5. 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.
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Morningstar Managed Portfolios
6. 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
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Morningstar Managed Portfolios
7. 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)
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Morningstar Managed Portfolios
9. Our portfolios at a glance
Asset Allocation Series aims to meet Retirement Income Series is designed Focused Allocation Series provides
your needs at various life stages with to generate a cashflow stream that will exposure to a specific area of the capital
different risk profiles and return last over a client’s expected time horizon markets, alternative investments, and
objectives. These complete portfolio and protect against the risk of clients global opportunities.
solutions include multiple asset classes, outliving their assets
investment styles, and managers.
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.
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Morningstar Managed Portfolios
10. Team of investment professionals focused on you
Morningstar
Financial Advisor Investment
Services
Analyzes your current financial situation Determines target asset mix
× ►
Assists in determining your risk/return
× Evaluates fund performance data to
►
profile peer group and benchmark
Helps you select the appropriate portfolio
× Analyzes, selects, and monitors fund
►
Monitors performance relative to your managers
×
goals and objectives
Creates and constructs portfolios
►
Reviews changes in your circumstances
×
Reallocates and rebalances portfolios
►
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Morningstar Managed Portfolios
11. Our Investment Management Process
Risk
Portfolio
Asset Allocation Fund Selection
Management
Construction
Dynamic Asset Allocation Fund Evaluation System Diversified Portfolios Maintain Risk Profile
Strategic Allocation Quantitative Analysis Portfolio Level Monitor
Sets long-term risk and Performance analysis Holdings based analysis Managers
return profile Risk metrics Manage to target risk Portfolio positioning
Diversify across multiple Run screens Fund interaction/overlap Risk factors
asset classes
Qualitative Due Diligence Fund Level Adjust
Tactical Overlay
Interview managers Tailor fund to strategy Rebalance accounts
Over/underweight relative Peruse SEC filings Contribution to portfolio Top-down adjustments
to strategic allocation On-site visits risk and expenses Fund specific changes
Valuation sensitive Evaluate stewardship
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Morningstar Managed Portfolios
12. 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
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Morningstar Managed Portfolios
13. Our Absolute Return Portfolio Allocation
Long Equity, 7
Cash, 10
Fixed Income, 10
Commodities, 5
High Yield, 4
Merger Arbitrage, 6
Hedged Equity, 14
Convertible Arbitrage, 16
Long Short, 30
Based on recent allocations to funds that employ these strategies
and positioning and may change over time.
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Morningstar Managed Portfolios
14. 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
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Morningstar Managed Portfolios
15. 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.
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Morningstar Managed Portfolios
16. Our Retirement Income Series: balancing income withdrawals
and long-term growth
Retirement Income Long Range
Recommended Time Horizon in Retirement: 20+ Years
Target Distribution Rate: 4%
Retirement Income Mid Range
Recommended Time Horizon in Retirement: 10-20 Years
Target Distribution Rate: 5%
Retirement Income Short Range
Recommended Time Horizon in Retirement: 2-15 Years
Target Distribution Rate: 6%
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Morningstar Managed Portfolios
17. Mutual Fund Portfolio Pricing Schedule
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%
× Account Minimum $50,000
× Client fee does not include the mutual funds’ expenses
× Advisor fee can be discounted in 5 bps increments
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Morningstar Managed Portfolios
19. Our ETF Portfolio Line
URN
T
Conservative Income and Moderate Growth Aggressive
RE
Growth Growth Growth
RI S K
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.
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Morningstar Managed Portfolios
20. The Best of Both Worlds
All the Advantages of ETFs
+
Active
Management
For Advisor use only. Not for public distribution.
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Morningstar Managed Portfolios
21. A “Core and Explore” Approach
Explore Growth
Financial
Health-
Core care
Total Stock
Energy
Foreign
Cash
Retail
Bond
TIPS
For Advisor use only. Not for public distribution.
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Morningstar Managed Portfolios
22. Sample Portfolio
Growth ETF Portfolio Holdings Ticker Weighting Exp Ratio
Vanguard Total Stock Market ETF VTI 28% 0.07
Vanguard FTSE All-World ex-US ETF VEU 18% 0.25
Core
Vanguard Total Bond Market ETF BND 13% 0.11
Money Market 3% 0.48
FMOXX
Vanguard Growth ETF VUG 7% 0.11
iShares S&P Global 100 Index IOO 7% 0.40
Financial Select Sector SPDR XLF 6% 0.24
Explore
XLV
Health Care Select Sector SPDR 0.24
5%
SPDR S&P Oil & Gas Exploration & Prod XOP 5% 0.35
SPDR S&P Retail XRT 5% 0.35
iShares Lehman TIPS Bond TIP 3% 0.20
Portfolio Blended Expense Ratio 0.20
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Morningstar Managed Portfolios
23. ETF Rating Methodology
Morningstar Price to Fair Value
Valuation ×
Price multiples: P/E, P/B, P/CF, P/S, Forward P/E
×
Fundamentals Morningstar growth, profitability, business risk scores
×
Costs Expense ratio
×
Bid/ask spread
×
Index Construction Diversification
×
Methodology Weighting methodology
×
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Morningstar Managed Portfolios
24. Valuation Example
SPDR S&P Retail (XRT)
Morningstar Price/
Name Weighting % Price Fair Value Fair Value
Office Depot 2.0% $14.43 $32.00 0.45
Chico’s 2.0% $9.95 $18.00 0.55
Petsmart 1.6% $23.14 $38.00 0.61
Macy’s 1.8% $24.93 $38.00 0.61
Walgreen 1.6% $36.00 $50.00 0.72
Staples 1.8% $22.96 $30.00 0.77
Borders Group 1.8% $10.29 $26.00 0.39
Portfolio 0.73
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
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Morningstar Managed Portfolios
25. Benefits of ETFs
× Transparency of price
× Tax efficiency
× Passive diversification
× Great tool for implementing asset allocation strategies
× Protection against cash drag
× Cost advantages
26
Morningstar Managed Portfolios
26. Competitive Fee Structure
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%
$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
×
Advisor fee can be discounted in 5 bps increments
×
*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.
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Morningstar Managed Portfolios
28. Our Stock Portfolios at a Glance
× 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
×
For Advisor use only. Not for public distribution.
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Morningstar Managed Portfolios
29. Select Stock Baskets Portfolios
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.
Advisor/Client can elect further customization by requesting Fixed Income ETF’s
×
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Morningstar Managed Portfolios
30. Strategist Stock Baskets Portfolios
Conservative Equity Tortoise Portfolio
Growth Equity Hare Portfolio
Equity Income Dividend Portfolio
Portfolios with minimum of $100,000
×Model
can elect further customization by requesting Fixed Income ETF’s to balance out
×Advisor
the portfolio. As long as the Equity position meets the minimum.
can elect restrictions on sector, industry, or individual stocks
×Advisor
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Morningstar Managed Portfolios
32. 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
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Morningstar Managed Portfolios
33. 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.
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Morningstar Managed Portfolios
34. Morningstar Stock Research: Ratings
× FairValue 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 value
1-2 stars trading at a premium to our fair value
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Morningstar Managed Portfolios
35. From Analyst Valuation to the Morningstar Rating for Stocks
36
Morningstar Managed Portfolios
36. 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
×
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Morningstar Managed Portfolios
37. Global Coverage
Regional Coverage
North America 1847
Australia/New Zealand 251
Asia 109
Europe 124
Latin America 61
Middle East/Africa 22
2414
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Morningstar Managed Portfolios
38. Stock Valuations
This graph shows the price to fair value of the median stock in Morningstar, Inc.’s
stock coverage universe
All-time High Current
52-Wk High All-time Low
Dec. 31, 2004 Jan. 9, 2009
Dec. 26, 2007 Nov. 20, 2008
1.14 P/FV 0.75 P/FV
0.94 P/FV 0.55 P/FV
For illustrative purposes only. Source: http://www.morningstar.com
Past performance is not a guarantee of future results. Data as of Jan.9, 2009. See important disclosures in the Appendix.
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Morningstar Managed Portfolios
39. 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
42
Morningstar Managed Portfolios
40. Clear Pricing Schedule
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%
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
×
Advisor fee can be discounted in 5 bps increments
×
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Morningstar Managed Portfolios
45. 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
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Morningstar Managed Portfolios
46. Your Morningstar Investment Services Team
Mike Reeves, Regional Director
404-277-5744 mike.reeves@morningstar.com
Sean Klock, Regional Consultant
877-626-3224 ext. 8 sean.klock@morningstar.com
Stephen Winchell, Service Consultant
877-626-3227 stephen.winchell@morningstar.com
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Morningstar Managed Portfolios