down firms going through turnarounds. It's not a well-followed corner of the market, but this fund has delivered great returns investing in this space.
Just to follow up on the small cap vs large cap...
Blue Chip Blues
How long will the stocks of America's largest companies remain weaklings on Wall Street?
COVER STORY PODCAST
Just a few years ago, U.S. blue chip stocks were the most respected asset class in the world. No longer. In May, the $22 billion Fidelity Blue Chip Growth fund, which holds shares of giant U.S. companies such as Microsoft (MSFT ), Johnson & Johnson (JNJ ), and Wal-Mart Stores (WMT ), will make a surprising request. It will ask shareholders to approve a switch in its benchmark from the Standard & Poor's 500-stock index, a traditional blue-chip barometer, to the Russell 1000 Growth Index, a broader gauge that includes many smaller companies. "The move," says fund manager John McDowell, "reflects the investment style of the fund through thick and thin." Meanwhile, another Fidelity fund, $50 billion Magellan (FMAGX ), recently dumped blue chips Pfizer (PFE ), Intel (INTC ), and Procter & Gamble (PG ) and boosted its foreign holdings to 25%, up from 4% just a few months ago.
These are confusing times for the shareholders of America's biggest corporations. General Electric Co. (GE ) has boosted its earnings by 22% since Chief Executive Jeffrey R. Immelt took the reins on Sept. 7, 2001. But GE's once vaunted stock price has languished during his tenure. Home Depot Inc. (HD ), the second-biggest U.S. retailer, has more than doubled its profits since 2001, a feat rewarded with a measly 1.5% bump in its stock price. Intel Corp.'s prize for boosting its earnings by 173% in five years? A 30% plunge in its shares.
A similar malaise afflicts Walt Disney (DIS ), Microsoft, Pfizer, Wal-Mart, and others across many sectors and industries. What exasperates the leaders of these corporations is that it seems there's little they can do about it. They're delivering the earnings growth, but investors aren't responding. At work are forces largely beyond their control.
BOILING DOWN TO ZILCH
Welcome to the blue chip blues. The S&P 500 is near a five-year high. But don't celebrate: It has returned just 4.3% annually during that span, far less than its long-term average of 10%. The S&P 100-stock index -- the bluest of the blue chips, with $6.5 trillion in market capitalization and a huge share of U.S. corporate profits -- has returned just 2.03% annually to investors during that span, chiefly from dividends. Without dividends, it's just 0.94% overall, or 0.19% annually. In any event, after taxes and inflation, that pretty much boils down to zilch. Things have gotten so bad that ISI Group strategist Jason R. Trennert has said blue chips could be "the cheapest asset class in the developed world."
There's no law that says stock prices must track corporate earnings perfectly. But the degree of the disconnect and its long duration pose serious questions for CEOs, managers, and shareholders alike. Is this a temporary phenomenon or a permanent structural change? Should America's investor class -- the doctors and nurses, couples and singles, clerks and judges -- continue to hold these stocks as dearly as they did a few years ago? What would it take to get big U.S. stocks moving again?
Just about everything is crushing blue chips: real estate, commodities, precious metals, international stocks, and smaller U.S. stocks. And investors haven't had to be geniuses to take part in those gains. They've merely had to dust off some old ideas. Basic finance theory says that investors can get the best balance of risk and reward by owning pieces of as many of the world's asset classes as they can, from stocks to gold, alpacas to saffron. For years, the S&P 500-stock index of the biggest U.S. companies was the best approximation of that ideal available to investors -- and they flocked to it.
But in the past decade, the world's financial markets have changed in unexpected ways. The proliferation of hedge funds, those lightly regulated pools of capital that cater to wealthy investors, has allowed pension fund managers and other institutional investors to venture beyond U.S. shores and seek high returns wherever they present themselves. And the explosion of exchange-traded funds, or mutual funds that trade like stocks, has opened up the world to individual investors in ways that were never before possible. China, Mexico, and South Africa are now just a mouse click away. A decade ago, they were available chiefly through clunky, high-fee mutual funds, if at all.
With more choices, investors are diversifying their portfolios as textbooks say they should. Emerging-market shares, small U.S. stocks, gold, and even commodities are taking up sizable chunks.
ONLY GAME IN TOWN
Some market strategists think this global rebalancing act could be a 10- or 20-year process. But skeptics point out that an overseas financial crisis could erupt at any time and send investors fleeing to the relative safety of the U.S. markets -- not unlike what happened during the 1997 and 1998 Asian and Russian sell-offs.
Who's right? Before we can sort out the possibilities, we must understand how the blue chips got so popular in the first place.
The biggest U.S. stocks returned an average of 16% a year during the 1982-2000 bull market, gains that far outpaced the underlying corporate profit growth. In 1981 the average price-earnings ratio for these stocks was around 8. By 2000, at the peak of the tech bubble that sent many stocks to all-time highs, it had swelled to 35. Even a conglomerate such as GE sported a ratio nearly double its current 18. Blue chips "are coming off the biggest p-e expansion in history," says James P. O'Shaughnessy, who oversees more than $6.5 billion at Bear Stearns Asset Management Inc. (BSC ) "In 2000 it was as if there was nothing else worth investing in."
Nothing indeed. The bull market resulted from a dearth of alternative opportunities. Long-term interest rates fell throughout the period, making bond yields less attractive to investors. Prices of oil, other commodities, and precious metals fell, too. Two housing busts soured investors on real estate by the mid-1990s. Stocks were the only game in town. The p-e ratios of companies with growing but stable earnings soared, with blue chips enjoying unprecedented popularity.
Then the profit growth stopped -- and with it, blue chip supremacy. According to Goldman, Sachs & Co. (GS ), reported earnings per share of the companies in the S&P 500 fell from $50 in 2000 to $17.50 by 2002. The largest 100 stocks lost 53%, peak to trough. Assuming an 8% average annual return, it would still take Cisco Systems Inc. (CSCO ) 17 years to hit its 2000 level; Microsoft, 10 years; GE, 8; and Disney, 6.
Smaller stocks have fared much better, for two reasons. For one thing, their valuations hadn't run up so much in the first place. And second, smaller companies are nimbler than big ones, and can adapt to changing economic conditions faster. As blue chip profits cratered in 2002, the earnings of the S&P 600-stock index of small capitalization companies rocketed 20%, then 15% and 28% the following two years. Investors sought out the relative value of small and midsize companies, which have returned an average of 15% and 13% a year, respectively, since March, 2001. Small caps once were considered much riskier than big ones. The big-company earnings crash showed that even the celebrated blue chips are risky, too.
The question is, which period was the aberration: 1982-2000 or 2001-06? History seems to argue for the former. According to Ibbotson Associates, small caps have returned 11.7% annually since 1926, vs. large caps' 9.8%. As Herb Stein, chairman of the Council of Economic Advisers under President Nixon, once quipped, "if something cannot go on forever, it will stop."
Blue Chip Blues
How long will the stocks of America's largest companies remain weaklings on Wall Street?
COVER STORY PODCAST
Just a few years ago, U.S. blue chip stocks were the most respected asset class in the world. No longer. In May, the $22 billion Fidelity Blue Chip Growth fund, which holds shares of giant U.S. companies such as Microsoft (MSFT ), Johnson & Johnson (JNJ ), and Wal-Mart Stores (WMT ), will make a surprising request. It will ask shareholders to approve a switch in its benchmark from the Standard & Poor's 500-stock index, a traditional blue-chip barometer, to the Russell 1000 Growth Index, a broader gauge that includes many smaller companies. "The move," says fund manager John McDowell, "reflects the investment style of the fund through thick and thin." Meanwhile, another Fidelity fund, $50 billion Magellan (FMAGX ), recently dumped blue chips Pfizer (PFE ), Intel (INTC ), and Procter & Gamble (PG ) and boosted its foreign holdings to 25%, up from 4% just a few months ago.
These are confusing times for the shareholders of America's biggest corporations. General Electric Co. (GE ) has boosted its earnings by 22% since Chief Executive Jeffrey R. Immelt took the reins on Sept. 7, 2001. But GE's once vaunted stock price has languished during his tenure. Home Depot Inc. (HD ), the second-biggest U.S. retailer, has more than doubled its profits since 2001, a feat rewarded with a measly 1.5% bump in its stock price. Intel Corp.'s prize for boosting its earnings by 173% in five years? A 30% plunge in its shares.
A similar malaise afflicts Walt Disney (DIS ), Microsoft, Pfizer, Wal-Mart, and others across many sectors and industries. What exasperates the leaders of these corporations is that it seems there's little they can do about it. They're delivering the earnings growth, but investors aren't responding. At work are forces largely beyond their control.
BOILING DOWN TO ZILCH
Welcome to the blue chip blues. The S&P 500 is near a five-year high. But don't celebrate: It has returned just 4.3% annually during that span, far less than its long-term average of 10%. The S&P 100-stock index -- the bluest of the blue chips, with $6.5 trillion in market capitalization and a huge share of U.S. corporate profits -- has returned just 2.03% annually to investors during that span, chiefly from dividends. Without dividends, it's just 0.94% overall, or 0.19% annually. In any event, after taxes and inflation, that pretty much boils down to zilch. Things have gotten so bad that ISI Group strategist Jason R. Trennert has said blue chips could be "the cheapest asset class in the developed world."
There's no law that says stock prices must track corporate earnings perfectly. But the degree of the disconnect and its long duration pose serious questions for CEOs, managers, and shareholders alike. Is this a temporary phenomenon or a permanent structural change? Should America's investor class -- the doctors and nurses, couples and singles, clerks and judges -- continue to hold these stocks as dearly as they did a few years ago? What would it take to get big U.S. stocks moving again?
Just about everything is crushing blue chips: real estate, commodities, precious metals, international stocks, and smaller U.S. stocks. And investors haven't had to be geniuses to take part in those gains. They've merely had to dust off some old ideas. Basic finance theory says that investors can get the best balance of risk and reward by owning pieces of as many of the world's asset classes as they can, from stocks to gold, alpacas to saffron. For years, the S&P 500-stock index of the biggest U.S. companies was the best approximation of that ideal available to investors -- and they flocked to it.
But in the past decade, the world's financial markets have changed in unexpected ways. The proliferation of hedge funds, those lightly regulated pools of capital that cater to wealthy investors, has allowed pension fund managers and other institutional investors to venture beyond U.S. shores and seek high returns wherever they present themselves. And the explosion of exchange-traded funds, or mutual funds that trade like stocks, has opened up the world to individual investors in ways that were never before possible. China, Mexico, and South Africa are now just a mouse click away. A decade ago, they were available chiefly through clunky, high-fee mutual funds, if at all.
With more choices, investors are diversifying their portfolios as textbooks say they should. Emerging-market shares, small U.S. stocks, gold, and even commodities are taking up sizable chunks.
ONLY GAME IN TOWN
Some market strategists think this global rebalancing act could be a 10- or 20-year process. But skeptics point out that an overseas financial crisis could erupt at any time and send investors fleeing to the relative safety of the U.S. markets -- not unlike what happened during the 1997 and 1998 Asian and Russian sell-offs.
Who's right? Before we can sort out the possibilities, we must understand how the blue chips got so popular in the first place.
The biggest U.S. stocks returned an average of 16% a year during the 1982-2000 bull market, gains that far outpaced the underlying corporate profit growth. In 1981 the average price-earnings ratio for these stocks was around 8. By 2000, at the peak of the tech bubble that sent many stocks to all-time highs, it had swelled to 35. Even a conglomerate such as GE sported a ratio nearly double its current 18. Blue chips "are coming off the biggest p-e expansion in history," says James P. O'Shaughnessy, who oversees more than $6.5 billion at Bear Stearns Asset Management Inc. (BSC ) "In 2000 it was as if there was nothing else worth investing in."
Nothing indeed. The bull market resulted from a dearth of alternative opportunities. Long-term interest rates fell throughout the period, making bond yields less attractive to investors. Prices of oil, other commodities, and precious metals fell, too. Two housing busts soured investors on real estate by the mid-1990s. Stocks were the only game in town. The p-e ratios of companies with growing but stable earnings soared, with blue chips enjoying unprecedented popularity.
Then the profit growth stopped -- and with it, blue chip supremacy. According to Goldman, Sachs & Co. (GS ), reported earnings per share of the companies in the S&P 500 fell from $50 in 2000 to $17.50 by 2002. The largest 100 stocks lost 53%, peak to trough. Assuming an 8% average annual return, it would still take Cisco Systems Inc. (CSCO ) 17 years to hit its 2000 level; Microsoft, 10 years; GE, 8; and Disney, 6.
Smaller stocks have fared much better, for two reasons. For one thing, their valuations hadn't run up so much in the first place. And second, smaller companies are nimbler than big ones, and can adapt to changing economic conditions faster. As blue chip profits cratered in 2002, the earnings of the S&P 600-stock index of small capitalization companies rocketed 20%, then 15% and 28% the following two years. Investors sought out the relative value of small and midsize companies, which have returned an average of 15% and 13% a year, respectively, since March, 2001. Small caps once were considered much riskier than big ones. The big-company earnings crash showed that even the celebrated blue chips are risky, too.
The question is, which period was the aberration: 1982-2000 or 2001-06? History seems to argue for the former. According to Ibbotson Associates, small caps have returned 11.7% annually since 1926, vs. large caps' 9.8%. As Herb Stein, chairman of the Council of Economic Advisers under President Nixon, once quipped, "if something cannot go on forever, it will stop."
cont....
Hedge funds exacerbated the shift to small stocks. In 1982 they were minor players. But they took off in the late '90s and especially during this decade. Their superior information-gathering allows them to spot profit opportunities in small companies that aren't widely followed. The ability of so-called activist hedge funds to transform small companies by taking big positions and agitating for change has been another lure. Perhaps most important, hedge fund traders are trend followers, traveling in packs into and out of asset classes. Right now the trend favors small stocks. "If you were to stick a gun to my head," says Bear Stearns' O'Shaughnessy, "I'd say small caps will keep beating for 20 years."
It isn't only small caps that are dominating. Blue chips are getting crushed by just about everything overseas. South Korea was up 54% last year; Latin America, 55%; and Saudi Arabia, 108%. Russia and a resurgent Japan returned 87% and 42%, respectively. In the past five years, the S&P Citigroup Emerging Market Index has returned about 17% a year, slightly better than the annual returns U.S. blue chips posted from 1982 to 2000. Could emerging markets pull off a similar 18-year run?
Time was, investors looking for exposure to international and emerging markets would buy shares of a huge U.S. multinational, which supposedly offered transparency and sound governance and none of the crony capitalism found in emerging markets. Then the corporate scandals hit, and big U.S. companies were seen in a different light.
Nowadays, foreign pure plays are getting the benefit of the doubt over U.S. giants. For example, shares of Brazil's Banco Bradesco, which trade in the U.S. as American depositary receipts, have soared more than 370% since 2001. Citigroup's (C ) shares have gained only 12%, despite the bank's presence not only in Brazil but also China, India, Korea, Mexico, the Philippines, Poland, Russia, and almost 100 other countries. In all, Citigroup derived 41% of its 2005 net income from foreign markets. Yet investors clearly favor the Brazilian pure play.
It's difficult to argue with the growth these nations are posting. According to statistics from the International Monetary Fund, Brazil, China, India, and Russia drove 30% of the overall growth in global demand in 2005, more than double the figure five years earlier.
And so the hunger for international stocks is huge. Since 2003, net flows to international-stock mutual funds have more than tripled, to $150 billion, while flows into U.S. funds have plunged from $154 billion to $64 billion. In January, foreign equity funds' inflows almost doubled those of December.
The explosion of lower-cost exchange-traded funds (ETFs) has only hastened the advance, making it even easier for ordinary investors to jump into and out of emerging markets. Barclays Global Investors (BCS ) offers 37 international and global ETFs holding $72 billion in assets, up from 24 and $2 billion in January, 2001.
Some argue that emerging markets have emerged for good. "The structural story has changed," says Thomas Melendez, associate portfolio manager at MFS Emerging Markets Equity fund, which has returned an average of 38% annually for the past three years. Emerging markets, he says, will keep growing, diversifying, and cleaning up their fiscal houses.
Consider the emergence of red chips, the biggest and best companies in China. They don't have the stability of their Western counterparts, and they carry the risk of major government intervention. But over the next several years, red chips should turn bluer. Demand for the initial public offering later this year of Industrial & Commercial Bank of China, one of China's largest financial institutions, is expected to be strong. Already, Goldman Sachs has ponied up $2.58 billion for a 7% stake, ahead of a potentially $12 billion IPO that's on track to be one of the biggest ever.
Yet despite the long rally, emerging-markets companies still trade below their historical averages based on p-e and price-cash flow ratios. "The [emerging-markets] story has legs for the next 10 years," says Melendez. In fact, legendary value investor Warren Buffett, who made a fortune with big investments in blue chips such as Coca-Cola Co. (KO ) and Gillette, recently disclosed that he had made big bets on four major stock indexes, three of which are outside the U.S.
Whether or not you share that optimism, it's clear that big U.S. stocks face much more competition for investor dollars than ever before. With nearly everything else working, why should investors bother with blue chips?
Predicting the major turning points for markets has proved perilous for investors, academics, and business publications alike. But asset classes move in discernible cycles, rising and falling over long periods of time. Commodities, for instance, ruled the 1970s, slumped for two decades, and then resurged recently.
Strategists citing the cyclical argument have been predicting a blue chip comeback for 18 months. It hasn't happened yet. "Clients gripe: 'We listened to blue chip bulls last year, and it did not work,"' says Tobias Levkovich, chief U.S. equity strategist at Citigroup. "'[The bulls are] saying the same thing this year, and it's still not working."' The degree to which blue chips have fallen out of favor is remarkable. "When we buy a large cap, we hear: 'How can you buy that dog? It has done nothing for five years,"' says Ron Muhlenkamp, manager of the $3.2 billion Muhlenkamp Fund, which has big positions in several blue chips.
But betting against fund flows, prevailing sentiment, and trend lines has made contrarian investors rich over the years. "The time to make money," said Lord Rothschild, "is when there is blood on the streets." Big stocks are clearly wounded. "It actually hurts to say this again," wrote ISI's Trennert in a Feb. 27 research note to clients, "but we believe large caps are due."
FAT KITTY
Some of the signs that blue chips were overvalued in the 1990s are showing up in small caps now. The Russell 2000 index sports an estimated p-e of 25, a 10-point premium to the S&P 100's 15. "What ultimately wins in financial markets is valuation," says Trennert.
If valuation is king, cash is its queen. According to Moody's Investors Service (MCO ), U.S. nonfinancial companies now hold a record $1.5 trillion of cash -- double the kitty of just seven years ago, with blue chips sitting on the most. Sooner or later, activist hedge funds will come a-calling. "The real [opportunity] is now untapped shareholder value," says Trennert. "As in: 'Give the money back -- or else."' Attacks on a few big companies might send their stocks up. And other big-company CEOs might start spending on share buybacks, dividends, and acquisitions, to nip potential activist challenges in the bud. Dividends, of course, can be a powerful component of total return. DuPont's (DD ) shares, for example, rose just 0.5% during the past five years. But adding and reinvesting dividends jack up the total return to 18.5%. For Microsoft, the numbers are 0.8% and 15.2%.
Rising interest rates would make those cash hoards all the more enticing. "If bond yields creep up, companies will be pressured to do more with their cash," says Marc Freed, managing director of Lyster Watson & Co., a Manhattan hedge fund-of-funds shop. Investors would no longer tolerate idle cash languishing on balance sheets if it could be put to good use.
At the same time, rising rates would hurt smaller companies, which are more dependent on short-term borrowing. So while blue chips would be spending cash in ways to benefit shareholders, small companies could see their earnings decrease as their financing costs rise. That would change the perception of small caps as can't-miss investments, and prompt a shift back to blue chips -- the long-awaited flight to quality. Trend-following hedge funds would spot the turn faster than most, pile in, and speed things up even more.
Trennert takes the argument a step further. "The single biggest reason that large caps have lagged is that the economy hasn't slowed," he says. "A slowdown would get people thinking about safe, sustainable earnings growth again."
But what of the international funds and ETFs sucking so many tens of billions away from U.S. blue chips? Levkovich says the trend simply can't last. While the relative valuation of the 25 largest S&P 500 companies, including recent winners ExxonMobil (XOM ), Hewlett-Packard (HPQ ), and P&G, is near a 20-year low, flows into emerging-market funds as a percentage of all equity flows is twice the previous peak. The last time he saw flows so disparate was during the last call for tech and growth stocks in 2000. "You can see the fad, and know it's just a matter of time until it blows up," says Levkovich. "When people get worried, they will want the safety of U.S. equities."
Hedge funds exacerbated the shift to small stocks. In 1982 they were minor players. But they took off in the late '90s and especially during this decade. Their superior information-gathering allows them to spot profit opportunities in small companies that aren't widely followed. The ability of so-called activist hedge funds to transform small companies by taking big positions and agitating for change has been another lure. Perhaps most important, hedge fund traders are trend followers, traveling in packs into and out of asset classes. Right now the trend favors small stocks. "If you were to stick a gun to my head," says Bear Stearns' O'Shaughnessy, "I'd say small caps will keep beating for 20 years."
It isn't only small caps that are dominating. Blue chips are getting crushed by just about everything overseas. South Korea was up 54% last year; Latin America, 55%; and Saudi Arabia, 108%. Russia and a resurgent Japan returned 87% and 42%, respectively. In the past five years, the S&P Citigroup Emerging Market Index has returned about 17% a year, slightly better than the annual returns U.S. blue chips posted from 1982 to 2000. Could emerging markets pull off a similar 18-year run?
Time was, investors looking for exposure to international and emerging markets would buy shares of a huge U.S. multinational, which supposedly offered transparency and sound governance and none of the crony capitalism found in emerging markets. Then the corporate scandals hit, and big U.S. companies were seen in a different light.
Nowadays, foreign pure plays are getting the benefit of the doubt over U.S. giants. For example, shares of Brazil's Banco Bradesco, which trade in the U.S. as American depositary receipts, have soared more than 370% since 2001. Citigroup's (C ) shares have gained only 12%, despite the bank's presence not only in Brazil but also China, India, Korea, Mexico, the Philippines, Poland, Russia, and almost 100 other countries. In all, Citigroup derived 41% of its 2005 net income from foreign markets. Yet investors clearly favor the Brazilian pure play.
It's difficult to argue with the growth these nations are posting. According to statistics from the International Monetary Fund, Brazil, China, India, and Russia drove 30% of the overall growth in global demand in 2005, more than double the figure five years earlier.
And so the hunger for international stocks is huge. Since 2003, net flows to international-stock mutual funds have more than tripled, to $150 billion, while flows into U.S. funds have plunged from $154 billion to $64 billion. In January, foreign equity funds' inflows almost doubled those of December.
The explosion of lower-cost exchange-traded funds (ETFs) has only hastened the advance, making it even easier for ordinary investors to jump into and out of emerging markets. Barclays Global Investors (BCS ) offers 37 international and global ETFs holding $72 billion in assets, up from 24 and $2 billion in January, 2001.
Some argue that emerging markets have emerged for good. "The structural story has changed," says Thomas Melendez, associate portfolio manager at MFS Emerging Markets Equity fund, which has returned an average of 38% annually for the past three years. Emerging markets, he says, will keep growing, diversifying, and cleaning up their fiscal houses.
Consider the emergence of red chips, the biggest and best companies in China. They don't have the stability of their Western counterparts, and they carry the risk of major government intervention. But over the next several years, red chips should turn bluer. Demand for the initial public offering later this year of Industrial & Commercial Bank of China, one of China's largest financial institutions, is expected to be strong. Already, Goldman Sachs has ponied up $2.58 billion for a 7% stake, ahead of a potentially $12 billion IPO that's on track to be one of the biggest ever.
Yet despite the long rally, emerging-markets companies still trade below their historical averages based on p-e and price-cash flow ratios. "The [emerging-markets] story has legs for the next 10 years," says Melendez. In fact, legendary value investor Warren Buffett, who made a fortune with big investments in blue chips such as Coca-Cola Co. (KO ) and Gillette, recently disclosed that he had made big bets on four major stock indexes, three of which are outside the U.S.
Whether or not you share that optimism, it's clear that big U.S. stocks face much more competition for investor dollars than ever before. With nearly everything else working, why should investors bother with blue chips?
Predicting the major turning points for markets has proved perilous for investors, academics, and business publications alike. But asset classes move in discernible cycles, rising and falling over long periods of time. Commodities, for instance, ruled the 1970s, slumped for two decades, and then resurged recently.
Strategists citing the cyclical argument have been predicting a blue chip comeback for 18 months. It hasn't happened yet. "Clients gripe: 'We listened to blue chip bulls last year, and it did not work,"' says Tobias Levkovich, chief U.S. equity strategist at Citigroup. "'[The bulls are] saying the same thing this year, and it's still not working."' The degree to which blue chips have fallen out of favor is remarkable. "When we buy a large cap, we hear: 'How can you buy that dog? It has done nothing for five years,"' says Ron Muhlenkamp, manager of the $3.2 billion Muhlenkamp Fund, which has big positions in several blue chips.
But betting against fund flows, prevailing sentiment, and trend lines has made contrarian investors rich over the years. "The time to make money," said Lord Rothschild, "is when there is blood on the streets." Big stocks are clearly wounded. "It actually hurts to say this again," wrote ISI's Trennert in a Feb. 27 research note to clients, "but we believe large caps are due."
FAT KITTY
Some of the signs that blue chips were overvalued in the 1990s are showing up in small caps now. The Russell 2000 index sports an estimated p-e of 25, a 10-point premium to the S&P 100's 15. "What ultimately wins in financial markets is valuation," says Trennert.
If valuation is king, cash is its queen. According to Moody's Investors Service (MCO ), U.S. nonfinancial companies now hold a record $1.5 trillion of cash -- double the kitty of just seven years ago, with blue chips sitting on the most. Sooner or later, activist hedge funds will come a-calling. "The real [opportunity] is now untapped shareholder value," says Trennert. "As in: 'Give the money back -- or else."' Attacks on a few big companies might send their stocks up. And other big-company CEOs might start spending on share buybacks, dividends, and acquisitions, to nip potential activist challenges in the bud. Dividends, of course, can be a powerful component of total return. DuPont's (DD ) shares, for example, rose just 0.5% during the past five years. But adding and reinvesting dividends jack up the total return to 18.5%. For Microsoft, the numbers are 0.8% and 15.2%.
Rising interest rates would make those cash hoards all the more enticing. "If bond yields creep up, companies will be pressured to do more with their cash," says Marc Freed, managing director of Lyster Watson & Co., a Manhattan hedge fund-of-funds shop. Investors would no longer tolerate idle cash languishing on balance sheets if it could be put to good use.
At the same time, rising rates would hurt smaller companies, which are more dependent on short-term borrowing. So while blue chips would be spending cash in ways to benefit shareholders, small companies could see their earnings decrease as their financing costs rise. That would change the perception of small caps as can't-miss investments, and prompt a shift back to blue chips -- the long-awaited flight to quality. Trend-following hedge funds would spot the turn faster than most, pile in, and speed things up even more.
Trennert takes the argument a step further. "The single biggest reason that large caps have lagged is that the economy hasn't slowed," he says. "A slowdown would get people thinking about safe, sustainable earnings growth again."
But what of the international funds and ETFs sucking so many tens of billions away from U.S. blue chips? Levkovich says the trend simply can't last. While the relative valuation of the 25 largest S&P 500 companies, including recent winners ExxonMobil (XOM ), Hewlett-Packard (HPQ ), and P&G, is near a 20-year low, flows into emerging-market funds as a percentage of all equity flows is twice the previous peak. The last time he saw flows so disparate was during the last call for tech and growth stocks in 2000. "You can see the fad, and know it's just a matter of time until it blows up," says Levkovich. "When people get worried, they will want the safety of U.S. equities."
and the end...
For a time, they will. But don't expect 2006 to kick off another 20-year blue chip bull market. One of the byproducts of globalization has been more efficient capital markets, with swifter and larger money flows. That poses a challenge for the millions of investors out there still fixated on big U.S. indexes. Stubbornly sticking with what used to work is a sure way to fail. "The 1990s spoiled us," says Jeffrey M. Mortimer, chief investment officer for equities at Charles Schwab Investment Management (SCH ). "All you had to do was show up." Mortimer, who keeps his finger on the retail pulse by checking in on Schwab branches, says he's "shocked" by how hard old habits die. "They're looking east for the sunset," he says.
"The reality," says Edward Yardeni of Oak Associates Ltd., "is that we live in a much more competitive world than ever before." Big U.S. stocks will have to duke it out with red chips, small caps, gold ETFs, and all the new issues that'll hit the scene in the years to come. What's the good news? Increasingly complex financial markets mean more opportunities for investors -- and, if they're played right, fewer risks.
Bank on this: The blue chips will see another bull market, and perhaps soon. But with so many choices at investors' fingertips, the easy money may have already been made. Diversification is back. And that's not a bad thing.
For a time, they will. But don't expect 2006 to kick off another 20-year blue chip bull market. One of the byproducts of globalization has been more efficient capital markets, with swifter and larger money flows. That poses a challenge for the millions of investors out there still fixated on big U.S. indexes. Stubbornly sticking with what used to work is a sure way to fail. "The 1990s spoiled us," says Jeffrey M. Mortimer, chief investment officer for equities at Charles Schwab Investment Management (SCH ). "All you had to do was show up." Mortimer, who keeps his finger on the retail pulse by checking in on Schwab branches, says he's "shocked" by how hard old habits die. "They're looking east for the sunset," he says.
"The reality," says Edward Yardeni of Oak Associates Ltd., "is that we live in a much more competitive world than ever before." Big U.S. stocks will have to duke it out with red chips, small caps, gold ETFs, and all the new issues that'll hit the scene in the years to come. What's the good news? Increasingly complex financial markets mean more opportunities for investors -- and, if they're played right, fewer risks.
Bank on this: The blue chips will see another bull market, and perhaps soon. But with so many choices at investors' fingertips, the easy money may have already been made. Diversification is back. And that's not a bad thing.
If you want exposure to a large sample of these giant caps...DGT is a good route to go
streetTRACKS DJ Global Titans DGT
Morningstar's Take | 09-07-2005
by Dan Culloton
You can't get any larger-cap than this.
StreetTracks Dow Jones Global Titans' benchmark, the Dow Jones Global Titans 50, includes the biggest multinational stocks in the world. As a result the portfolio has the highest average market capitalization of any fund, exchange traded or otherwise, in Morningstar's database.
This could be a good thing if you think large-cap stocks, after years of playing second fiddle to the shares of smaller companies, are due for their day in the sun. The ETF's bogy includes financially solid, market-leading firms that get some of their revenue from outside of their home country. Because the United States is home to many global conglomerates, such as General Electric GE and American International Group AIG, domestic companies account for nearly two thirds of the fund's assets. Dow Jones, however, contends that when you consider the revenue sources of the Global Titans' constituents, the index's domestic exposure is lower. For example, 47% of GE's 2004 revenue came from overseas.
It's true that many of this ETF's holdings move more in tandem with the fortunes of the sectors in which they do business than with their home economies. Yet, this fund has some traits that could cause it to diverge from other globe-spanning portfolios. The ETF is concentrated. The portfolio has about 50 stocks and keeps close to 40% of its assets in its top 10 holdings. The fund also is less diversified by sector than the iShares S&P Global 100 Index IOO and other large-blend and world-stock funds. The ETF is light on utility, industrial, and consumer stocks and heavier on telecom, financial, and energy equities.
That doesn't disqualify it, but its 0.51% expense ratio makes it hard to recommend over iShares S&P Global 100, which is relatively cheaper at 0.4%. It's the cheaper and more diversified option.
See Previous Analyst Reports
Year Total Return (%) +/- Category
YTD 3.85 -0.33
2005 2.82 -0.92
2004 7.34 -1.10
2003 24.92 -2.80
2002 -23.37 0.29
Data through 03-31-2006
Role in Portfolio
Core
Dan Culloton is a senior fund analyst for Morningstar. He welcomes e-mail but cannot give investment advice. He can be reached at analyst feedback. Find out about Morningstar's editorial policies here.
Morningstar Rating
2*
Kudos
Broad, global diversification.
Transparency: You know what you own.
Competitive yield.
Risks
Another ETF covers similar territory for a lower expense ratio.
As with all ETFs, investors have to pay commissions to buy and sell the fund, which can increase transaction costs.
A bit concentrated in terms of number of holdings.
Strategy
This fund tracks the Dow Jones Global Titans 50, which includes the some of biggest multinational companies in the world. Down Jones screens 5000 stocks across the globe, ranking them by a mixture of free-float market capitalization, sales and net income (weighted 60%, 20%, and 20%, respectively) and takes the highest-ranking stocks for the Global Titans Index. Constituents additionally have to be established companies that derive at least some revenue from outside their home country. The float-adjusted, market-cap-weighted index checks the weightings of its holdings quarterly and reconstitutes in April.
Management
SSgA Funds Management is this ETF's advisor. Karl Schneider and John Tucker are the principal members of the fund's management team. Schneider has been with SSgA since 1996 and manages more than $400 billion in funds and accounts, including some tracking the Wilshire 5000, Russell 2000, and Wilshire 4500. Tucker is the head of the portfolio management team for the firm's ETFs. He's the former head of SSgA's structured-products group in the firm's London office. Tucker also is responsible for new-product research and development.
streetTRACKS DJ Global Titans DGT
Morningstar's Take | 09-07-2005
by Dan Culloton
You can't get any larger-cap than this.
StreetTracks Dow Jones Global Titans' benchmark, the Dow Jones Global Titans 50, includes the biggest multinational stocks in the world. As a result the portfolio has the highest average market capitalization of any fund, exchange traded or otherwise, in Morningstar's database.
This could be a good thing if you think large-cap stocks, after years of playing second fiddle to the shares of smaller companies, are due for their day in the sun. The ETF's bogy includes financially solid, market-leading firms that get some of their revenue from outside of their home country. Because the United States is home to many global conglomerates, such as General Electric GE and American International Group AIG, domestic companies account for nearly two thirds of the fund's assets. Dow Jones, however, contends that when you consider the revenue sources of the Global Titans' constituents, the index's domestic exposure is lower. For example, 47% of GE's 2004 revenue came from overseas.
It's true that many of this ETF's holdings move more in tandem with the fortunes of the sectors in which they do business than with their home economies. Yet, this fund has some traits that could cause it to diverge from other globe-spanning portfolios. The ETF is concentrated. The portfolio has about 50 stocks and keeps close to 40% of its assets in its top 10 holdings. The fund also is less diversified by sector than the iShares S&P Global 100 Index IOO and other large-blend and world-stock funds. The ETF is light on utility, industrial, and consumer stocks and heavier on telecom, financial, and energy equities.
That doesn't disqualify it, but its 0.51% expense ratio makes it hard to recommend over iShares S&P Global 100, which is relatively cheaper at 0.4%. It's the cheaper and more diversified option.
See Previous Analyst Reports
Year Total Return (%) +/- Category
YTD 3.85 -0.33
2005 2.82 -0.92
2004 7.34 -1.10
2003 24.92 -2.80
2002 -23.37 0.29
Data through 03-31-2006
Role in Portfolio
Core
Dan Culloton is a senior fund analyst for Morningstar. He welcomes e-mail but cannot give investment advice. He can be reached at analyst feedback. Find out about Morningstar's editorial policies here.
Morningstar Rating
2*
Kudos
Broad, global diversification.
Transparency: You know what you own.
Competitive yield.
Risks
Another ETF covers similar territory for a lower expense ratio.
As with all ETFs, investors have to pay commissions to buy and sell the fund, which can increase transaction costs.
A bit concentrated in terms of number of holdings.
Strategy
This fund tracks the Dow Jones Global Titans 50, which includes the some of biggest multinational companies in the world. Down Jones screens 5000 stocks across the globe, ranking them by a mixture of free-float market capitalization, sales and net income (weighted 60%, 20%, and 20%, respectively) and takes the highest-ranking stocks for the Global Titans Index. Constituents additionally have to be established companies that derive at least some revenue from outside their home country. The float-adjusted, market-cap-weighted index checks the weightings of its holdings quarterly and reconstitutes in April.
Management
SSgA Funds Management is this ETF's advisor. Karl Schneider and John Tucker are the principal members of the fund's management team. Schneider has been with SSgA since 1996 and manages more than $400 billion in funds and accounts, including some tracking the Wilshire 5000, Russell 2000, and Wilshire 4500. Tucker is the head of the portfolio management team for the firm's ETFs. He's the former head of SSgA's structured-products group in the firm's London office. Tucker also is responsible for new-product research and development.
