morningstar investments overview

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Morningstar Investment Services

× Mike Reeves, Regional DirectorMorningstar Managed Portfolios404-277-5744

2Morningstar Managed Portfolios 2


Third Party Asset Manager:

Mutual Fund Portfolios

ETF Portfolios

Stock Portfolios

Stock/ETF Portfolios



Turnkey Investment Management Solution

Proposal generation

Investment Policy Statement

Reporting: statements, asset allocation reports, snap shots

Investment Management

Investment Analysis: Portfolio Compare, Monte Carlo Simulator



What we bring to the table:

Independence

Experience

Reach

Resources

Access

5Morningstar Managed Portfolios

Our Philosophy

×

We invest for the long-term×

We are independent thinkers ×

We employ a disciplined, consistent investment process ×

We believe in active management ×

We are sensitive to costs and taxes ×

We invest our clients’

money as if it were our own

×

We communicate in a timely and candid fashion

For Advisor use only. Not for public distribution.


Why some advisors utilize a Turnkey Asset Management Program?

×

Access to consistent well-defined investment management

×

Active portfolio construction and risk management

×

Sharing of fiduciary responsibility

×

Ability to create operational efficiencies and deliver a differentiating client experience on a repeatable basis

×

Create capacity to serve clients better, Time Management

×

Focus on your strength & resources

×

Build value in practice


TAMP statistics

► TAMP Assets have grown significantly with $200B+ today versus just $4B in 1994

TAMP users

Non-Users► Worry about delivering high-quality

investment management products and services 5%

75%

► Anxious about market volatility

23.6%

65.2%

► Dealing with compliance and regulatory issues

39.8%

61.7%

Source: CEG Worldwide (Financial Planning)


Our Mutual Fund Portfolios


Our portfolios at a glance

The information displayed is for illustrative purposes only. It should not be used to assess the exact risk/return relationship between portfolios. No guarantees can be given about future performance.

Asset Allocation

Series aims to meet your needs at various life stages with different risk profiles and return objectives. These complete portfolio solutions include multiple asset classes, investment styles, and managers.

Retirement Income Series is designed to generate a cashflow

stream that will last over a client’s expected time horizon and protect against the risk of clients outliving their assets

Focused Allocation Series provides exposure to a specific area of the capital markets, alternative investments, and global opportunities.


Team of investment professionals focused on you

×

Analyzes your current financial situation×

Assists in determining your risk/return profile

×

Helps you select the appropriate portfolio×

Monitors performance relative to your goals and objectives

×

Reviews changes in your circumstances

►

Determines target asset mix►

Evaluates fund performance data to peer group and benchmark

►

Analyzes, selects, and monitors fund managers

►

Creates and constructs portfolios►

Reallocates and rebalances portfolios

MorningstarInvestment

Services Financial Advisor


Our Investment Management Process

Asset Allocation Fund Selection Portfolio Construction

Risk Management

Dynamic Asset Allocation

Strategic Allocation

Sets long-term risk and return profile Diversify across multiple asset classes

Tactical Overlay

Over/underweight relative to strategic allocation Valuation sensitive

Fund Evaluation System

Quantitative Analysis

Performance analysis Risk metrics Run screens

Qualitative Due Diligence

Interview managers Peruse SEC filings On-site visits Evaluate stewardship

Maintain Risk Profile

Monitor

Managers Portfolio positioning Risk factors

Adjust

Rebalance accounts Top-down adjustments Fund specific changes

Diversified Portfolios

Portfolio Level

Holdings based analysis Manage to target risk Fund interaction/overlap

Fund Level

Tailor fund to strategy Contribution to portfolio risk and expenses


Program benefits

×

Access to full universe of funds×

Portfolio management integrity×

Recognized, trusted name×

Scalable & Repeatable Investment process for Advisors×

All the resources of Morningstar to work for you & the client×

Simple communications×

Customized client management×

Responsive service team ×

Access to the Investment Team


Our Absolute Return Portfolio Allocation

Long Equity, 7

Fixed Income, 10

Hedged Equity, 14

Long Short, 30

Convertible Arbitrage, 16

Merger Arbitrage, 6

High Yield, 4

Commodities, 5

Cash, 10

Based on recent allocations to funds that employ these strategies and positioning and may change over time.


Building Blocks for an Absolute Return Allocation

×

Lower Volatility×

Tighter return spectrum×

Lower Beta vs. S&P 500×

Low correlation to the broad markets

Absolute Return Portfolio has been able to deliver:×

80% of the upside of S&P 500×

40% of the Downside of S&P 500


Alternative Strategies

×

Convertible Arbitrage:

Take long positions in convertible bonds and short underlying common stock. Neutralizes portfolio from beta or equity market risk, while income from coupons on convertibles and short interest credit are primary sources of returns.

×

Covered Call Writing:

Designed to generate income from writing call options against a basket of long equity positions. May also use put options to provide further downside protection.

×

Long-Short:

Take long positions in stocks that manager believes will increase in price while shorting stocks manager believes are overvalued and will decline in price. Short positions lower beta of portfolio and benefit from down market environments.

×

Merger Arbitrage: Buy shares in the target company of an announced acquisition, which will tend to sell at a slight discount to the takeover price due to uncertainty regarding the deal closing. Hedge position through use of options or shorting acquirer.


Our Retirement Income Series: balancing income withdrawals and long-term growth

Retirement Income Long Range

Retirement Income Mid Range

Retirement Income Short Range

Recommended Time Horizon in Retirement: 2-15 Years

Target Distribution Rate: 6%

Recommended Time Horizon in Retirement: 10-20 Years


Recommended Time Horizon in Retirement: 20+ Years



Mutual Fund Portfolio

Pricing Schedule

×

Account Minimum $50,000 ×

Client fee does not include the mutual funds’

expenses

×

Advisor fee can be discounted in 5 bps increments

Mutual Fund Portfolios

Up to $500,000

Next $500,000

Next $1MM

Over $2MM

Morningstar Investment Services 0.40%

0.35%

0.30%

0.20%

Advisory Firm 1.10%

1.05%

1.00%

0.90%

Total Annual Fee

1.50%

1.40%

1.30%

1.10%


Our ETF Portfolio Line

The information displayed is for illustrative purposes only. It should not be used to assess exact spacing between portfolios. No guarantees can be given about future performance. For Advisor use only. Not for public distribution.

Conservative Income and Growth

Moderate Growth

Growth Aggressive GrowthR

E

T

U

R

N

R I S K


The Best of Both Worlds

All the Advantages of ETFs

Active

Management

+



A “Core and Explore”

Approach

Total Stock

Foreign

Bond

Core

Cash

Financial

Health-care

Energy

Retail

TIPS

GrowthExplore



Sample Portfolio

Growth ETF Portfolio Holdings Ticker Weighting Exp Ratio

Vanguard Total Stock Market ETF VTI 28% 0.07Vanguard FTSE All-World ex-US ETF VEU 18% 0.25Vanguard Total Bond Market ETF BND 13% 0.11

Vanguard Growth ETF VUG 7% 0.11iShares

S&P Global 100 Index IOO 7% 0.40Financial Select Sector SPDR XLF 6% 0.24Health Care Select Sector SPDR XLV 5% 0.24SPDR S&P Oil & Gas Exploration & Prod XOP 5% 0.35SPDR S&P Retail XRT 5% 0.35iShares

Lehman TIPS Bond TIP 3% 0.20

Money Market FMOXX 3% 0.48

Portfolio Blended Expense Ratio 0.20

Core

Expl

ore


ETF Rating Methodology

Valuation ×

Morningstar Price to Fair Value×

Price multiples: P/E, P/B, P/CF, P/S, Forward P/E

×

Morningstar growth, profitability, business risk scores

×

Expense ratio×

Bid/ask spread

×

Diversification×

Weighting methodology

Fundamentals

Costs

Index Construction Methodology


Valuation Example

0.39$26.00$10.291.8%Borders Group

0.45$32.00$14.432.0%Office Depot

0.55$18.00$9.952.0%Chico’s

0.61$38.00$23.141.6%Petsmart

0.61$38.00$24.931.8%Macy’s

0.72$50.00$36.001.6%Walgreen

0.73Portfolio

0.77$30.00$22.961.8%Staples

Price/Fair Value

Morningstar Fair ValuePriceWeighting %Name

×

Takeaway: XRT was recently trading at a 27% discount to fair value

Source: Morningstar Direct; portfolio weightings as of Jan. 31, 2008; price, fair value data as of February 20, 2008.For illustrative purposes only; not intended to be an offer or recommendation to buy/sell the above securities

SPDR S&P Retail (XRT)


Benefits of ETFs

×

Transparency of price×

Tax efficiency×

Passive diversification×

Great tool for implementing asset allocation strategies×

Protection against cash drag×

Cost advantages


Competitive Fee Structure

×

$100,000 account minimum (will accept accounts as low as $50,000 with minimum annual fee of $310)

×

Client fee does not include the underlying ETF’s expenses×


*Does not include fees/commissions associated with executing transactions nor the internal expenses of exchange-traded funds. It also does not include the advisory fee. Additionally, this fee covers costs associated with middle and back-office services such as a trading infrastructure and Participating Client accounting and reporting.

ETF Portfolios

First $1MM

Next $4MM

Thereafter

Total Fee

1.41%

1.35%

1.30%

Morningstar Investment Services Fee*

0.31%

0.25%

0.20%

Advisory Firm Fee

1.10%

1.10%

1.10%


Our Stock Portfolios at a Glance

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Customized portfolio of individual securities×

Areas of focus: Global Equity, Growth, Value, Small-cap, Mid-cap, Large-cap, Foreign, Conservative Equity, Growth Equity, Equity Income

×

Enables advisor to tailor portfolio to client needs×

Accommodate preference for restrictions on sector, industry, or individual stock exposures

×

Can add Fixed Income ETF’s or Bond mutual funds to balance out the portfolio×

Advisor can customize asset allocation between Stocks/fixed income

×

Accommodate current client holdings×

Client can transfer existing holdings for discretionary, tax-sensitive management×

Portfolio can be built around client’s other holdings

×

Actively managed to achieve added value×

Efficient trading and cost management



Broad Market

Global Equity

Market Capitalization

Large Cap

Mid-Cap

Small-Cap

Composite Style

Value & Core

Growth & Core

Foreign Foreign Stocks traded in the U.S.

Select Stock Baskets Portfolios

×

Advisor/Client can elect further customization by requesting Fixed Income ETF’s


Conservative Equity

Tortoise Portfolio

Growth Equity

Hare Portfolio

Equity Income Dividend Portfolio

×Model Portfolios with minimum of $100,000

×Advisor can elect further customization by requesting Fixed Income ETF’s to balance out the portfolio. As long as the Equity position meets the minimum.

×Advisor can elect restrictions on sector, industry, or individual stocks

Strategist Stock Baskets Portfolios


Morningstar Stock Research: Focus and key tenets

Look for superior businesses that trade at discounts to our fair

value

estimate

×

Wait for the “Fat-Pitch”×

Look for wide-moat companies×

Always, always have a margin of safety×

Don’t be afraid to hold relatively few stocks (25-30)×

Find great companies at a discount and don’t trade very often×

Free cash flow is what matters, not reported earnings


Economic Moats

×

Every stock we cover receives an Economic Moat rating, which is our assessment of the strength of the company’s competitive position.

×

We assume that all firms face competitive pressures that, over time, force down above-average returns on invested capital.

×

Companies with the ability to withstand the competition for very

long time receive Wide Moat ratings, companies with a moderate ability to withstand competition receive Narrow Moat ratings, and companies without meaningful competitive advantages receive No Moat ratings.

×

Moat ratings serve two important functions:×

Communicate overall quality of firm to investors. Wide Moat firms are more likely to be great long-term holdings; No Moat firms are more likely to bear close watching.

×

An input to valuation model –

the wider the moat, the higher the fair value. (Assuming similar growth rates and capital needs.)

Equity Research Services Provided by Morningstar, Inc.For Advisor use only. Not for public distribution.


Morningstar Stock Research: Ratings

×

Fair Value estimate×

Moat rating (Wide, Narrow, No-moat)×

Uncertainty Rating: Low, Medium, High, Extreme×

Stars Rating: 5-4 stars trading at a discount to our fair value

3 stars trading at/around Fair value1-2 stars trading at a premium to our fair value


From Analyst Valuation to the Morningstar Rating for Stocks


Morningstar’s Breadth of Coverage

×

Analyst coverage:×

More than 130 analysts×

Covering more than 2,000 stocks×

In 130 industries×

In nearly 50 countries ×

450 firms based outside the U.S.

×

Extensive coverage across market cap:×

465 large-cap stocks×

750 mid-cap stocks×

920 small-cap stocks


Global Coverage

Regional Coverage

North America 1847Australia/New Zealand 251Asia 109Europe 124Latin America 61Middle East/Africa 22

2414


Stock Valuations

Source: http://www.morningstar.comData as of Jan.9, 2009. See important disclosures in the Appendix.

All-time HighDec. 31, 2004

1.14 P/FV

52-Wk HighDec. 26, 2007

0.94 P/FV

CurrentJan. 9, 2009

0.75 P/FV

All-time LowNov. 20, 2008

0.55 P/FV

For illustrative purposes only.Past performance is not a guarantee of future results.

This graph shows the price to fair value of the median stock in Morningstar, Inc.’s stock coverage universe


Investment Approach

“The Stock market is a no-called strike game. You don’t have to swing at everything----you can wait for your pitch”

Warren Buffett


Clear Pricing Schedule

×

Account minimum: $100,000 for Strategist Series (Tortoise, Hare,

& Dividend)×

Account minimum: $250,000 Select Custom Stock Baskets×

Client fee does not include transaction costs associated with custody/clearing×


Select Stock Baskets Portfolios

First $1MM

Next $4MM

Thereafter

Morningstar Investment Services 0.55%

0.50%

0.45%

Advisory Firm 1.10%

1.10%

1.10%

Total Annual Fee

1.65%

1.60%

1.55%


Tools and Resources


Comprehensive web platform for advisors


Client presentation tools (Samples)

Client Profile

Client Overview

Proposal


Advisor information tools (Samples)

Monthly Portfolio ReportsQuarterly Commentary


Helping advisors help their client’s

×

Illustration tools

× Monte Carlo Simulations

× Portfolio Comparison

×

Market educational pieces

×

Direct communication

× Client write-ups and calls

×

X ray and snapshot reports, individual performance information


Your Morningstar Investment Services Team

Mike Reeves, Regional Director404-277-5744 [email protected]

Sean Klock, Regional Consultant877-626-3224 ext. 8 [email protected]

Stephen Winchell, Service Consultant877-626-3227 [email protected]

morningstar investments overview

Economy & Finance

resources of morningstar

investment team

active management

risk portfolio positioning

consistent investment

time management focus

asset allocation reports

multiple asset classes