Morningstar Managed Portfolios SM Managed ETF Strategies

Transcription

1 Morningstar Managed Portfolios SM Managed ETF Strategies Peter Dugery, National Sales Director Jeff Ptak, President and CIO Morningstar Investment Services, Inc. <#>

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3 Why 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 Free up one of your most valuable assets: time Focus on building great client relationships and gathering assets 3 3

4 Team of Investment Professionals Focused on You Financial Advisor Morningstar Investment Services 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 4 4

5 About Morningstar Investment Services Objective independent approach Actively managed mutual fund, stock, and ETF portfolios Online platform including profiling tools, proposals, and statements Discretionary investment management You manage your clients and your business Let us worry about portfolio construction and manager/security selection 5 5

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7 Our Philosophy We invest for the long-term Just because we can trade ETFs intraday, doesn t mean we should We are independent thinkers We often buy the unloved by investing in ETFs that target beaten-down areas We employ a disciplined, consistent investment process We follow strategic asset-allocation targets set by Ibbotson Associates We believe in active management We employ judicious tactical allocation, not guesswork or performance-chasing We are sensitive to costs and taxes We construct ETF portfolios whose composite expense ratios < 0.30% We eat our own cooking and communicate in a timely, candid fashion 7 7

8 Morningstar Managed ETF Strategies All the advantages of ETFs... Low costs Transparency Asset-class, style-discipline Tax-efficiency Active management... Proprietary ETF grading process Morningstar, Inc. research Tactical overlay Dedicated management team 8 8

9 Morningstar Managed ETF Strategies R E T U R N Conservative Income and Growth Moderate Growth Growth Aggressive Growth R I 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. 9 9

10 Morningstar Managed ETF Strategies All the Advantages of ETFs + Active Management 10 10

11 Core and Explore Approach Core Broadly diversified ETFs Passive and low cost Track asset classes in strategic asset allocation Explore + ETFs that track narrower segments (style, sector, region, etc.) Selection based on proprietary rating methodology Aim to add value over index 11 11

12 Core and Explore Approach Tactical View Potential ETF Core Total Stock Corp. Bonds Credit market will continue to heal ishares iboxx $ Invest-Grade Corp ishares iboxx $ High-Yield Corp Foreign Fixed Income Cash Energy Health Care Commodities markets rally with global econ. Health care reform s bark worse than bite Vanguard Energy ETF Health Care SPDR Explore Global High- Quality Div-Pay Stocks Dividends prized in a low-growth climate High-quality, global firms to pace the recovery Vanguard Dividend Appreciation ETF Vanguard Info Technology ETF Consumer Staples SPDR Information is for illustrative purposes only and is not a recommendation or an offer to purchase or sell a specific security. Information is subject to change at anytime without notice

13 Core Explore Sample: Growth ETF Strategy Ticker Weighting Exp Ratio Vanguard Total Stock Market ETF VTI 21% 0.07 Vanguard Europe Pacific ETF VEA 16% 0.16 Vanguard Total Bond Market ETF BND 9% 0.11 Vanguard Small Cap ETF VB 6% 0.15 Vanguard Emerging Markets Stock ETF VWO 5% 0.27 Money Market 1% Vanguard Dividend Appreciation ETF VIG 9% 0.28 Vanguard Information Technology ETF VGT 9% 0.25 Vanguard Energy ETF VDE 7% 0.25 Health Care Select Sector SPDR XLV 6% 0.24 ishares iboxx $ Investment-Grade Corp. LQD 4% 0.15 Consumer Staples Select Sector SPDR XLP 4% 0.24 ishares iboxx $ High-Yield Corp. HYG 3% 0.50 Portfolio Blended Expense Ratio 0.19 For illustrative purposes only; not intended to be an offer or recommendation to buy/sell the above securities. Allocations subject to change without notice; Weighting and expense ratio as of Mar. 31,

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15 Morningstar Managed ETF Strategies Core-and-Explore format leverages Morningstar s strengths Asset allocation research - Strategic asset allocations set by Morningstar Investment Services with input by Morningstar, Inc. affiliate, Ibbotson Associates - Alter asset allocation to produce various risk/reward tradeoffs (i.e., Aggressive Growth, Growth, Moderate Growth, Income & Growth, Conservative) Security research and portfolio construction - Morningstar, Inc. s deep ETF analytics, data - MIS extensive experience managing client capital, making tactical decisions 15 15

16 What We Believe Makes a Good Core ETF? 16 Broad, predictable exposure Low costs Good tracking Tax-efficiency i.e., U.S. stock market, investment-grade bond market, etc. i.e., predictable index construction, reconstitution i.e., <=25 basis point expense ratio i.e., NAV returns approximate benchmark s, price hugs NAV i.e., history of minimal cap gains distributions 16

17 What We Believe Makes a Good Explore ETF? 17 Congruent with our tactical outlook i.e., credit markets oversold i.e., high-quality stocks left behind i.e., commodities rally as recovery takes hold i.e., healthcare stocks victims of legislative uncertainty Readily expresses our view Even if we see a mispricing in an area that an ETF targets, we insist on good tracking (example: convertible bonds) Passes our sniff test ETF grading methodology 17

18 Our ETF Grading Methodology Valuation Morningstar Price to Fair Value Price multiples: P/E, P/B, P/CF, P/S, Forward P/E Fundamentals Costs Index Construction Methodology Morningstar growth, profitability, business risk scores Expense ratio Bid/ask spread Diversification Weighting methodology 18 18

19 Our Decision-making Matrix Buy Purchase Candidate Tactical View Sale Candidate Sell 0.0 Grade

20 Tactical Decision-making 20 20

21 Morningstar, Inc. Equity Research For illustrative purposes only; not intended to be an offer or recommendation to buy/sell the above securities. Past performance is not a guarantee of future results

22 Morningstar Inc s Stock Research: Focus and key tenets No Moat Narrow Moat Wide Moat Look for superior businesses that trade at discounts to the Morningstar Analyst estimate of their fair values Free cash flow is what matters, not reported earnings Focus on firms whose businesses display moatlike characteristics 22 22

23 Performance Record of Morningstar, Inc. Rating for Stocks (Strategies) Buy 5-star / Sell1-Star (Gain probability vs. S&P 500 since inception: 50%) Buy 5-star / Sell at FV (Gain probability vs. S&P 500 since inception: 57%) Buy 5-star / Sell 3-Star (Gain probability vs. S&P 500 since inception: 60%) Trailing 1-Year % Trailing 3-Year* Trailing 5-Year* S&P 500 Index (cap-weighted) Russell 2000 Index (cap-weighted) Time-weighted returns through 2/28/2010 * Annualized percentage returns Source: Morningstar For illustrative purposes only; the indices noted are unmanaged and can not be directly invested in

24 Example: Estimating an ETF s Fair Value Equity ETF Portfolio stocks that Morningstar, Inc. analysts cover stocks that Morningstar, Inc. analysts do not cover Fair Value Est. x % Weightings Portfolio Fair Value 24 24

25 Growth ETF Strategy: Health Care Select Sector SPDR Ticker Weighting Exp Ratio Vanguard Total Stock Market ETF VTI 21% 0.07 Vanguard Europe Pacific ETF VEA 16% 0.16 Core Vanguard Total Bond Market ETF BND 9% 0.11 Vanguard Small Cap ETF VB 6% 0.15 Vanguard Emerging Markets Stock ETF VWO 5% 0.27 Money Market 1% Vanguard Dividend Appreciation ETF VIG 9% 0.28 Vanguard Information Technology ETF VGT 9% 0.25 Explore Vanguard Energy ETF VDE 7% 0.25 Health Care Select Sector SPDR XLV 6% 0.24 ishares iboxx $ Investment-Grade Corp. LQD 4% 0.15 Consumer Staples Select Sector SPDR XLP 4% 0.24 ishares iboxx $ High-Yield Corp. HYG 3% Portfolio Blended Expense Ratio 0.19 For illustrative purposes only; not intended to be an offer or recommendation to buy/sell the above securities. Allocations subject to change without notice; Weighting and Expense Ratio as of Mar. 31,

26 Growth ETF Strategy: Healthcare Select Sector SPDR Morningstar Style-Box Magnification of Style-Box Source: Morningstar Direct; portfolio weightings as of Feb. 28, 2010; price/fair value data as of Mar. 31, For illustrative purposes only; not intended to be an offer or recommendation to buy/sell the above securities. Information is subject to change at anytime without notice. > 40% discount to fair value 25% - 40% discount 10% - 25% discount Within 10% of fair value > 10% premium No fair value estimate ETF ownership zone 26 26

27 Growth ETF Portfolio: Healthcare Select Sector SPDR Name Weighting % Price Morningstar Fair Value Price/ Fair Value Johnson & Johnson 13.8% $65.20 $ Pfizer 11.2% $17.15 $ Merck & Co. 8.9% $37.35 $ Abbott Laboratories 5.7% $52.68 $ Amgen 4.6% $59.84 $ Medtronic 3.8% $45.03 $ Gilead Sciences 3.4% $45.47 $ Bristol-Myers Squibb 3.4% $26.70 $ UnitedHealth Group 3.2% $32.67 $ Baxter International 2.8% $58.20 $ Portfolio 0.84 Source: Morningstar Direct; portfolio weightings as of March 31, 2010; price, fair value data as of March 31, For illustrative purposes only; not intended to be an offer or recommendation to buy/sell the above securities. Past performance is not a guarantee of future results. Information is subject to change at anytime without notice

28 Growth ETF Portfolio: Valuation Name Wgt % Price Morningstar Fair Value Price/ Fair Value Vanguard Div Appreciation ETF 9% $48.83 $ Vanguard Info Technology ETF 9% $56.18 $ Vanguard Energy ETF 7% $84.01 $ Health Care Sector SPDR 6% $32.13 $ Consumer Staples Sector SPDR 4% $27.93 $ Equity Explore Portfolio 0.93 Source: Morningstar Direct. Portfolio weightings as of March 31, 2010; price, fair value data as of March 31, For illustrative purposes only; not intended to be an offer or recommendation to buy/sell the above securities Past performance is not a guarantee of future results. Information is subject to change at anytime without notice

29 Sell-Discipline Core positions If expenses rise, tracking breaks down, or tax-efficiency flags, we ll consider selling 29 Explore positions Equity ETFs - As ETF s market price approaches fair value - Also, if fundamentals deteriorate, causing the fair value of the stocks an ETF owns to decline Fixed income/other ETFs - Based on a mosaic of factors that our investment team considers (i.e., credit spreads, interest rates, etc.) 29

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31 No Is Part of Our Vocabulary We will not use a product unless we re confident it will confer good outcomes to our clients Even if it ostensibly would help us to express a tactical view For that reason, we have said no to certain types of ETFs, such as.. Leveraged ETFs (including inverse) Derivatives-based commodity ETFs Specialized fixed-income ETFs Quasi-active, actively-managed ETFs Exchange-traded notes (ETNs) 31 31

32 32 Our Value Proposition Superior asset-allocation research Ibbotson Associates Discerning approach to investment decision-making Not run-and-gun Disciplined, methodical approach to tactical allocation We re willing to say no Reasonable all-in costs Strategies composite expense ratios < 0.30% Long-term investment orientation and core-and-explore format reduces need to trade 32

33 Morningstar Managed ETF Strategies: Performance Gross Returns %** YTD One-Year Since-Incept Incept Date Aggressive Growth 4.07% 52.15% % 9/30/07 Growth 3.52% 43.22% % 9/30/07 Moderate Growth 2.97% 33.21% % 9/30/07 Income & Growth 2.43% 25.60% % 9/30/07 Conservative 2.09% 19.15% 2.95% 9/30/07 Index Returns %** S&P % 49.77% - 8.0% MSCI EAFE 0.87% 54.44% % MSCI Emerging Markets 2.40% 81.08% - 4.6% BarCap Aggregate Bond 1.78% 7.69% 6.4% ** Returns as of March 31, 2010 do not include the Total Maximum Annual Program Fee (141 bps), which if included, would reduce the returns shown. Please see important disclosure in the Appendix. For illustrative purposes only; not intended to be an offer or recommendation to buy/sell. Past performance is not a guarantee of future results. The indices noted are unmanaged and can not be directly invested in

34 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 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

35 Our Sales Team General Information Internal Service Representatives Reach our sales team members at Aaron Peterson Ext. 1 aaron.peterson@morningstar.com Region 1 California, Nevada, Oregon, Washington +Alaska, +Guam, + Hawaii 2 Justin Stender Ext. 2 justin.stender@morningstar.com Region 2 Idaho, Illinois, Iowa, Mich., Minn., Montana, Nebr., N. Dakota, S. Dakota, Wisc., Wyoming 3 Steven Geiger Ext. 3 steven.geiger@morningstar.com Region 3 Delaware, Maryland, North Carolina, Pennsylvania, Virginia, West Virginia 4 Brad Murphy Ext. 4 brad.murphy@morningstar.com Region 4 Massachusetts, Maine, New Hampshire, Rhode Island, Vermont 5 Mike Reeves Ext. 5 mike.reeves@morningstar.com Region 5 Alabama, Florida, Georgia, Louisiana, South Carolina, Tennessee + Puerto Rico 6 John Green Ext. 6 john.green@morningstar.com Region 6 Arizona, Colorado, Kansas, Missouri, New Mexico, Oklahoma, Texas, Utah Peter Dugery National Director peter.dugery@morningstar.com 7 Todd Schaul Ext. 7 todd.schaul@morningstar.com Region 7 Connecticut, New Jersey, New York 8 Sean Klock Ext. 8 sean.klock@morningstar.com Region 8 Arkansas, Mississippi 9 Adam Herakovich Ext. 9 adam.herakovich@morningstar.com Region 9 Ohio, Indiana, Kentucky 35 35

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37 Appendix: Disclosures Gross Portfolio Performance: The portfolio returns presented are derived from portfolios seeded on the Inception Dates noted in the tables. Return calculations do not include the Total Maximum Annual Program Fee (141 bps), brokerage commissions, or the effects of taxation. If such expenses/adjustments were taken into account, the performance above would be less (and in some cases may be significantly less). The gross performance calculations do assume all dividends and capital gains distributions are reinvested and are net of underlying fund s fees and expenses. Performance is based on an exchange traded fund s market price as of close of trading on the last business day of a month. Performance returns were calculated using a time weighted, geometrically linked rate of return formula. Returns for periods over one year are annualized. The Seeded Portfolios have similar investment objectives and strategies as the portfolios recommended to individual clients. The purpose in presenting the Seeded Portfolio performance is to provide a historical indication of the performance of the portfolio s strategy. The Seeded Portfolios may not have contained the same holdings that are currently underlying the portfolios provided to individual clients. Past performance does not guarantee future results. In no way should the Seeded Portfolio performance be considered indicative of a portfolio s future performance nor should it be viewed as a substitute to the actual portfolios being recommended to individual clients. Results of an investment made today in the Morningstar Managed Portfolios Program may differ substantially from the historical performance shown and as a result, an individual client may incur a loss. Index Returns Individual index performance is provided as a reference only. Each index is unmanaged and is not available for direct investment. Since indices and/or composition levels may change over time, actual return and risk characteristics may be higher or lower than those presented. Although index performance data is gathered from reliable sources, Morningstar Investment Services cannot guarantee its accuracy, completeness or reliability. The information, data, analyses, and opinions presented herein do not constitute investment advice; are provided solely for informational purposes and therefore are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. The opinions expressed are as of the date written and are subject to change without notice. Except as otherwise required by law, Morningstar Investment Services shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses, or opinions or their use. The information contained herein is the proprietary property of Morningstar Investment Services and may not be reproduced, in whole or in part, or used in any manner, without the prior written consent of Morningstar Investment Services