Portfolio Monitor

Monthly Report for THOMAS WINKE

June 07, 2010
marcelparcel Portfolio

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© 2010 Morningstar, Inc. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; (3) is not warranted to be accurate, complete or timely; (4) does not constitute
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performance is no guarantee of future results. “Morningstar” and the Morningstar logo are registered marks of Morningstar, Inc.
Performance Overview | marcelparcel Portfolio | May 01, 2010 - May 31, 2010 Page 2 of 55

marcelparcel Portfolio
Your Morningstar Personal Return % of Mutual Fund Reporting Previous Balance $ 651,498.90
Rating This Period Outperformed Period New Net Investment $ 0.00

QQQQ –7.84% 44.00% May 2010 Gain/Loss $

Dividend $
–51,075.36

Total 0.00
Portfolio Performance Capital Gain/Loss $
Market Value Total 0.00
$672K Re-Invested Dividends $ 0.00
Re-Invested Interest $ 0.00
614
Current Balance $ 600,423.53
557

499

441 06-09 07-09 08-09 09-09 10-09 11-09 12-09 01-10 02-10 03-10 04-10 05-10
1-Wk 1-Mo 3-Mo YTD 1-Yr 3-Yr* 5-Yr* 10-Yr* Sin. Purch*
Total Return % 2.08 –7.84 –0.37 –0.81 23.73 –7.54 3.59 2.77 —
Personal Return % 2.08 –7.84 –0.43 –0.87 23.31 –6.47 0.48 1.51 3.37
US Market Index Return % 1.74 –8.13 –0.71 –1.36 20.42 –9.94 –0.89 –1.74 3.90
*Annualized

Top 5 Gainers
Name Morningstar Rating Price $ Market Value $ 1-Mo Return %
ADC Telecommunications, Inc. QQ 8.26 7,434.00 3.25
Quanta Services, Inc. . 20.73 6,219.00 2.98
MFS Intermediate Income QQQ 6.62 1,475.54 0.66

Top 5 Losers
Name Morningstar Rating Price $ Market Value $ 1-Mo Return %
Transocean, Inc. QQQQ 56.77 5,677.00 –21.50
DWS International S QQ 38.67 7,570.08 –11.97
DWS International S 38.67 9,636.59 –11.97
BankFinancial Corporation . 8.53 8,530.00 –11.70
Dodge & Cox International Stoc ... QQQ 28.93 5,261.85 –11.39

In this section we provide a

Potential Value in 5, 10, 20 and 30 Years hypothetical outlook on your portfolio’s
$22Mil future performance highlighting the
18 percent chance of achieving the values
we project.
15

11

Years 5 10 20 30
75% Chance 638,279 809,672 1,401,826 2,528,925
50% Chance 863,023 1,240,473 2,562,817 5,294,776
25% Chance 1,166,901 1,900,492 4,685,337 11,085,600

Generated on June 07, 2010

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Portfolio X-Ray | marcelparcel Portfolio | May 01, 2010 - May 31, 2010 Page 3 of 55

X-Ray Overview Diagnostics

Asset Allocation Equity Investment Style Fixed Income Style Asset Allocation

Large Med
Size

High Med Low

Credit Quality
Cash 2.41 Your portfolio is aggressive. An asset
16 17 28 0 58 0 mix such as yours normally generates
U.S. Stocks 65.63
high long-term returns but can be very
Foreign Stocks 31.09 5 11 11 0 0 0 volatile. Financial planners typically
Bonds 0.43 recommend these types of mixes for

Small
2 6 5 0 0 0 investors who have investment
Other 0.03
Value Core Growth Short Interm Long horizons longer than 10 years, need
Not Classified 0.42 high returns, and are comfortable with
Valuation Interest Rate Sensitivity
a high level of risk.

Equity Investment Style

Sector Weighting
Your portfolio's stock exposure is
% Net Assets 1-Mo Return % Portfolio 1-Mo Return % spread evenly across the market and
Portfolio S&P 500 Portfolio S&P 500 –3.69 –1.85 0 1.85 3.69 includes a good mix of small, medium,
and large companies, as well as a fairly
h Information Economy 20.69 23.17 –1.50 –1.69 even mix of conservatively priced value
r Software 5.46 4.36 –0.44 –0.35 stocks and high-flying growth stocks.
t Hardware 6.11 10.87 –0.43 –0.77 For most investors, maintaining such
broad-based market exposure is a
y Media 1.71 2.73 –0.15 –0.24 prudent way to invest.
u Telecommunication 7.40 5.21 –0.48 –0.34
Sector Weighting
j Service Economy 47.35 40.41 –3.69 –3.27
i Healthcare Services 13.95 11.44 –1.15 –0.94 { Over Exposure
} Under Exposure
o Consumer Services 11.53 8.90 –0.74 –0.57
p Business Services 8.63 3.56 –0.59 –0.24 Fees & Expenses
a Financial Services 13.24 16.51 –1.22 –1.52 The mutual funds in your portfolio tend
k Manufacturing Economy 31.96 36.42 –2.36 –2.78 to have very low expense ratios. This
is good, because expense ratios have
s Consumer Goods 8.84 10.95 –0.36 –0.45
been shown to be a major factor in
d Industrial Materials 14.15 11.14 –0.99 –0.78 mutual-fund performance over the long
f Energy 7.82 10.95 –0.91 –1.28 term.
g Utilities 1.15 3.38 –0.09 –0.27 Regional Exposure
Not Classified 0.00 — 0.00 —
{ Over Exposure
} Under Exposure

Stock Statistics
Portfolio Relative to S&P 500 Portfolio Relative to S&P 500
Forward P/E Ratio 14.66 0.96 5-Yr Proj EPS Growth % 11.49 1.23
P/B Ratio 2.03 0.98 Dividend Yield % 1.13 0.57
ROA 6.36 0.89 Average Market Cap $mil 11,099.44 0.24
ROE 14.47 0.78

Fees & Expenses Regional Exposure

Average Mutual Fund Expense Ratio % 0.83 % of Stocks
Expense Ratio of Similarly Weighted Hypothetical Portfolio % 1.39 U.S. & Canada 71.52
Estimated Mutual Fund Expense $ 3,519.07 Europe 17.83
Total Sales Charge Paid $ 0.00 Japan 3.57
Latin America 2.19
Asia & Australia { 3.90
Other 0.99
Not Classified 0.00

Generated on June 07, 2010

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Holding Detail | marcelparcel Portfolio | May 01, 2010 - May 31, 2010 Page 4 of 55

Morningstar Change % of Holding Personal Return %

Name Ticker Rating in Rating Assets Value $ 1-Mo 3-Mo 1-Yr* 3-Yr* 5-Yr*

Harbor International Instl HAINX QQQQQ — 9.36 56,195.86 –11.36 –6.80 10.31 — —
United Parcel Service, Inc. UPS h QQQQ +1 4.02 24,162.60 –9.23 6.84 22.72 –4.46 –3.15
TIAA-CREF Mid-Cap Growth Retai ... TCMGX QQQ — 3.57 21,450.63 –6.76 3.79 31.69 — —
Dodge & Cox Stock DODGX QQQ — 3.53 21,164.95 –9.36 –2.15 22.54 –12.51 –1.13
Columbia Acorn Z ACRNX QQQQ — 3.40 20,440.07 –7.53 3.78 33.14 –5.37 4.49
Fidelity Diversified Internati ... FDIVX QQQ — 3.29 19,756.51 –10.55 –6.30 5.84 –12.63 1.58
Bed Bath & Beyond, Inc. BBBY QQQ 0 2.99 17,948.00 –2.37 7.83 59.62 — —
Buffalo Small Cap BUFSX QQQQQ — 2.92 17,531.81 –5.30 5.42 28.90 –2.33 4.49
Meridian Growth MERDX QQQQQ — 2.91 17,473.42 –5.74 5.11 29.24 –1.67 5.20
Columbia Acorn International S ... ACFFX QQQQ — 2.76 16,555.91 –8.16 –1.70 15.97 –7.18 7.39
Vanguard Strategic Equity VSEQX QQ — 2.70 16,234.21 –7.27 3.47 31.61 — —
Morgan Stanley Inst US Md Cp V ... MPMVX QQQ — 2.69 16,145.84 –5.57 8.13 44.60 –3.37 7.50
Stryker Corporation SYK QQQQ 0 2.65 15,909.00 –7.68 –0.13 37.96 — —
T. Rowe Price Equity Income PRFDX QQQQ — 2.60 15,611.89 –8.65 0.83 25.02 — —
Cognizant Technology Solutions ... CTSH h QQQ +1 2.50 15,012.00 –2.09 3.97 98.65 — —
Scout International UMBWX QQQQQ — 2.50 15,006.11 –10.10 –6.57 12.93 — —
UnitedHealth Group, Inc. UNH QQQQQ 0 2.42 14,535.00 –4.09 –14.15 9.29 — —
Vanguard International Growth ... VWIGX QQQQ — 2.36 14,154.23 –10.39 –5.05 11.53 — —
PineBridge US Small Cap Growth ... PBSBX QQQ — 2.33 13,990.85 –7.20 3.66 25.96 –8.63 2.50
Eaton Corporation ETN QQQ 0 2.33 13,990.00 –9.34 2.69 60.80 — —
TELUS Corporation TU QQQ 0 2.30 13,816.00 –2.18 10.00 — — —
Third Avenue Small Cap Value I ... TASCX QQ — 2.27 13,628.46 –9.38 –1.46 18.83 — —
Kinetic Concepts, Inc. KCI QQQ 0 2.07 12,420.00 –4.39 –1.24 59.66 — —
Columbia Value & Restructuring ... UMBIX QQ — 2.03 12,203.32 –9.95 –3.21 20.95 –10.76 0.82
Vanguard Mid Capitalization In ... VIMSX QQQ — 2.02 12,125.92 –7.33 2.78 34.38 –7.26 2.93
American Century Heritage Inv TWHIX QQQQ — 2.02 12,099.43 –7.36 2.53 27.45 — —
Sysco Corporation SYY h QQQQ +1 1.99 11,924.00 –5.49 3.15 — — —
T. Rowe Price Growth Stock PRGFX QQQQ — 1.89 11,362.19 –7.87 0.82 22.20 — —
Janus T JANSX QQQ — 1.88 11,312.84 –7.53 –1.75 19.36 –6.35 1.49
DWS International S SCINX 1.60 9,636.59 –11.97 –8.97 3.94 –14.73 6.60
SSgA S&P 500 Index Instl SVSPX QQQ — 1.59 9,552.75 –7.99 –0.86 20.90 –8.79 0.18
Longleaf Partners LLPFX QQQ — 1.52 9,140.49 –6.23 4.33 31.72 — —
William Blair International Gr ... WBIGX QQQ — 1.50 8,978.16 –8.74 –2.50 15.06 –12.11 2.70
BankFinancial Corporation BFIN . — 1.42 8,530.00 –11.70 –11.15 –4.80 –19.66 —
Linear Technology LLTC QQQ 0 1.40 8,388.00 –6.92 2.91 19.59 –7.99 —
DWS International S SCINX QQ — 1.26 7,570.08 –11.97 –8.97 3.94 –15.42 0.26
ADC Telecommunications, Inc. ADCT QQ 0 1.24 7,434.00 3.25 30.28 17.50 — —
Mairs & Power Growth Inv MPGFX QQQQQ — 1.17 7,000.85 –7.20 2.54 26.38 –4.27 1.91
Quanta Services, Inc. PWR . — 1.04 6,219.00 2.98 — — — —
Transocean, Inc. RIG QQQQ 0 0.95 5,677.00 –21.50 –28.88 –28.57 — —
Dodge & Cox International Stoc ... DODFX QQQ — 0.88 5,261.85 –11.39 –4.90 14.14 –10.66 3.58
Perkins Mid Cap Value T JMCVX QQQQQ — 0.74 4,456.32 –6.80 0.00 21.80 1.24 5.76
Vanguard Strategic Equity VSEQX 0.66 3,962.60 –7.27 3.47 31.67 –11.47 –0.42
T. Rowe Price Intl Gr & Inc TRIGX QQQ — 0.50 2,979.27 –11.20 –6.21 9.17 –13.42 7.11
MFS Intermediate Income MIN QQQ — 0.25 1,475.54 0.66 –1.97 12.07 — —

Generated on June 07, 2010

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Holding Detail | marcelparcel Portfolio | May 01, 2010 - May 31, 2010 Page 5 of 55

*Annualized

Generated on June 07, 2010

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Analyst Digest | marcelparcel Portfolio | May 01, 2010 - May 31, 2010 Page 6 of 55

were officially named co-portfolio managers in early 2009, but they have been fully
Harbor International Instl HAINX | involved in the decision-making on the fund for years and are quite talented in their

QQQQQ own rights. The team plans to add a new analyst in 2010 to further strengthen the
fund's bench.

$48.22 x$6.18 | –11.36%

12-14-2009 | by Kevin McDevitt, CFA

Morningstar Take
While Harbor International's increasing concentration is a long-term positive, the
risks here are real--as in the Brazilian real.

This fund isn't afraid to be boldly unconventional. Its excellent 2009 performance
owes in large part to its 11% weighting in Brazilian securities (versus less than 5% in
Japan). Brazilian equities have been on fire this year and top-10 holdings PetroBras
and Itau Unibanco have both more than doubled. This Brazil weighting has given the
fund a big edge over its peers in 2009, as its average rival has less than 2% in Brazil
and only about 7% in emerging markets overall. By contrast, this fund currently has
17.4% of assets in emerging markets, which is not unusual.

Short term, the fund's sizable emerging-markets weighting invites volatility. Brazil
looks particularly vulnerable given an influx of hot money and the government's
retaliatory capital restrictions. There is also a threat that the government could take
greater control of PetroBras through either a larger ownership stake or direct
resource control. But courting emerging-markets risk is nothing new for this fund,
which once had Russia's Lukoil as its top holding. Not surprisingly, it has been more
volatile than most large-blend peers.

But such differentiation is welcome from a management team that has long-
demonstrated a competitive advantage. In the past year, management has further
consolidated the portfolio, cutting total holdings from 90 to fewer than 70. This
decision was driven by a desire to focus more on the team's favorite holdings and to
ensure that every stock has an impact on performance. While this change could
potentially add to volatility, it seems like a wise move. Seventy holdings provide
plenty of diversification, and fewer names should save management from wasting
time and resources monitoring immaterial positions.

This fund could get hit hard in a sell-off, but that doesn't diminish its long-term
appeal. Still, the fund is not a good fit for those leery of volatility.

Role in Portfolio
Core. With strong long-term returns, limited volatility, low expenses, and a talented
management team, this fund is one of the best core international offerings around.

Strategy
Management looks for reasonably priced large caps that have strong franchises or
other competitive advantages. In addition, the team considers macroeconomic
factors and industry themes. Management also has a long investment horizon and
rarely hedges the fund's currency exposure. The fund has a 2% redemption fee on
shares held fewer than 60 days, and it uses an outside service to set fair-value prices
in certain situations.

Management
Hakan Castegren, who has led this fund since its 1987 inception, is the second-
longest-serving manager in the foreign large-blend group. He was named
Morningstar International-Stock Manager of the Year in 1996 and 2007. His former
analysts--Jim LaTorre, Howard Appleby, Jean-Francois Ducrest, and Ted Wendell--

Generated on June 07, 2010

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Analyst Digest | marcelparcel Portfolio | May 01, 2010 - May 31, 2010 Page 7 of 55

transport U.S. urgent (overnight and two-day) and ground shipments through the
United Parcel Service, Inc. UPS | same network. In comparison, FedEx uses duplicate networks of drivers and trucks to

QQQQ separately handle ground and express shipping. In addition to the greater efficiency
of UPS' single system, clients appreciate the convenience of using the same driver to
handle both express and ground packages. UPS benefits from this bundling by
bettering FedEx's yield by 20% on these U.S. express packages. Furthermore, UPS'
drivers are already unionized employees, which means margins are unlikely to
$62.76 x$6.38 | –9.23% deteriorate from the need to increase compensation expense or abide by more
Fair Value Estimate $78 restrictive work rules. FedEx faces these potential shocks and incurs regular legal
expenses to maintain its status under the Railway Labor Act in express and
Consider Buying Price $54.6
independent contractors in ground.
Consider Selling Price $109.2
Fair Value Uncertainty Medium The firm has expanded into less-than-truckload shipping in the U.S. and is
continuously extending its global reach. Its new air hub in Shanghai is authorized to
Economic Moat Wide
handle unlimited weekly flights, enhancing UPS' service of the Chinese market,
Stewardship Grade B where it already serves most significant locations.

05-28-2010 | by Keith Schoonmaker

Valuation
We are increasing our fair value estimate to $78 per share from $70 to reflect our
Growth new expectation concerning the timing of economic recovery and volume expansion.
UPS compounded revenue by 9.0% annually during 2004-08. Growth slowed during UPS' performance is tied to the health of the global economy, and we believe
2008 and 2009 because of the soft global economy. UPS extends its top line by shipping volume will not recover for several quarters. Over the long run, however, we
expanding global package volume, regularly raising prices, and acquiring delivery believe overall global parcel shipping market expansion and consistent price
firms. increases will enable UPS to grow at a compound annual rate of 8% during the next
five years. The firm expects to expand international package shipping faster than the
broader market through internal growth and by adding assets. UPS generated an
Profitability
impressive 20%-plus return on invested capital during the past five years and
UPS is highly profitable. The operating margin has averaged 11.6% for the past 10
produced tremendous free cash flow of 5%-11% of sales. The firm reinvests heavily
years--more than 1.5 times that of several competitors. UPS returns nearly 20% on
and earns consistently high returns on its assets.
invested capital.

Risk
Financial Health
Our fair value uncertainty rating is medium. Rapid changes in shipping demand
UPS deployed its balance sheet capacity to fund a $6.1 billion payment to withdraw
during 2009 demonstrate that the cone of uncertainty surrounding modeling
from the underfunded multiemployer Central States pension plan in 2007. This marks
estimates can quickly widen because of macroeconomic factors. UPS derives more
a shift from low debt in the past, but UPS' ample cash flow easily covers payments.
than one fifth of revenue from international sources, but it still relies on the U.S.
market. The UPS driver team is unionized, but UPS recently minimized the risk of
The Thesis 05-28-2010 service disruption by signing a new labor contract well before the expiration of the
United Parcel Service has crafted a wide economic moat by assembling a dense previous agreement.
integrated global shipping network that's unlikely to be matched by any but a few
global players. This substantial barrier to entry is buttressed by high customer
Strategy
satisfaction earned through conscientious drivers, reliability, and sophisticated
Efficient and customer-friendly drivers, motivated by equity ownership of the firm,
package-tracking tools. We expect UPS to continue to produce industry-leading
are a vital link in UPS strategy. The firm invests in new businesses, such as less-
margins and returns on invested capital for years to come.
than-truckload and retail operations, and in international assets. UPS built a new hub
in Shanghai and new Shenzhen service center. The firm spends heavily on technology
UPS is the largest package delivery company in the world, delivering 15 million
to benefit productivity and enhance the customer experience.
pieces, on average, every business day. New entrants are unlikely to build such a
globe-spanning infrastructure and then incur the expense of trying to steal share
from established networks. DHL's recent results bear witness to the high price of Management & Stewardship
entering the U.S. package delivery market: After losing nearly $1 billion in this Overall, UPS has good corporate-governance policies, and management has done
market during the prior year, DHL abandoned its domestic U.S. delivery business in right by shareholders. Chairman and CEO Scott Davis advanced from the CFO post to
early 2009. take the reins in January 2008. During 2009, Davis was paid a base salary of $1
million and total compensation of $6.3 million. Much of this compensation was in the
UPS is the most profitable of its peers, we think by funneling substantially more form of stock awards ($3.9 million) and option awards ($438 thousand). This package
package volume through its efficient assets. Keys to its profitability are high does not strike us as egregious, given that UPS is the world's largest transportation
utilization, an integrated organizational structure, efficient operations, and excellent company. It also generates best-in-class profitability on around $50 billion in
drivers. Although FedEx's FDX express and ground units together handle more than 6 revenue. Davis' 2008 total comp was similar to 2009, on the same base pay. The firm
million average parcels daily, UPS moves more than double the volume through its consistently generates cash and deploys it in investments in technology and in
sophisticated delivery machine. This enables UPS to cover the United States with a domestic and foreign assets, as well as in dividends and share repurchases. While
highly integrated web, filling its trucks and facilities with a huge flow of parcels. an impressive 36% of outstanding shares are Class A stock owned by employees,
retirees, and descendants of founders, Class A shares are somewhat troublesome for
A critical aspect of UPS' competitive advantage lies in its use of integrated assets to nonemployee investors, since each Class A share garners 10 votes, compared with 1

Generated on June 07, 2010

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Analyst Digest | marcelparcel Portfolio | May 01, 2010 - May 31, 2010 Page 8 of 55

vote per publicly held Class B share. Also, UPS has a poison-pill provision stipulating
that after any investor accumulates 25% of outstanding voting power, voting stock in
excess of 25% is reduced in power to 1/100 of a vote.

Profile
As the world's largest parcel delivery company, UPS uses more than 500 planes and
100,000-plus vehicles to deliver on average 15 million packages a day to residences
and businesses. The U.S. package segment generates two thirds of consolidated
revenue and three fourths of total margins. The growing international segment
delivers to Europe, Asia, and the Americas. UPS also operates less-than-truckload
freight delivery, freight forwarding, logistics services, and retail stores.

Generated on June 07, 2010

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Analyst Digest | marcelparcel Portfolio | May 01, 2010 - May 31, 2010 Page 9 of 55

Dodge & Cox Stock DODGX | QQQ

investment policy committee, which runs this fund, has nine members. The team is
supported by a large squad of analysts and research assistants.

$93.77 x$9.68 | –9.36%

03-15-2010 | by Dan Culloton

Morningstar Take
Those who remember Dodge & Cox Stock's past may be fortunate enough to repeat
it.

There's something familiar about this fund's situation. It still has a great long-term
record. Its more than 7% gain for the decade ended March 12, 2010, crushes that of
its typical large-value peer as well as those of the S&P 500 and Morningstar Large
Value indexes. Still, the fund has seen $8.4 billion in outflows in the last three years.

The fund was unpopular at the turn of the last decade, too. When everyone was
clamoring for tech, media, and telecom stocks in 1999, this fund was focused on
forgotten industrial stocks. Back then the typical large-value fund had more than a
fourth of its assets in information economy stocks while this fund had less than 7%.
At the time, it preferred industrial-materials stocks. Many investors derided the fund
as stodgy and sold it.

The rest is history. The technology bubble burst begetting another mania fueled by
easy money and real estate. This fund avoided the first bust, and misplayed the
second, but still posted strong 10-year returns, albeit with more volatility.

Ten years from now, will the fund's returns be as strong? There's no guarantee. Even
with the outflows, the fund is much larger than it was a decade ago and can't invest
in mid-cap stocks the way it once did. Still, it has advantages and has stayed true to
its style. Fees are still low and most of its veteran managers remain, plying the same
against-the-grain approach. Indeed, the fund's positioning relative to its peers at the
start of this decade is as striking as it was at the beginning of the last one. As the
average large-value fund's helping of health-care, tech, media, and telecom stocks
has slipped from about 32% of assets in 2000 to 28%, this fund's stakes in those
areas have gone from about 15% to nearly 55%. This isn't a top-down call. Tech and
health-care stocks, such as Nokia NOK and Merck MRK, offer better growth for their
valuations, the managers say. This contrarian stance could help the fund stand out
again.

Stewardship Grade
We like this fund's low fees, strong corporate culture, and clean regulatory record. It
reflects some of the industry's best corporate governance practices.

Role in Portfolio
Core

Strategy
This fund's management team invests in mostly large-cap stocks that look cheap on a
range of valuation measures. It favors companies with good management, dominant
competitive positions, and good growth potential, but it usually doesn't get
interested until these stocks are under some sort of cloud. Because management
takes such a long-term view, the fund's turnover is just a fraction of the large-value
category average.

Management
This fund has an experienced and deep management team. The Dodge & Cox equity

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Analyst Digest | marcelparcel Portfolio | May 01, 2010 - May 31, 2010 Page 10 of 55

Columbia Acorn Z ACRNX | QQQQ

In September 2003, legendary manager Ralph Wanger relinquished his position as
head of the fund. His longtime comanager Chuck McQuaid is now at the helm, with
Rob Mohn joining as his comanager. Mohn has served as a manager on Columbia
Acorn USA for several years and has delivered fine results.

$25.55 x$2.08 | –7.53%

12-10-2009 | by Christopher Davis

Morningstar Take
Columbia Acorn hasn't roared out of the gates this year but it still can beat the
competition.

Relatively speaking, at least, this offering has looked a bit tepid. To be sure, its 33%
gain for the year to date through Dec. 9, 2009, isn't anything to sneeze at, but it's
middling by the standards of the mid-growth category. But that showing should be
put into context. For one, it beat more than 80% of its rivals in 2008's bear market,
albeit with a bone-jarring 39% loss. Two, the fund has fared similarly in buoyant
environments like 2009's. In 2003, for instance, it finished in the middle of the mid-
growth pack, despite a 45% gain for the year. Finally, it's worth noting the fund is
more than 4 percentage points ahead of its benchmark, the Russell 2500 Index, for
the year.

Although the fund still struggled in 2008's brutal market, it handily beat the
competition that year for the same reason it has been sluggish this year. Managers
Chuck McQuaid and Rob Mohn employ a moderate, valuation-conscious growth
strategy that helps shelter it in tough times. But it means that it has less exposure to
the more-speculative fare that many of its aggressive rivals favor. Such stocks
usually fare best in the early stages of a market recovery, and 2009 has been no
different.

Over the long haul, however, the fund has delivered. Indeed, the 10-year record of its
Z shares (its oldest share class) is among the best in the mid-growth category. Yes,
the fund is a lot bigger than it was a decade ago, and its size may prevent it from
replicating that feat. But we still think it can outperform. McQuaid and Mohn are
capable stock-pickers who have the research backing of one of the biggest and most
experienced analyst teams focused on small and mid-caps in the business. That the
managers and analysts continue to invest with long-term perspective further sets
them apart in a world obsessed with the short term. Nimbler Columbia Acorn Select
LTFAX continues to hold appeal for more-aggressive investors, but others will do just
fine here.

Stewardship Grade
Low expenses and high manager ownership are positives here, though broader
issues at Columbia keep the fund's grade from being higher.

Role in Portfolio
Supporting Player. The fund's mid- and small-cap portfolio makes a good foil for
investors' large-cap holdings.

Strategy
Comanagers Chuck McQuaid, Rob Mohn, and their colleagues use a combination of
top-down themes and fundamental research to put together this fund's sprawling
portfolio of about 400 holdings. The managers are far more price-sensitive than their
typical mid-growth rival, and the portfolio usually has lower valuations and a much
smaller technology weighting than the category norm. They have often favored
business-services companies and financials.

Management

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Analyst Digest | marcelparcel Portfolio | May 01, 2010 - May 31, 2010 Page 11 of 55

its foreign-currency exposure.

Fidelity Diversified International FDIVX |
QQQ Management
Bill Bower took over here in 2001, succeeding longtime manager Greg Fraser, who
built a stellar record on the offering. Bower had a solid stint at Fidelity International
Growth & Income (now Fidelity International Discovery FIGRX) and has only bolstered
$24.83 x$2.93 | –10.55% this fund's numbers. Bower draws from Fidelity's rich regional research staff, located
around the world, as well as a group of global sector analysts.
01-11-2010 | by Christopher Davis

Morningstar Take
A recent misstep shouldn't undermine Fidelity Diversified International's long-term
appeal.

This fund probably hasn't turned any heads lately. Judged against the foreign large-
growth category, it looked positively poky in 2009. However, the fund has long
straddled the blend-growth divide--currently in the large-blend position in the
Morningstar Style Box--so we don't expect it to keep up with racier rivals. Even so,
its 31% gain, while good in absolute terms, merely matched the return of the MSCI
EAFE Index. It's not that manager Bill Bower hasn't had any successes. Versus the
EAFE, he's added value in nearly every major market sector as of late. He scored
especially big in energy, with picks like Petrobank Energy and Resources up nearly
200% in 2009. He also invested well in technology; for instance, he emphasized
semiconductor-related stocks, whose demand he thought would recover from too-low
levels during the financial crisis.

Those successes were undermined by Bower's misstep in financials, however. Like

many Fidelity managers, he seized upon analyst research arguing Japanese banks
were cheap and didn't face liquidity and balance sheet issues like their U.S. and
European counterparts. But Western banks were huge winners last year when
investors realized governments would ensure their survival. And Japan's banks had
to shore up their balance sheets by selling stock, depressing their share prices in the
process.

There's good reason to expect better, however. Bower's strategy is distinguished

enough to set the fund apart from the competition. His broad but eclectic portfolio
has long included a healthy dose of emerging markets and diverges meaningfully
from the EAFE. Bower has delivered index-beating performance over the long haul,
returning 6% annually since his March 2001 start, versus 4% for the index. This fund
may not be a world-beater, but veteran, successful management make it a solid
choice for a core holding.

Stewardship Grade
This fund has some good things going for it on the stewardship front, including low
fees and a generally attractive culture. However, other factors, including an
insufficiently independent board, keep its overall grade from being higher.

Role in Portfolio
Core. True to its name, this offering is widely diversified across sectors and regions.
It's as close to a complete foreign fund as you'll get.

Strategy
Manager Bill Bower runs a sprawling portfolio of more than 350 names, selected
with a growth-at-a-reasonable-price approach. He focuses mainly on large-cap
stocks but also fishes in small- and mid-cap waters. He isn't afraid to deviate from
his benchmark, so the fund sometimes sports small but noticeable stakes in
emerging-markets stocks. Although sector weightings tend to move in line with the
benchmark, Bower sources his stock ideas broadly, often in line with big-picture
themes. Fidelity uses fair-value pricing when necessary, and the fund does not hedge

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Analyst Digest | marcelparcel Portfolio | May 01, 2010 - May 31, 2010 Page 12 of 55

Bed Bath & Beyond, Inc. BBBY | QQQ

for distribution capacity. Since stores receive shipments directly from more than
4,500 suppliers, the firm can operate its entire 1,000-store base with lower
distribution costs than rivals.

Although it represents just 7% of the $106 billion home furnishings category, we

$44.87 x$1.09 | –2.37% believe Bed Bath & Beyond is poised to take share from weaker rivals. Management
Fair Value Estimate $47 envisions 1,300 domestic Bed Bath & Beyond stores, implying another 400 openings
before reaching saturation. However, we expect the next wave of growth to come
Consider Buying Price $32.9
from the more nascent brands--Christmas Tree Shops and buybuy Baby, in particular-
Consider Selling Price $65.8 -which represent just over 100 stores combined. We also foresee significant
Fair Value Uncertainty Medium international growth. Following its first Canadian store in 2007, the company entered
Mexico in 2008 through a joint venture with Home & More, a privately held home
Economic Moat None
furnishings retailer operating two stores in Mexico City.
Stewardship Grade C
Despite its significant growth opportunities, market share gains may not come as
04-09-2010 | by R.J. Hottovy, CFA easily as they did in the past. While we believe Bed Bath & Beyond will benefit from
the bankruptcy of Linens 'n Things and other defunct rivals, increased competition
from mass channel rivals may constrain returns on invested capital over an extended
Growth
horizon.
During the next three years, we forecast total average revenue growth of about
7.5%, driven by mid-single-digit comparable store sales growth and about 60-70
annual new store openings. Our growth expectations compare favorably with the Valuation
low-single-digit growth projections for the home furnishings industry, implying We are raising our fair value estimate to $47 per share from $39, as the firm's
market share gains. current sales and operating margin trajectories are trending closer to the more
optimistic scenarios in our previous model. Our new fair value estimate implies
forward fiscal-year price/earnings of 18 times, enterprise value/EBITDA of 8.4 times,
Profitability
and a free cash flow yield of 5.4%. We continue to forecast 2010 top-line growth in
We anticipate average operating margins of about 13.5% during the next three
the high single digits, owing to a 5% increase in square footage and low- to mid-
years, driven by increased fixed cost leverage tied to improving sales trends as well
single-digit comparable-store sales. However, we are cautious that the firm's current
as greater supply chain and distribution efficiencies for newer concepts. Our model
sales momentum is partly the result of pent-up demand following several years of a
assumes 14% return on invested capital over the same period.
sluggish housing market, and we believe comparable-store sales will be weaker in
the back half of the year. Over a longer horizon, we continue to expect mid- to high-
Financial Health single-digit revenue growth, driven by low- to mid-single-digit comparable-store
The firm is in excellent financial health. Even with rapid expansion, it has been debt- sales growth (partially the result of market share gains from defunct competitors) and
free since 1996, using cash generated from operations to fund new store openings. mid-single-digit square footage expansion (roughly 60-70 consolidated new store
The company has ample cash on hand and plans to buy back shares with excess openings per year with increasing contribution from newer retail concepts). Bed Bath
capital. & Beyond's operating margins surpassed our expectations for 2009, as fixed cost
leverage more than offset higher advertising and corporate overhead expenses. We
expect positive operating leverage again in 2010, likely bringing operating margins to
The Thesis 04-09-2010 just north of 13% for the year. Over time, we expect operating margins to improve to
Bed Bath & Beyond has withstood turbulent macroeconomic and housing market the midteens, moderately ahead of previous estimates, owing to increased
conditions relatively well. Some home furnishings retailers--especially those with economies of scale but partially tempered by increased mass-channel competition.
higher-ticket furniture products--have experienced a significant deceleration in sales
volume, but Bed Bath & Beyond's sales and profitability remain comparatively
stronger. We are confident that the firm can navigate the cyclical softness better Risk
than its rivals, thanks to an exceptional business model that requires only modest The U.S. housing market remains volatile, implying that demand for home-related
capital to generate solid returns. Given this and its ample store-growth prospects, products could remain weak over the near term. The home furnishing category is
consistent execution, and pristine balance sheet, we view Bed Bath & Beyond as one highly competitive, with discounters, department stores, specialty retailers, and
of the top names in the home furnishings retail category. direct merchants all vying for market share. There are also merchandising risks, given
that store managers have the authority over so much of the assortment. A more rapid
A key factor in the firm's capital efficiency is its sales productivity. We expect Bed buildout of the emerging concepts could weigh on profitability.
Bath & Beyond to generate about $240 in sales per square foot this year--roughly
$7.3 million per store--which easily outpaces its direct rivals. Even though gross
Strategy
margin rates are comparable with the industry at just over 40% of revenue, the firm
Bed Bath & Beyond's goal is to take additional market share from department store
generates superior returns on invested capital because of its exceptionally strong
and specialty retail rivals. The firm has plans to expand the core Bed Bath & Beyond
sales productivity. With relatively low operating expenses, we believe the firm
concept to about 1,300 North American locations, and we expect acceleration in
should continue to produce enough free cash flow to internally fund new store
growth among the newer concepts in coming years. The firm aims to reaccelerate
openings and other growth initiatives.
store openings in more stable economic conditions. There are also ample
international growth prospects.
Bed Bath & Beyond's superior productivity can be partially explained by a
decentralized structure in which store managers select 75% of the merchandise
carried in their stores. As a result, stores reflect regional tastes and preferences. This Management & Stewardship
structure is supported by an innovative central buying system that reduces the need In general, we consider management to be excellent operators with a strong history

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Analyst Digest | marcelparcel Portfolio | May 01, 2010 - May 31, 2010 Page 13 of 55

of balancing rapid growth and profitability. Cofounders Warren Eisenberg and

Leonard Feinstein are still involved with the day-to-day operations as cochairmen.
CEO Steven Temares has been with the company since 1992. There has been very
little management turnover, as senior executives average more than 20 years with
the firm. Cash compensation for executives is relatively low, but equity-based
compensation is a bit excessive compared with the peer group. However, we find
this reasonable, given the firm's consistent success. The board consists of Eisenberg,
Feinstein, Temares, and seven outside directors, so there appears to be sufficient
independence. Eisenberg and Feinstein owned 2.0% and 1.5% of the common
shares, respectively, as of January 2010, but have been steadily paring their
positions during the past several months. However, we believe the board and
executive officer's ownership stake--around 5% of the outstanding shares--is still
sufficient to align their interests with common shareholders. We disapprove of the
staggered board terms, certain change-of-control payouts, and a few related-party
transactions (buybuy Baby was purchased from Feinstein's sons), but generally find
Bed Bath & Beyond's stewardship practices to be fair for minority shareholders.

Profile
Bed Bath & Beyond is a premier home furnishings retailer, operating more than 1,100
stores in 49 states, Puerto Rico, and Canada. Stores carry an assortment of branded
bed and bath accessories, kitchen textiles, and cooking supplies. In addition to
almost 970 Bed Bath & Beyond stores, the firm operates 60 Christmas Tree Shops
(gifts and housewares), 45 Harmon Face Value units (health and beauty care), and 30
buybuy Baby stores (infant accessories).

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Analyst Digest | marcelparcel Portfolio | May 01, 2010 - May 31, 2010 Page 14 of 55

Buffalo Small Cap BUFSX | QQQQQ

$24.10 x$1.35 | –5.30%

01-11-2010 | by John Coumarianos

Morningstar Take
Buffalo Small Cap showed that it can play offense as well as defense in 2009.

This small-cap growth fund looks for fast-growing companies, but it has a bias for
those that produce prodigious returns on invested capital. It doesn't simply want
earnings growth that requires so much capital expenditure that it doesn't lead to
higher returns. Managers Kent Gasaway, Robert Male, and Grant Sarris also look for
companies with solid balance sheets. Indeed, while the fund's holdings sport returns
on assets that are above the average small-growth fund's holdings, they also display
lower returns on equity. This means that the firms are carrying relatively low levels
of debt, because returns on equity are dramatically increased with debt.

This attention to balance sheets and financial health usually means the fund will
perform relatively well when debt-laden companies stumble. Indeed the fund's 30%
loss in 2008, though painful in absolute terms, characteristically put it in the top
decile of its category. However, although the financial health of its firms could have
boded poorly for the fund in 2009, when lots of companies with high levels of debt
roared again, the fund managed a 38% gain, which placed it in the top half of its
category.

Among the stocks that drove performance in 2009 were slot machine maker WMS
Industries WMS, casual dining chain Panera Bread PNRA, and orthodontic product
maker Align Technology ALGN. Casino-related stocks, casual eateries tapping into
the desire for healthier food, and medical-related business have been staples for the
fund in addition to technology firms that one often finds in other small-growth funds.

Over the longer haul, the strategy of looking for profitable growth and tapping into
demographic trends has been successful, with the fund posting an impressive 11.4%
annualized return for the decade through mid-January 2009. This fund remains a fine
supporting player.

Role in Portfolio
Supporting Player

Strategy
Using a growth-at-a-reasonable-price philosophy, the managers employ numerous
themes to direct stock selection, such as those related to demographic patterns and
technological innovation. Firms with strong earnings and cash flow, competitive
products, and rock-solid balance sheets are fund favorites. Such stocks often trade at
a premium, but management gets edgy when prices climb too high. Although its
initial position in any one issue is small, it holds on to winners. Turnover is very low.

Management
Kent Gasaway and Robert Male have both comanaged the fund since its April 1998
inception. Grant Sarris, a former small-cap manager with Waddell & Reed, has been
with the fund since November 2003. Four analysts support Male, Gasaway, and
Sarris.

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Analyst Digest | marcelparcel Portfolio | May 01, 2010 - May 31, 2010 Page 15 of 55

Meridian Growth MERDX | QQQQQ

$35.77 x$2.18 | –5.74%

05-19-2010 | by Michael Breen

Morningstar Take
Meridian Growth proves the wisdom of never putting oneself in too big of a hole.

Unlike many mid-growth funds, this one is far from a swashbuckler. Instead of
making momentum plays on the hottest new stocks, manager Rick Aster favors
established firms with dominant market share and steady prospects that he can buy
at reasonable prices. Take insurance broker Willis Group WSH. Aster says it has
strong margins, a clean balance sheet, and a steadily growing global business, yet it
trades at a P/E of just 10. Aster holds stocks for the long term and the portfolio's
turnover rate is less than half its typical peer's.

This patient and prudent tack gives the fund a distinct risk/reward profile. Its upside
capture ratio against the Russell Mid Cap Growth Index is 85, while its downside
capture ratio is just 58. This means the fund makes a bit smaller gains than the
benchmark in up markets, but suffers 42% less losses in down periods. Net result:
Returns that land in its category's upper reaches in every trailing period back to
inception. And while the use of tax-loss carryforwards is temporarily making some of
the fund's rapid-trading rivals appears more tax-wise than they really are, this one's
low-turnover approach has consistently done a nice job keeping the tax man at bay.

Aster is treading lightly. He's found select bargains among asset managers, and
Affiliated Managers AMG is a top-20 holding. He says the firm faces challenges but
rolls up a great lineup of more than 50 asset managers and is positioned to benefit
from an extended market rebound. He boosted his stake in top holding Valspar VAL
because he says the maker of industrial coatings is well diversified globally and is
set to get a boost from rebounding residential paint sales as remodeling becomes the
option of choice for many in an uncertain economy.

This is a top option. Its relative rank will slip in sharp market upturns, but that's to be
expected and is part and parcel of its winning formula.

Role in Portfolio
Core. This fund may not suit aggressive types, but others will find its moderate
volatility appealing. Tax efficiency hasn't been stellar, though, so consider holding it
in a tax-sheltered account.

Strategy
This fund takes a kinder, gentler approach to growth investing. Manager Rick Aster
looks for small- and mid-cap names growing their earnings at least 15% a year. He
won't pay up for that growth, however, which typically gives the fund price multiples
below the mid-growth averages. Aster employs a buy-and-hold style and won't
necessarily dump picks that have drifted into large-cap territory. He keeps a compact
portfolio of about 50 holdings and often concentrates his picks in a handful of
sectors.

Management
Rick Aster has been at the helm since the fund's 1984 inception. He is the founder of
the fund's advisor, Aster Investment Management Company. In mid-2005, Aster
brought aboard a former Brandywine BRWIX analyst, Talal Qatato, to assist him with
stock-picking.

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Analyst Digest | marcelparcel Portfolio | May 01, 2010 - May 31, 2010 Page 16 of 55

includes Zach Egan and Louis Mendes, who run successful Columbia Acorn
Columbia Acorn International Select Z International.

ACFFX | QQQQ

$22.61 x$2.01 | –8.16%

01-12-2010 | by Kevin McDevitt, CFA

Morningstar Take
Columbia Acorn International Select is a paradox: It's concentrated, yet conservative.

This fund's high-quality emphasis has helped it control risk more effectively than
many better-diversified peers. Manager Chris Olson focuses above all on holding
companies with strong franchises and healthy balance sheets that can weather
cyclical downturns. Such holdings have helped the fund earn below-average to low
risk scores while owning 40 to 60 stocks. Olson rarely allows much cash to build,
although the cash percentage did briefly hit double digits in summer 2008.

This attractive risk profile helped stem the fund's losses in 2008, as Olson foresaw
the collapse in financials before many peers. After riding that sector to strong gains
through 2006, he started cutting exposure in 2007 as loan-to-deposit ratios
escalated. The portfolio's financials stake fell from 25.5% in 2006's fourth quarter to
1.6% in at the end of 2008, far below the current 16.8% category average. Olson
reinvested the proceeds in health-care companies, which were far less likely to
require new capital. The fund's health-care weighting nearly doubled from the end of
2007 to 22% by early 2009.

However, what helped the fund in 2008 held it back in 2009, as cheap money flooded
back into financials and generally ignored health-care stocks. A dearth of emerging-
markets exposure also hurt. Emerging markets represented just 3.3% of assets
heading into 2009. Unlike sibling Acorn International LAIAX, which invests more
heavily in emerging markets, this fund generally sticks to developed markets. Such
conservatism has hurt the fund in other liquidity-fueled rallies, such as in 2003 and
2005--years in which it hit the category's bottom decile.

Despite lagging during these bull runs, the fund has been excellent under Olson, as it
landed near the category's top decile in three of his four years as lead manager.

Role in Portfolio
Supporting Player. The fund should be used in combination with a mainstream
portfolio.

Strategy
This fund doesn't look like many others. Management favors firms with market caps
of $5 billion to $10 billion--and buys some larger companies as well--so the fund's
average market cap tends to be both much bigger than the foreign small/mid-growth
norm and far smaller than the foreign large-growth norm. The team looks for above-
average growth rates, strong balance sheets, and good cash flows. It also pays a lot
of attention to valuations, and it normally owns around 50 names. A 2% redemption
fee is imposed on shares held fewer than 60 days.

Management
Chris Olson became this fund's sole manager in December 2005, after Todd Narter
stepped down from his comanager position and left Columbia Wanger Asset
Management. Olson handles stock selection in his areas of expertise--the United
Kingdom and Ireland--as well as overall portfolio construction for the fund. He works
with nine analysts, who pick stocks in their areas of expertise. His analyst team

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Analyst Digest | marcelparcel Portfolio | May 01, 2010 - May 31, 2010 Page 17 of 55

Vanguard Strategic Equity VSEQX | QQ

James Troyer, a veteran member of the Vanguard QEG, has taken care of day-to-day
management of this fund since 2006. Troyer, who has been with Vanguard since
1989, has long been responsible for the firm's quantitative research. Early in 2009,
Vanguard hired Sandip Bhagat, formerly the director of Morgan Stanley's global
quantitative strategies group, to run QEG.
$15.82 x$1.24 | –7.27%
05-07-2010 | by Jonathan Rahbar

Morningstar Take
Vanguard Strategic Equity deserves the benefit of the doubt.

The quantitative process employed here has struggled mightily since mid-2007 when
the bear market began taking shape. In fairness, nearly all quant funds got hit hard
when the market collapsed and have had difficulties finding firmer ground in its rapid
rebound. Just because the past couple of years have been a challenge, investors
shouldn't throw in the towel.

There haven't been any significant changes with the fund's process or management.
The portfolio still maintains a broad, diversified profile with sector weightings that
typically fall in line with its benchmark. Computer models rate the relative
attractiveness of companies in the index based on a variety of factors including
valuation, earnings quality, and growth metrics. In the end, roughly 700 of those
2,200 possible candidates make the cut, and single positions normally don't account
for more than 1.25% of assets.

Many funds claim to own quality companies with strong prospects trading at cheap
prices, but this one walks the walk. The portfolio is filled with stocks that have better
profitability characteristics (net margins, return on assets, and return on equity) and
are more attractively priced, based on the fund's P/B and P/E ratios, than the typical
mid-blend offering. It holds smaller companies than the category average as well, so
if stocks farther down the market-cap spectrum hit a rough patch, the fund may have
more trouble than its peers.

A sturdy portfolio doesn't make the fund's recent performance look any better, with
three- and five-year returns that land in the category's bottom quarter. When
assessed over longer periods, like the past decade, the fund has done a good job of
outpacing the competition and its proxy. Investors shouldn't lose hope on this fund
just yet.

Stewardship Grade
This isn't Jack Bogle's Vanguard, but it's still a fine steward of shareholders' wealth.
The family's mutual ownership structure helps it offer low fees and keep investor
interests paramount. A blemish free regulatory record, and loyal fund owners and
employees also help make this a trustworthy fund.

Role in Portfolio
Supporting Player. With no exposure to the 300 largest U.S. companies, this fund
wouldn't fit as a core holding in most portfolios. However, it could nicely fill the
small- or mid-cap slot.

Strategy
Quantitative models, designed by Vanguard's Quantitative Equity Group, call the
shots at this fund. Management consults the models to construct a portfolio with
moderate valuations, strong earnings growth, and sector weightings similar to those
of the MSCI U.S. Small and Mid-Cap 2200 Index. The models consider myriad factors,
including revisions to analysts' earnings estimates and changes in insider ownership.

Management

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Analyst Digest | marcelparcel Portfolio | May 01, 2010 - May 31, 2010 Page 18 of 55

Jim Gilligan, the longtime lead manager of this fund's management team, stepped
Invesco US Mid Cap Value Y MPMVX | down on Jan. 1, 2009. Tom Copper, who has been on the team since 2003, took over

QQQ as lead manager for the mid-cap strategy. John Mazanec, formerly of Wasatch Small
Cap Value WMCVX, joined in mid-2008 and supplements Copper's efforts here.
Mazanec and Copper also have the team's large-cap stock-pickers at their disposal,
including Thomas Bastian, James Roeder, Mark Laskin, Mary Jayne Maly, and Sergio
Marcheli.
$32.04 x$1.89 | –5.57%
04-30-2010 | by Katie Rushkewicz

Morningstar Take
Morgan Stanley Institutional US Mid Cap Value still makes sense.

This fund will be renamed once Invesco's purchase of Morgan Stanley's retail fund
lineup is completed in early June. Besides a new name, not much else is expected to
change. The team, led by Tom Copper and John Mazanec, will move to Invesco and
will continue picking stocks as they have since taking over the fund in 2003.

That bodes well for shareholders. The fund has posted a solid record during the
team's tenure, gaining nearly 11% per year since late 2003 and landing in the
category's top quintile. The team embraces unloved companies whose stock prices
are depressed because of temporary challenges. The managers are willing to be
patient with turnaround stories as long as they see a catalyst for change. Often their
patience pays off, as has been the case with Estee Lauder EL, which has thrived after
hiring a new CEO and improving cost efficiencies.

The managers pride themselves on performing diligent stock-by-stock research

alongside the large-value managers who run Van Kampen Growth & Income ACGIX.
Because they get to know their companies well, they're comfortable keeping a
compact portfolio of 40 stocks. At times, their stock-picking can lead to buildups in
certain sectors or industries depending on where they're finding value. Currently, the
fund has a cyclical tilt, with industrials names such as Goodrich GR and Pentair PNR
dominating the top holdings.

That's paid off during the rally; the fund's 62% gain during the trailing year through
April 28 lands in the category's top decile. The managers have been taking some
profits, selling technology stocks such as Teradata TDC after their valuations ran up,
but the fund remains well positioned for a continued economic recovery.

The fund has a lot working in its favor, so shareholders shouldn't be worried about
the upcoming move to Invesco. It could even be an advantage if cost efficiencies lead
to lower fees.

Stewardship Grade
This fund is supported by a weak corporate culture that can, at times, struggle to put
shareholder interests ahead of business incentives. That said, its compensation
structure does aim to align managers’ interests with those of their investors.

Role in Portfolio
Supporting Player. Like most mid-cap funds, this one works best as a secondary
holding in investors' portfolios.

Strategy
The fund's management team holds a compact portfolio of beaten-down companies
with catalysts for change. The managers are willing to hold on to winners and to
make significant sector bets in their attempt to beat the Russell Midcap Value Index.

Management

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Analyst Digest | marcelparcel Portfolio | May 01, 2010 - May 31, 2010 Page 19 of 55

Stryker Corporation SYK | QQQQ With its cash-rich balance sheet and admirable free cash-flow generation, Stryker
remains in the enviable position of having many avenues to return value to
shareholders. Stryker could significantly boost its dividend or repurchase shares at
attractive prices to bolster investor returns with its substantial cash resources. Also,
$53.03 x$4.41 | –7.68% depending on the acquisition target, Stryker could use its big cash position to invest
Fair Value Estimate $72 in new technology in fast-growing niches, boosting its growth potential.

Consider Buying Price $50.4

Consider Selling Price $100.8 Valuation
We're keeping our fair value estimate at $72 per share. We assume sales growth
Fair Value Uncertainty Medium rebounds to about 11% compounded annually through 2014. Specifically, we assume
Economic Moat Wide the orthopedic business grows 9% compounded annually during those years, which
Stewardship Grade C reflects solid growth from knees and hips and acceleration in the spine business as
new product candidates are launched successfully. From a low base in 2009, we
05-21-2010 | by Julie Stralow, CFA assume the MedSurg business follows the growth trends of the orthopedic business
with a little boost from international expansion, causing 14% compound annual
growth in that segment from 2009 to 2014. Our fair value estimate also depends on
Growth operating margins staying around 23% through 2012 and then dropping to about 22%
We think new product launches and procedure growth should help Stryker grow 11% after the U.S. device tax is implemented in 2014. These factors should lead to
compounded annually through 2014. Acquisitions could add to that rate. earnings per share increasing about 11% during that period. We discount our
assumptions at 9.5%.
Profitability
Through major cost-control efforts, operating margins in recent quarters have risen Risk
past our long-term assumption of 22%. We think reform initiatives and increasing Economic concerns have disrupted Stryker's medical equipment segment recently,
regulatory requirements could constrain Stryker's margins in the long run. and caregivers may delay purchases in this segment--especially of big ticket items--
in economic downturns. Also, many highly motivated and resource-rich firms
compete with Stryker. If the company does not stay near the top of the innovation
Financial Health
curve, it risks losing customers to those rivals. In the longer term, third-party payers
Stryker ended March with $2.9 billion in net cash. With those substantial resources
may need to reduce payments for procedures in order to afford the expected uptick in
and ongoing cash flow, we expect it to return more value to shareholders or make
procedure volume. If payment cuts trickle down to Stryker and it can't make
acquisitions in fast-growing niches.
comparable cost reductions, those cuts could damage returns on invested capital.

The Thesis 05-21-2010

Strategy
Stryker excels in several orthopedic and medical equipment niches. We expect the
Stryker hopes to arm hospitals and surgeons with the tools needed to successfully
firm to continue launching innovative new products to help expand these niches and
treat patients. Its broad product set includes orthopedic implants, operating room
its own profitability even further in the long run.
equipment, and medical furniture. By interacting with many departments in the
hospital, Stryker aims to become a top supplier to medical caregivers. It also aims to
Around 60% of Stryker's revenue comes from orthopedic implants, where the firm is
acquire new businesses to ramp up growth and diversify sales.
a top-tier provider of knees and hips and a growing provider of spinal implants. We
think the orthopedic industry is very attractive because of its high barriers to success,
and Stryker should be a key beneficiary of growth in surgical procedures to repair Management & Stewardship
joints. Demographic trends in developed countries should drive solid volume growth Although we think Stryker's stewards employ fair practices, outside shareholders
for the industry, as their populations age and suffer from the consequences of should be aware of how little control they may have on Stryker's strategic direction.
obesity trends. Although we are enthusiastic about orthopedic volume growth Stephen MacMillan heads the firm's executive team and board, which we think
prospects, some uncertainty exists regarding ongoing pricing levels because of U.S. remains insulated. Even though the majority of the board pass U.S. independence
reform initiatives and growing national budget deficits worldwide, which could cause standards; we think the average tenure on the board, a director's consulting
some key payers to scrutinize medical costs more intensely. However, even in our relationship with Stryker, and the founding family's board seat and voting power
most dire scenarios, we think Stryker's returns on invested capital should remain override that litmus test. Because of those factors, the board's interests may not
higher than capital costs, primarily because of the positive characteristics of the necessarily be naturally aligned with most shareholders' interests. Also, though
orthopedic implant market. we're glad variable compensation, such as bonuses and stock-related rewards, make
up the vast majority of executive compensation, we'd prefer to see those rewards
The balance of Stryker's sales comes from tools and equipment to outfit surgical based on returns on invested capital or free cash flow rather than earnings per share,
suites and regular hospital rooms. Stryker is particularly prolific in operating room which can be easily manipulated and may not be a true measure of value creation.
products, including cutting tools, medical video equipment, and irrigation devices. We do applaud Stryker's disclosure surrounding compensation and financial
These tools often complement its orthopedic devices and greatly improve the performance, however, and we find Stryker's annual orthopedic market report
efficiency of surgical procedures. Stryker is even a top provider of medical beds and especially valuable.
emergency equipment, such as stretchers. Although not as fundamentally attractive
as implants and somewhat susceptible to economic cycles, these offerings often
expand at faster rates than Stryker's orthopedic implant products. In the long run, we Profile
think that trend could continue, assuming the company expands as expected in Stryker develops, manufactures, and markets medical devices and equipment for use
international markets. primarily in orthopedic procedures. The firm generates most of its revenue from
reconstructive implants, such as knees and hips, but serves a variety of other

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Analyst Digest | marcelparcel Portfolio | May 01, 2010 - May 31, 2010 Page 20 of 55

orthopedic niches, including spine. Stryker also offers a wide range of operating
room equipment and tools used for orthopedic and other procedures. Hospital beds
and stretchers account for a portion of Stryker's sales, too.

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Analyst Digest | marcelparcel Portfolio | May 01, 2010 - May 31, 2010 Page 21 of 55

care, technology, and wherever the price is right.

T. Rowe Price Equity Income PRFDX |
QQQQ Management
Brian Rogers has managed this fund since its 1985 inception. He is backed by T.
Rowe Price's deep bench of analysts. In January 2004, Rogers became T. Rowe
Price's chief investment officer, and he also serves as the chairman of the company's
$21.01 x$1.99 | –8.65% board. He says he invests a large portion of his assets in the fund.

03-23-2010 | by Harry Milling

Morningstar Take
A seasoned stalwart, T. Rowe Equity Income is an easy choice.

Much of the fund's deserved praise stems from its reliably solid returns throughout
its nearly 25 years. It usually loses a bit less than its large-value peers in bear
markets, and it usually outperforms a bit in market rallies. This success stems from
the expertise and consistent approach of its veteran manager Brian Rogers, who has
been at the fund's helm since its inception in late 1985. He tends to anchor the fund
in the nation's behemoths to provide the fund's dividend yield. Perennial top holdings
like ExxonMobil XOM and AT&T T also keep the fund's volatility down.

Generally, yield is a secondary consideration, though, and it's beneath the S&P 500's.
The top holdings may be a bit mispriced based on future cash flows, but Rogers'
priority is to seek price appreciation in more beaten-up stocks of established firms
with temporary difficulties.

The guts of the fund consist of marquee names such as Bank of America BAC, Pfizer
PFE, and Lockheed Martin LMT that have strong competitive advantages but became
bargains after their growth ran aground. Typically, Rogers has bought and sold his
value plays several times before, and he knows the businesses and managements
well, so he is confident buying them in their darkest hours. For example, he tripled
his position in Bank of America in 2009's first quarter when its stock was in the
single digits, and many were concerned about its survival. It has since more than
doubled in price.

His savvy with these established but beaten-up names comes from his accumulated
depth of investment experience. But Rogers also has added to returns on the margins
with less well-known names suggested by T. Rowe's renown analyst staff. Here, too,
price appreciation takes precedence over yield.

With this fund, you are in the hands of an accomplished investor who is also open to
the using ideas of others for the sake of shareholders.

Stewardship Grade
This offering looks good on the stewardship front, benefiting from a top-rate
investment culture, low fees, strong manager ownership, and a spotless regulatory
history.

Role in Portfolio
Core. Given this fund's valuation-sensitive, dividend-focused strategy, conservative
investors should be happy here. Consider pairing it with a growth-oriented offering.

Strategy
This fund employs a true-blue approach to value investing. Longtime manager Brian
Rogers looks for companies trading cheaply relative to their historic price multiples
while also being mindful of dividend yield. The backbone of the fund are blue-chip
behemoths that may not be huge bargains but provide yield nevertheless. The real
priority is price appreciation, though, and he seeks that by buying down-and-out
marquee names, which are found in a variety of sectors, including industrials, health

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Analyst Digest | marcelparcel Portfolio | May 01, 2010 - May 31, 2010 Page 22 of 55

services outpaced the growth from that of non-discretionary services.

Cognizant Technology Solutions
Corporation CTSH | QQQ
Cognizant's adjusted operating margin during the quarter stood at 19.1%, which is
well within the company's targeted 19% to 20% range. The benefits of higher
utilization and improved productivity from a higher proportion of fixed-price projects
were offset by currency headwinds and lower price realization. The dip in the
company's price realization levels was primarily due to growth in lower price point
$50.04 x$1.07 | –2.09% BPO projects.
Fair Value Estimate $47
Overall, it was a solid quarter performance from Cognizant, in our view. We believe
Consider Buying Price $32.9
the company is well-positioned to benefit from the pick-up in the demand
Consider Selling Price $65.8 environment.
Fair Value Uncertainty Medium
Economic Moat Narrow The Thesis 05-03-2010
Stewardship Grade B Cognizant Technology Solutions, the youngest of the Tier 1 Indian IT service firms,
was fast to get off the blocks and has increased revenue in excess of 50% annually,
05-03-2010 | by Swami Shanmugasundaram on average, during the last five years. Cognizant's consistent performance and fast
growth is driven by its high-quality consultative approach and deep client
partnerships. The company is an active player in a large and rapidly growing IT
Growth services market and possesses the highest growth profile among its Tier 1 peers.
During the last five years, revenues have increased rapidly at a CAGR of 41%.
However, we expect revenue growth to decelerate during the next five years due to Although Cognizant is a United States-based company, its business model closely
sluggish economic conditions. We model a CAGR of 17% during our forecast horizon. resembles that of its Indian counterparts. However, to distinguish itself from
competitors in an increasingly crowded field, Cognizant chose to build a U.S.-based
management team to gain the trust of U.S. customers while delivering the cost
Profitability
savings of the offshore model. This strategy of using American nationals and Indians
Cognizant is very profitable with operating margins averaging in the high teens over
with extensive exposure to U.S. business culture for key customer-relationship roles
the last five years. Going forward, we expect the company's margin to decline
has helped Cognizant outperform its older peers. This customer-centric focus also
slightly due to wage inflation and employee attrition.
helped Cognizant build a significant competitive advantage as it straddles the best of
consulting and outsourcing.
Financial Health
Cognizant's maintains a strong balance sheet with more than $1.4 billion in cash and Cognizant derives a significant portion of its revenue from its largest clients, who
no debt. With Cognizant generating solid free cash flows that averaged 10% of generally form long-term relationships with the company. Much of Cognizant's
revenue over the last five years, we expect the company to remain unleveraged in growth thus far has been through repeat business from its existing client base, and
the future. we believe this trend will continue. Cognizant's geographic breadth, domain
expertise (financial services, health care, manufacturing, and so on), and a wide
range of horizontal service offerings (enterprise resource planning, business process
Analyst Note 05-04-2010 outsourcing, testing, IT infrastructure services, and so on) not only act as catalysts for
Driven by the continued improvement in the demand environment, Cognizant CTSH growth, but also shield the company from feeling the pinch of a global economic
reported strong first-quarter results. As it has over the last few years, the company slump or weakness in any particular part of its business.
once again managed to outpace its other Tier 1 competitors. Based on its project
pipeline and solid execution skills, we expect Cognizant to stay ahead of its peers We believe that Cognizant's ability to capture market share should continue for the
during the coming quarters. foreseeable future for a couple of reasons. First, Cognizant's strategy to reinvest the
excess profits generated during this high-growth period to extend its range of service
Cognizant delivered first-quarter revenue of $960 million, representing 6.3% offerings and increase the employee bench strength while maintaining stable
sequential and 28.7% year-over-year growth. The company's strong showing was operating margins of 19%-20% should benefit the company in the long run. Second,
aided by solid performance from all its industry segments. Manufacturing and Cognizant's reinvestments in the past have enabled the company to build a critical
Healthcare led the pack, with 41% and 33% year-over-year growth. Revenue from mass of technological expertise, industry-specific knowledge, and business acumen.
the company's Financial Services segment, which, at 42% of revenue is its largest, This huge reserve of skilled labor should enable Cognizant to scale up its offerings in
grew by 20.3%--its most robust growth rate in the last six quarters. The Financial a short period with minimal effort. As the outsourcing market matures, offshoring
Services segment's relatively strong performance can be attributed to the recent services are gaining more traction in the broader IT services market. Even though
spurt in IT spending triggered by regulatory compliance and M&A-related integration many countries have emerged as attractive offshore destinations, India remains the
projects. With most of the large integration projects typically expected to last for 18 preferred destination. This provides Cognizant, one of the dominant players in the
to 24 months, we believe this is not a one-off item, and we expect to see some Indian market, an excellent opportunity to expand further and garner significant
strong performance from this vertical in the next few quarters. market share.

Among the service lines, Application Development maintained its growth momentum Cognizant's growth is also aided by a positive industry tailwind. Historically,
and registered a 30% year-over-year increase in revenue. Application Development is outsourcing has been aggressively pursued by companies in a weak economy. The
considered discretionary by clients, and its higher growth rate is a good sign that current economic downturn might force clients to turn more toward outsourcing to
business is slowly getting back to normal for IT service providers. Revenue from reduce their operating costs. This increase in business should offset any weakness in
Application Maintenance, which mostly involves non-discretionary services, grew discretionary projects. Overall, we believe that Cognizant, with its world-class
28% on a year-over-year basis. It's more than a year since revenue from discretionary management team, strong recurring revenue base, and maintenance revenue

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Analyst Digest | marcelparcel Portfolio | May 01, 2010 - May 31, 2010 Page 23 of 55

streams, is well-positioned to weather the current economic slowdown.

Valuation
We are raising our fair value estimate for Cognizant to $47 per share from $40. The
increase is to account for time value of money and improved demand environment for
offshore IT services. As the global economy gradually recovers from a recession, we
expect companies to increase their spending on IT spending, particularly on
discretionary and transformational projects. Additionally, the demand for offshore
based cost-reduction projects is expected to remain stable. Being a Tier 1 service
provider with global reach and a comprehensive portfolio of services, we expect
Cognizant to benefit from this increased demand trends. Overall, our forecast
assumes revenue CAGR of 17% during the next five years. We estimate Cognizant's
operating margin to decline slightly in the future, primarily driven by rising employee
attrition and increasing wage inflation. We expect operating margins to average
17.5% during our forecasting period, which is 100 basis points less than its last five
year average of 18.5%.

Risk
Cognizant, like other IT service providers, is exposed to higher customer
concentration; the company's top 5 and 10 customers contribute around 20% and
30% of revenues, respectively. Given the higher switching costs and sticky nature of
client-vendor relationships, it is unlikely that clients will switch service providers but
the risk of client defection does exist. Cognizant is also subjected to cyclical
downturns in technology spending--any weakness in the economy may force
customers to cut their IT spending, hurting Cognizant's growth prospects. The Indian
government has granted tax subsidies on Indian software exports, and as these
subsidies get phased out by 2011, Cognizant's low tax rates should rise.

Strategy
The core of Cognizant's strategy is its focus on the "fourth generation" of offshore
outsourcing, which is aimed at capturing the best of both worlds--offshore
outsourcing and local consulting. Fourth-generation outsourcing combines the
traditional offshore model with industry and technical expertise, cultural
compatibility, and local consulting capability. Additionally, by establishing a stronger
footprint in Europe, Cognizant is diversifying from its dependence on the U.S. market,
which currently accounts for about 80% of its revenue.

Management & Stewardship

We believe that stewardship at Cognizant is good. Cognizant is led by CEO Francisco
D'Souza, who took over in 2007 when Lakshmi Narayanan moved into the vice
chairman role. D'Souza had been COO since 2003 and previously led Cognizant's
North American division. D'Souza is a Cognizant veteran who has been with the firm
since its inception in 1994, and we believe he provides the firm with solid leadership.
D'Souza's compensation of $5.6 million in 2009 was in line with others in the
industry. John Klein, an independent director with Cognizant since 1998, was elected
to serve as chairman of the board in December 2003. We are pleased that a
substantial portion of the total management compensation is based on the creation
of measurable shareholder value. Executives and directors collectively own 2% of
Cognizant's outstanding shares, a sufficient stake, given the size of the company, in
our opinion. From an operational and strategic point of view, we believe the
management team is among the best in the industry. Cognizant could improve its
Stewardship Grade by eliminating its staggered board structure and antitakeover
provisions.

Profile
Based in Teaneck, N.J., Cognizant is a leading provider of offshore software
development, maintenance, testing, and packaged implementation services. It was
started in 1994 as a part of Dun & Bradstreet and was spun out in 1996. Cognizant
serves clients primarily in North America and Europe with a focus on the financial,
health-care, and retail/manufacturing/logistics industries.

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Analyst Digest | marcelparcel Portfolio | May 01, 2010 - May 31, 2010 Page 24 of 55

fund from 2003 to 2007. Michael Stack, who arrived at UMB in early 2006 as a
Scout International UMBWX | comanager on this fund, is now devoting more time to new sibling UMB Scout

QQQQQ International Discovery UMBDX, though he still contributes to this fund as well.

$26.44 x$2.97 | –10.10%

12-11-2009 | by Gregg Wolper

Morningstar Take
For most investors, 2009 probably seems very out-of-the-ordinary, but for Scout
International it has been a typical year.

Of course, that doesn't mean the year has been uneventful. With markets tumbling in
early 2009, the fund lost 16.2% in just the first two months of the year. With markets
rallying since then, it has powered ahead, and as a result the fund has a 35.3% year-
to-date return through Dec. 7, better than roughly 70% of the foreign large-blend
category. If the fund finishes the year with a gain of that magnitude or more, it would
be its highest annual return in its 16-year history.

So how can such an extraordinary yearly performance be described as typical?

Because manager Jim Moffett has done the same thing he's been doing since the
fund started, and because the results are similar to those of most years if one
compares them with peers rather than simply looking at the absolute number.
Moffett uses a patient, low-turnover style, locating mid-caps and large caps that he
thinks can benefit from some larger trend he has identified, while keeping the
portfolio broadly diversified in the interest of risk control. Though he usually keeps
the fund fully invested, he's also willing to hold substantial cash stakes on occasion;
that helped keep the fund's losses milder than most in 2008 and early 2009. But by
midyear 2009 he was fully invested again.

Moffett does make changes and doesn't match index weightings. He says he has
kept an overweighting in technology stocks, for example, because he thinks there's
tremendous pent-up demand. He mentions Infosys INFY, Taiwan Semiconductor
Manufacturing TSM, and Hon Hai in that regard, but says a favorite is Nidec NJ,
which makes small motors used in computers and autos. In financials, meanwhile, he
has made some shifts, selling some that have risen sharply to buy or add to others he
thinks have a more solid foundation.

This fund has consistently outperformed since its inception and seems likely to
continue to do so.

Role in Portfolio
Core

Strategy
James Moffett combines top-down country and sector analysis with bottom-up stock
selection. He often looks for positive macroeconomic trends to determine country
weightings. He favors firms with strong balance sheets and stable long-term growth
potential and prefers market leaders that can benefit from demographic trends. He
does not invest directly in China. The fund will use fair-value pricing when it deems it
appropriate and imposes a 2% redemption fee on shares sold within two months of
purchase. It doesn't hedge its currency exposure.

Management
Lead manager James Moffett has directed this fund since its inception in 1993. He
works with comanager Gary Anderson and a small group of in-house analysts under
the leadership of director of research Michael Fogarty, who was a comanager on this

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Analyst Digest | marcelparcel Portfolio | May 01, 2010 - May 31, 2010 Page 25 of 55

reasons. The firm's 32 million medical members allow it to spread out fixed
UnitedHealth Group, Inc. UNH | administrative costs and negotiate large discounts with health-care providers. The

QQQQQ company's extensive database of claims improves underwriting and can be used to
identify the most effective health-care providers. Finally, UnitedHealth's industry-
leading position across geographies and product lines--including commercial
insurance, Medicare, Medicaid, data services, pharmacy benefit management, and
specialty benefits--reduces its risk and allows management to be opportunistic about
$29.07 x$1.24 | –4.09% its allocation of effort and capital.
Fair Value Estimate $50
Since premiums are collected months before claims have to be paid, health insurance
Consider Buying Price $35
is largely a self-financing business. This allows UnitedHealth to generate massive
Consider Selling Price $70 free cash flows and earn healthy returns on capital. At the same time, the need for
Fair Value Uncertainty Medium large provider networks deters new entrants. Continued strong performance depends
primarily on the various managed-care organizations all raising prices in line with
Economic Moat Narrow
ever-increasing medical costs. We think pricing will be rational over the long run
Stewardship Grade C because thin margins and high customer switching costs mean that it usually isn't
worthwhile for an MCO to undercut its competitors on price. Underwriting missteps
03-25-2010 | by Matthew Coffina in 2008 were quickly corrected so that the same problem didn't recur in 2009, which
we see as a strong indication of UnitedHealth's pricing power.
Growth
Health-care reform remains an important issue affecting UnitedHealth's future. Even
We project 3.5% compound annual operating revenue growth but flat operating
though the Democrats managed to enact comprehensive reform without any
income over the next five years. We expect share repurchases to enable earnings per
Republican support, we expect the legislation to be only marginally negative for
share growth in the mid-single-digits.
UnitedHealth. While the firm will be hurt by lower Medicare reimbursements and
provisions regulating the percentage of premiums that must be spent on medical
Profitability care, it will also benefit from a reduction in the number of people without insurance,
We project 5.7% average operating margins excluding investment income over the new investments in health IT, and expansions of the Medicaid program.
next five years and returns on invested capital well in excess of UnitedHealth's cost
of capital.
Valuation
We are maintaining our $50 fair value estimate, as we believe our model already
Financial Health accounts for the impact of the final reform legislation. We expect Medicare
UnitedHealth is in good financial health, with more interest income than interest Advantage reimbursement rates to approximate parity with the cost of original
expense and a 32% debt/capital ratio. The company generates several billion dollars Medicare within the next few years. In our base-case scenario, we project that
of free cash flow annually. UnitedHealth's operating revenue (which excludes investment and other income) will
increase at a 3.5% annual rate during the next five years. We project that the
company's operating margin (excluding investment income) will contract from 6.7%
Analyst Note 05-06-2010 in 2009 to 5.6% by 2014, due to a combination of slow revenue growth (which makes
The TRICARE Management Activity (TMA), the government agency that oversees the administrative cost leverage challenging) and a deteriorating medical cost ratio
TRICARE program, recently announced that it is awarding the TRICARE North Region (because of business mix, regulatory, and competitive pressures). We estimate
contract to Health Net HNT, the incumbent provider. The contract was originally UnitedHealth's cost of equity at 10.5%.
awarded to Aetna AET last July, but a protest by Health Net led to Aetna being
disqualified for allegedly using insider information in preparing its bid. The TMA also
announced that it is soliciting new bids for the South Region contract. This contract Risk
was originally awarded to UnitedHealth UNH over the incumbent provider Humana UnitedHealth is in the difficult and sensitive business of trying to restrain health-care
HUM. spending growth, which often leads to negative publicity and potentially expensive
lawsuits. Government actions could have significant, sudden, and unpredictable
Considering its relatively small size, the TRICARE contract has the greatest impact on effects on UnitedHealth's business, including changes to Medicare or Medicaid
Health Net. We are putting the company under review and expect to increase our fair funding and policies, the creation of a national health insurance plan, or laws that
value estimate. We do not anticipate changing our fair value estimates for the much restrict the premiums UnitedHealth can charge or mandate the benefits it must
larger Aetna or UnitedHealth because of this news. If the South Region contract is provide. Competition could lead to deteriorating underwriting practices in the
ultimately returned to Humana, we may raise our fair value estimate for that industry.
company. We note that the contract award could make Health Net an even more
attractive acquisition target, and somewhat ironically we consider Aetna a likely
Strategy
acquisitor.
UnitedHealth has focused on expansion to obtain scale and has a long history of
acquisitions. We think the company is likely to continue acquiring complementary
The Thesis 03-25-2010 businesses.
UnitedHealth's scale endows the firm with significant competitive advantages. With
underwriting and regulatory concerns fading to the background, we think
Management & Stewardship
UnitedHealth will continue churning out free cash flow and creating value for
We are encouraged by UnitedHealth's stewardship of late, despite a poor history
investors for the foreseeable future.
marked by an option-backdating scandal and excessive executive compensation. We
think governance issues are mostly in the past, and we give the company a fair mark.
We think UnitedHealth's scale results in a narrow economic moat for several

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Analyst Digest | marcelparcel Portfolio | May 01, 2010 - May 31, 2010 Page 26 of 55

As part of a legal settlement, former CEO Bill McGuire was forced to surrender stock
options and other compensation valued at more than $600 million. This large sum
represents only a fraction of McGuire's total compensation during his 15-year tenure,
which highlights the egregious nature of former compensation policies. Former COO
Stephen Hemsley became CEO in 2006 after joining the company in 1997. His total
compensation in 2008 was just $3 million--well below levels at peers. Given
UnitedHealth's poor results in that year, we think this is a good sign that the board is
serious about basing pay on performance. We appreciate UnitedHealth's efforts to
keep administrative costs in check over the past year, and we believe the company
was proactive in its participation in the health reform debate.

Profile
UnitedHealth provides health insurance and related services to more than 70 million
Americans. Products include risk-based health insurance, non-risk-based plan
management for self-insured employers, Medicare, Medicaid, and SCHIP plans,
pharmacy benefit and disease management, and database and consulting services.
Subsidiaries include UnitedHealthcare, Ovations, AmeriChoice, OptumHealth,
Prescription Solutions, and Ingenix.

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Analyst Digest | marcelparcel Portfolio | May 01, 2010 - May 31, 2010 Page 27 of 55

on the fund since 1999 and also runs Vanguard International Explorer VINEX. James
Vanguard International Growth Inv Anderson of Baillie Gifford Overseas was added in 2003 and manages about 42% of

VWIGX | QQQQ
the portfolio. Graham French and Greg Aldridge of M&G Investment Management
were added to the lineup in February 2008, and they currently manage 8% of the
portfolio.

$15.43 x$1.79 | –10.39%

12-15-2009 | by Courtney Goethals Dobrow

Morningstar Take
Vanguard International Growth continues to impress.

Foreign large-blend funds are enjoying a strong run in 2009, and this fund is doing
better than most. The category is up 30% for the year through Dec. 10, but this fund
is turning in a top-decile performance and is topping its typical peer by 10 percentage
points and the MSCI EAFE Index by even more.

Three solid subadvisors with complementary approaches run the portfolio. James
Anderson of Baillie Gifford runs about 42% of the portfolio, looking for companies
with strong balance sheets that can capitalize on big, structural economic changes.
Virginie Maisonneuve of Schroder Investment Management manages roughly 45% of
assets and focuses on quality growth and valuation, combined with macroeconomic
and thematic viewpoints. Greg Aldridge and Graham French of M&G Investment
Management manage about 8% of the portfolio with an emphasis on companies
with strong competitive advantages. The remaining assets are in cash.

The fund's emerging-markets stake has been a boon lately. At 21% of assets, it's
almost triple the category average. Emerging markets have been on a tear this year
and are a big reason this fund is crushing its rivals. Anderson says emerging markets
have held up better than in past downturns due to firms' stronger balance sheets. He
likes innovative Chinese tech companies such as Internet search firm Baidu BIDU,
which is up more than 200% this year. One of Maisonneuve's investing themes also
centers on emerging markets. She says U.K. grocer Tesco is well-positioned to serve
growing populations in developing countries. The three teams have proven adept at
navigating a variety of market environments. Expect them to navigate the eventual
slowdown in emerging markets with the same skill.

Stewardship Grade
This isn't Jack Bogle's Vanguard, but it's still a fine steward of shareholders' wealth.
The family's mutual ownership structure helps it offer low fees and keep investor
interests paramount. A blemish free regulatory record, and loyal fund owners and
employees also help make this a trustworthy fund.

Role in Portfolio
Core

Strategy
Virginie Maisonneuve of Schroder Investment Management looks for quality growth
and valuation, combined with macroeconomic and thematic viewpoints. The fund's
second subadvisor, Baillie Gifford, likes companies with strong balance sheets that
can capitalize on big structural economic changes. Its third subadvisor, M&G
Investment Management, focuses on high-quality companies.

Management
Roughly 45% of assets are run by Schroder Investment Management. Richard
Foulkes, who had overseen that money since 1981, retired Oct. 31, 2005, passing the
mantle to Virginie Maisonneuve and Matthew Dobbs. Dobbs has been number two

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Analyst Digest | marcelparcel Portfolio | May 01, 2010 - May 31, 2010 Page 28 of 55

Eaton Corporation ETN | QQQ

acquisitions going forward. We have factored this type of growth and cash usage
into our model, but a change in financial policy or a move to bigger, riskier
acquisitions could put pressure on the rating.

$69.95 x$7.21 | –9.34% The Thesis 04-22-2010

We believe that Eaton is poised for a powerful recovery from the cyclical bottom in
Fair Value Estimate $71 2009, stemming from expansion into developing markets and an economic recovery
Consider Buying Price $49.7 in core businesses. Over the long run, we think the firm's advanced technologies and
Consider Selling Price $99.4 high switching costs should lead to solid economic profit generation.

Fair Value Uncertainty Medium Eaton is a diversified manufacturer of electrical components and systems across a
Economic Moat Narrow broad number of end markets, but is importantly focused on the common theme of
Stewardship Grade C providing power solutions. Thus the firm has been successful at expanding its
business well beyond its central focus of supplying to car and truck manufacturers,
04-22-2010 | by Rick Tauber, CFA, CPA but hasn't drifted too far outside of its core competencies.

Eaton benefits primarily from a solid installed base of products, which leads to high
Growth switching costs and therefore solid long-term profitability. As such, we think the firm
Eaton's revenue grew almost 14% annually for the five years ended in 2008 but has carved a narrow economic moat. From providing valves and transmissions across
shrunk about 23% in 2009 as the brunt of worldwide economic contraction hit. We a broad array of auto and truck platforms, which typically produce units for several
think the company can grow sales in the mid- to high single digits organically over years, to providing steering and fluid distribution systems on the new F-35 fighter,
the next several years. Eaton has established strong competitive positions, which also lead to follow-on
service and aftermarket sales.
Profitability
Eaton has taken these positions a step further by expanding into new technologies
Eaton's profitability is good, as it generated mid-teens ROICs from 2004-08 before
and new geographies. International sales have grown from 20% of the total in 2000
dipping to 6% in 2009. We expect ROICs to return to double-digits over the next five
to 55% in 2009 (including 22% to developing markets, up from 8%). On the new
years and remain at higher levels due to its strong business positioning.
technology front, Eaton has successfully expanded from core valves to valve
actuators, which have much higher vehicle content and result in lower emissions and
Financial Health better fuel economy. Moves into supplying transmissions for hybrid trucks and valves
Eaton enjoys solid financial health with modest financial leverage and strong free for wind farms are other examples of the company's ability to expand into growth
cash flow generation. Management recently lowered its debt/capital target to the markets while leveraging off its core competencies.
mid-20% range from mid-30%, extended its next debt maturity to 2012, and typically
covers its interest expense over 10x with operating cash flow. Eaton has also used acquisitions as another key ingredient in its transformation, and
has spent 8.5% of sales over the past 5 years to purchase outside firms. Eaton now
serves a wide swath of industrial markets, including aerospace, energy, agriculture,
Analyst Note 06-04-2010 and construction.
Morningstar is initiating credit coverage of Eaton with an issuer rating of A. Eaton's
rating reflects a few key considerations, including management's new lower However, Eaton's growth does not come without challenges. Players such as Parker
leverage target of mid-20% net debt/capital as opposed to a mid-30% benchmark Hannifin PH in many of Eaton's subsectors provide robust competition. Further, while
previously. We believe that this financial discipline, if maintained, mitigates the risk Eaton has broadened its scope of businesses across early- to late-cycle industries,
of large future cash acquisitions. The other key factor is that we have a constructive there is still meaningful underlying cyclicality here which has caused operating
outlook for the company and the industrial sector in general, with expected credit results to fluctuate. After achieving mid-teen ROICs from 2004-08, ROICs declined to
improvement over the next few years. We expect our Solvency Score in particular to 6% in 2009.
improve as a result, keeping the ratings in the "A" category.
Still, we think Eaton will ramp up profits quickly and once again generate ROICs
Eaton is well-entrenched in a number of end markets, which we believe gives it a approaching the teens, due to operating leverage combined with near-term growth
narrow economic moat and supports our Business Risk rating of “Good”. The opportunities.
company has evolved over the last decade into a global supplier of power-related
products, with foreign sales now accounting for more than 50% of the total. The
company's end markets now range from early- to late-cycle, balancing out overall Valuation
volatility to some degree. Nonetheless, Eaton remains tied to the industrial business We are changing our fair value estimate to $71 per share from $63, based on strong
cycle and suffered a 23% decline in sales in 2009, with earnings before interest, top-line growth over the next two years combined with expanding margins. Overall
taxes, depreciation, and amortization falling 44%. Total debt to EBITDA rose to 3.4 we forecast revenues to grow over 9% in each of 2010 and 2011 before drifting back
times, far above recent averages, although the firm did generate robust free cash to a long-term rate of 4%. We forecast double-digit top line growth in what we
flow and paid down more than $700 million of debt. We forecast strong single-digit believe are the firm's early to mid-cycle segments of auto, truck, hydraulics, and
top-line growth over the next few years, which should correlate with improved international electrical for the next three years due to a combination of recoveries in
EBITDA and leverage falling back below 2 times. these end markets, increased penetration, and new fast-growing applications for
Eaton's products. We expect the firm's aerospace and domestic electrical segments,
Risks going forward include sub-par recoveries in some of Eaton's key end markets which we believe are late cycle, to suffer small revenue declines in 2010 before
including automotive, heavy-duty truck, aerospace, and construction. In addition, generating modest sales growth thereafter as these markets are still under pressure.
Eaton has historically been acquisitive and expects to add 2%-4% sales growth via We also expect operating margins to ramp up from 3.7% in 2009 to a peak of near

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11.0% in 2013 before settling at a longer-term margin of about 9.0% thereafter. Our
estimates do not include the impact of acquisitions, which are likely to occur but are
not highly predictable in timing and impact on valuation.

Risk
Eaton remains a fairly cyclical business, despite recent diversification within the
industrial space. Large end markets such as truck, auto, and aerospace may not
recover as expected and result in weaker performance. The company's growing
exposure to emerging markets such as China and Brazil adds operational and
geopolitical risk. Further, the company has historically been acquisitive and looks
likely to pick up the pace of acquisitions, which always entails the risk of paying too
much along with compromising the balance sheet.

Strategy
Eaton expects to continue to develop leading technologies to capture market share
across all segments, but will likely focus on growing its electrical, hydraulics, and
aerospace units. The auto and truck segments are expected to largely grow with the
underlying markets but also generate very strong cash flow, some of which is likely
to be reinvested in the growth segments.

Management & Stewardship

Sandy Cutler has been CEO since 2000, a director since 1993, and with the company
(or its predecessor) since 1975. He is also chairman of the board, which has 11
members as of April 2010. All except Cutler are independent, and board elections are
staggered. Besides Cutler, the rest of the management team has held various
executive positions since the early 2000s. We like the depth of the management
team and the independent board, although we prefer a CEO who is not also
chairman. The board changed certain compensation policies to address the 2009
downturn, which we applaud, including a reduction of executive management
salaries and the elimination of annual incentive payments for 2009. Total executive
compensation remains 80-90% performance-based, which we feel aligns
management with shareholders, but we don't like that the compensation split was
recently switched to 75% cash and 25% equity from 50%/50%. We'd also prefer to
not see EPS as a performance benchmark. That said, we like that management and
directors own over 2% of outstanding stock. Eaton also has a long history of dividend
growth, based on a target of growing EPS by 15% per year and dividends in a like
amount. The dividend was maintained throughout the recession, and may grow once
again as earnings recover. The company has periodically repurchased shares, but
largely uses share repurchases to balance out stock grants or options exercised.
Eaton has also been a serial acquirer over the years, but has also opportunistically
divested businesses. Overall, we feel this has been a successful strategy in
reshaping the business, and that management has been prudent is its use of debt
and equity to make acquisitions. There is good discipline in maintaining a solid
balance sheet along with returning cash to investors and growing the business.

Profile
Eaton provides power management solutions to diversified industrial customers,
including electrical systems, hydraulics components, aerospace fuel systems, and
truck and auto powertrain systems. Products include UPS systems, hydraulic pumps,
cylinders, clutches, and circuit breakers. The company sells to both OEM and
aftermarket customers, and generates over 50% of its sales outside of the U.S.

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TELUS Corporation TU | QQQ

Telus has managed to build a strong competitive position in a three-player oligopoly,
evidenced by its high average revenue per user (ARPU) and low churn rates that have
historically been the best in Canada. This performance, in part, is driven by quality
services such as its customer-sticky Telus Spark & Mike push-to-talk product lines,
which produce strong network effects. Additionally, with wireless penetration in the
$34.54 x$0.77 | –2.18% high 60s, there are still plenty of subscribers to add.
Fair Value Estimate $37
Despite the sector's penetration upside, we are seeing some red flags throughout
Consider Buying Price $25.9
Telus' model that hint of tougher times ahead. The combination of increased
Consider Selling Price $51.8 competition and a weakened economic environment is beginning to hurt the firm's
Fair Value Uncertainty Medium pricing dynamics. ARPU is no longer increasing, and while better usage will largely
offset these declines, the firm needs to find new ways to grow. To that point, the
Economic Moat Narrow
firm recently launched a cable television offering, which should open the door for
Stewardship Grade B numerous bundling and cross-selling opportunities. Subscriber growth seems to have
leveled off around 9% and churn rates are setting new highs, so the firm's ability to
11-09-2009 | by Imari Love offer a quality diversified product is key to sustaining a long-term competitive
advantage.
Growth
A sustainable edge will be necessary because last summer's wireless spectrum
We only expect mid-single-digit revenue growth. EBITDA growth will probably fall
auction has once again opened the door for new competition. From 1997 to 2004,
short of that pace as the firm rolls out Telus TV. Over the long term, we project flat
Microcell proved to be a disruptive force in the sector as an aggressive, unprofitable
EBITDA growth for its wireline segment.
fourth entrant. Before Rogers RCI bought out Microcell, pricing was cut and
competition was more intense. Coupling this with the fact that cable TV operators
Profitability are now competing with Telus on the wireline voice side through voice over Internet
Telus has the top operating margins in its sector and should continue to remain protocol, the near-term outlook is cloudy at best.
relatively profitable given its strategy and high-quality product base. However, we do
expect margins to weaken because of competition and buildouts. However, the environment today is far different than it was a decade ago, when
penetration rates were much lower, operators were building out their networks, and
the telecom and technology industries were going through an unprecedented rise and
Financial Health fall. Today, it will be much more difficult for new entrants to wreak havoc, given the
Telus operates in a net debt/EBITDA range of 1.5-2 times. The firm announced it is quality of the incremental subscriber additions, the installed base of the current
buying back an additional 8 million shares, and it has raised its annual dividend for operators, and the high up-front costs of a launch. To ready itself for the war on new
five consecutive years. entrants, Telus joined forces with Bell Canada BCE to launch a new high-speed HSPA
network, that will not only offer higher speeds but also allow the firm to finally
Analyst Note 05-07-2010 support GSM-based handsets such as the iPhone. The network overlay will also
Though the fundamentals were mixed, Telus TU pleased investors by raising its allow it to close the roaming gap with Rogers, since GSM is the most commonly used
dividend (and dividend payout ratio) earlier than we expected. The firm increased its standard worldwide. Five years ago, Telus was Canada's ARPU/AMPU (average
dividend 5.3% to CAD 0.50 ($0.48) per share and raised its payout range to 55%-65% margin per user) leader; this network upgrade gives it an outside shot to regain its
from 45%-55% of sustainable net earnings. We expected a dividend uptick at some crown.
point, but not until the second half of the year.
Valuation
The dividend announcement overshadowed an otherwise forgettable first-quarter Our fair value estimate is $37 per share. We use a conversion rate of CAD 1.07 per
earnings release. Group revenue was flat year over year, as a 4% uptick in wireless $1 as of Nov. 9. A 10% increase in the Canadian dollar would increase our fair value
revenue was offset by a 3% drop in wireline sales. Wireless revenue was driven by estimate to $40, while a 10% decrease would lower it to $34. Given the change in
relatively strong subscriber growth of 6.3%, which made up for the fact that average the competitive landscape and the weakened economic backdrop, we project
revenue per user once again fell, by 4.4%. The cost of acquisition also fell (4.2% revenue per wireless subscriber to decline during the next few years. Subscriber
from the year-ago period), but not enough to stop wireless EBITDA margins from growth should also continue to slowly erode from its current 10%, driving wireless
falling 1 percentage point to 42%. Equipment sales jumped by more than 19% in part revenue to accelerate in the mid- to high-single-digit range during the next five years.
because of the higher unit costs that come with supporting high-end smartphones We project wireless earnings before interest, taxes, depreciation, and amortization
like the iPhone 3GS. to increase at the same pace as revenue for this year and next year. On the wireline
side, data growth will be mostly offset by the losses in the voice segment. Here, we
Telus' wireline EBITDA margin was up 3.2 percentage points to 35.9% despite the project revenue to increase in the low-single-digit range, while EBITDA for the
revenue drop. The firm did a good job of cutting wireline expenses across the board, segment is relatively flat. We project an 11% rise in capital expenditures for 2009
with salary expenses, termination fees, and restructuring costs all down from the over last year.
year-ago period. This kind of economic efficiency is critical in an environment where
there isn't much sales growth. While we appreciate the dividend boost, until the firm
revives its top-line growth, we are lukewarm on its near-term prospects. Risk
Last year's advanced wireless services auction adds uncertainty to the near-term
outlook for all of the major Canadian wireless operators. The fact that incumbents
The Thesis 11-09-2009 will be required to share towers with new entrants significantly reduces startup
Although we see some chinks in its armor, Telus is fundamentally strong enough to launch costs. Wireless number portability might not necessarily cause major moves
hold up in an increasingly competitive Canadian telecom sector, in our opinion. in market share rates, but it might push up the cost of retaining subscribers. Also,

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Analyst Digest | marcelparcel Portfolio | May 01, 2010 - May 31, 2010 Page 31 of 55

cable operators entering the voice market increases the risk on the wireline side.

Strategy
Telus has always focused on profitability instead of market share. The firm does this
through signing customers to extended contracts (one or three years) and managing
its current customers to optimize their contribution potential. Although based in the
western part of the country, Telus has done a good job of expanding into central
Canada.

Management & Stewardship

Since CEO Darren Entwistle arrived from Cable & Wireless eight years ago, he has
done a good job of increasing shareholder profits through efficiency and cost cuts. He
is the only company executive on Telus' board. Chairman Brian Canfield spent more
than 50 years with Telus or its predecessors, including four years as chairman and
CEO of BC Telecom. The Chartered Accountants of Canada recently named Telus the
best company in Canada (across all industries) in terms of corporate reporting.
Another positive point is that Telus has some of the highest amounts of senior
management compensation at risk. Overall compensation, including stock option
grants, is reasonable. In February 2007, the firm adopted a majority voting policy,
which makes it easier for shareholders to replace board members.

Profile
Telus is a leading telecom company in Canada with more than 6 million wireless
subscribers (the smallest of the three main carriers with 27% share), 4.2 million
wireline network access lines, and 1.2 million Internet subscribers, 86% of which are
high-speed subscribers. Wireless is now 48% of revenue and 54% of earnings before
interest, taxes, depreciation, and amortization. Its network covers 95% of Canada's
population.

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however, and shares Whitman's commitment to value investing. Whitman remains at

Third Avenue Small Cap Value Insti Cl the firm, and Jensen continues to work closely with him.

TASCX | QQ

$17.59 x$1.82 | –9.38%

12-17-2009 | by Bridget B. Hughes, CFA

Morningstar Take
Third Avenue Small-Cap Value has been a bit out of sync with the market--not
unusual here.

Over the past three years, a period that encompasses the market's ups and downs
associated with the financial crisis, this fund lands about in the middle of the small-
blend category. Its three-year annualized loss of 6.75% through Dec. 16, 2009, is just
a bit worse than that of the S&P Small Cap 600 Index.

Those relationships, however, are deceiving, in a way, considering the main drivers
of the fund's performance. Although it performed relatively well in 2008, when it
limited its loss to about 35%, it wasn't the kind of standout performance expected of
a conservative stock-picking approach--not because manager Curtis Jensen held
some of the ugly financials or had been loaded up with energy stocks that came
crashing down, but rather, in part, because of its Japanese holdings. In 2009, the
story is largely the same in that its Japanese stocks continue to be a drag on returns.
But the fund hasn't sunk to the very bottom of the category--its 23% gain sits behind
about two thirds of its peers'--despite its cash hoard and portfolio of generally better
financed companies.

The point being, the fund marches to the beat of its own drummer, and does so
because of its unique portfolio. Consider the fund's recent (but not first) forays into
distressed debt. Jensen says the portfolio currently has 6% of assets in such
instruments; he bought them because he felt he could get equitylike returns higher
up a company's capital structure. (He also says that such opportunities are harder to
come by as high-yield markets have rallied hard this year.) The fund still has 7.5% of
assets in Japan, currently fully hedged out of the yen. The fund's top holding,
Lanxess, is a German chemicals firm, though it has global operations. It's not your
typical small-blend fund.

It is a good one, though. The fund requires shareholders to be as patient as Jensen

is, but it has proved its mettle over the long haul.

Role in Portfolio
Supporting Player

Strategy
Curtis Jensen does things just a bit differently at this fund than firm founder Marty
Whitman does at sibling Third Avenue Value TAVFX. He still tries to invest in
companies with strong balance sheets at less than half of what he thinks they're
worth. This usually means purchasing companies at a significant discount to net
asset value, or less than 10 times peak earnings. Like Whitman, Jensen uses a tax-
efficient, buy-and-hold strategy. But at this fund, he focuses mostly on small caps.
Jensen will also buy distressed debt from time to time, but it's not as big a focus as
it can be on Value.

Management
Curtis Jensen became this fund's sole manager when comanager Marty Whitman
stepped down in mid-2001. Jensen has been on the fund since its inception,

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Analyst Digest | marcelparcel Portfolio | May 01, 2010 - May 31, 2010 Page 33 of 55

Kinetic Concepts, Inc. KCI | QQQ

forward, as investments for geographic expansion should pay off in future periods.
Also, from a credit perspective, we were glad to see the firm repay $75 million of its
credit facility early. That activity should help the firm save on interest payments in
the long run, reducing total obligations for the firm.

$41.40 x$1.90 | –4.39% The Thesis 11-19-2009

Fair Value Estimate $42 Kinetic Concepts owns the negative-pressure wound therapy market. However, with
Consider Buying Price $29.4 new competitive entries and key patent expirations inching closer, we think KCI's
Consider Selling Price $58.8 narrow moat would benefit from diversification, and the LifeCell acquisition looks
like a good step in that direction.
Fair Value Uncertainty Medium
Economic Moat Narrow KCI's Vacuum Assisted Closure (V.A.C.) product set has revolutionized the way
Stewardship Grade B caregivers treat deep, complex wounds by introducing negative pressure to close
wounds quicker and remove exudate and infectious particles. A quicker healing
11-19-2009 | by Julie Stralow, CFA process benefits patients, health-care providers, and payers by letting patients
resume daily activities sooner and by reducing the total costs associated with
treating each patient compared with traditional methods. Each V.A.C. device consists
Growth of a negative-pressure generator and foam dressings, and V.A.C. devices can vary by
Booming V.A.C. sales and the LifeCell acquisition kept KCI's annualized sales growth user interface and delivery features.
at 20% during the past five years. As V.A.C. comes under more pressure, we expect
annualized mid-single-digit growth through 2014 and limited growth thereafter. Because V.A.C. devices still account for about 70% of total firm sales, product
concentration risk looms large. Further, new competitors, including Smith & Nephew
SNN, are vying to disrupt KCI's virtual monopoly in negative-pressure wound therapy.
Profitability
Smith & Nephew's initial entry into foam dressings in early 2009 is especially
Profits should increase faster than sales through 2012, as KCI wrings out operating
worrisome; in the past, we'd assumed KCI's key patents would keep competitors
efficiencies. After that, operating profits may fall as V.A.C. sales decline, but net
from offering such a direct copycat until at least late 2012. Although KCI is pursuing
profits actually may increase slightly, primarily as interest expenses decline with
legal action, we think a positive outcome for KCI is far from certain; possible legal
debt repayment.
outcomes range from an injunction against Smith & Nephew's product, a monetary
settlement benefiting KCI, or unfettered competition. Although KCI has been holding
Financial Health its own, at this point, unfettered competition appears most likely in the near and long
KCI financed the $1.7 billion LifeCell deal mostly with debt. We think it can handle term.
the higher financing costs, given expected cash flows, but this transaction definitely
raises the stakes for KCI in terms of executing on its strategy. To counteract these forces, KCI has taken steps to diversify its revenue streams.
Although KCI still aims to enter Japan with V.A.C. products in 2010, its largest
diversification effort, so far, has come from the mid-2008 acquisition of LifeCell,
Analyst Note 04-27-2010 which makes tissue-regeneration products. LifeCell products generated $242 million
Kinetic Concepts KCI reported first quarter results that were disappointing to the of sales in 2008 and increased 27% year over year. We think LifeCell's new Strattice
market, but put it on target to meet our full-year cash flow expectations for the firm. product holds great potential, especially internationally, and KCI's established
We'll dig in further, but at first glance, we don't anticipate adjusting our fair value international distribution network could help with Strattice's marketing efforts. We
estimate. also think LifeCell's focus on United States surgeons should help KCI with product
launches for deeper wounds in surgical applications. So overall, the LifeCell
Revenue grew 3% year over year (up 1% in constant currency) to $486 million. The acquisition serves to diversify KCI's revenue and expand the potential of new product
regenerative medicine segment, which sells LifeCell products to repair soft tissue, launches by utilizing merged resources more effectively than they could be used as
led the charge with 19% growth in the quarter, to $79 million. The Strattice shortage separate entities.
that plagued KCI during recent quarters appears to be over, allowing the firm to meet
high demand for this tool used primarily in breast reconstruction and hernia repair.
The firm's therapeutic support system business continued to decline by 1% reported Valuation
(5% in constant currency), to $74 million, which was somewhat disappointing given We're raising our fair value estimate for KCI to $42 per share from $37 primarily to
the easy comparable period and the uptick we saw in that business last quarter. reflect cash flow generated in recent quarters. Our fair value estimate depends on
KCI increasing sales about 4% in 2009 and then about 3% compounded annually
However, KCI's largest segment--V.A.C.--overshadowed the others, with only 1% through 2014. On the bottom line, we think earnings per share will increase about
growth on a reported basis (but down 1% in constant currency) to $333 million, as 6% during that time frame. Our long-term valuation assumptions are sensitive to
the North America region saw its first year-over-year decline. KCI's management several factors. First, starting in late 2012, we think key V.A.C. patent expirations will
team noted competitive and economic pressures constraining that business. Given invite even more competition for V.A.C., resulting in legacy V.A.C. sales declines,
the March court ruling and the potential for an injunction or licensing fees imposed rather than just deceleration. However, with growth in other wound-management
on competitor Smith & Nephew SNN in the U.S., we could see the competitive and regenerative medicine products, such as LifeCell's Strattice, we think total sales
pressures ease slightly for KCI there in the near future. Also, we'd note that the will increase slightly to about $2.4 billion in 2017 from $2.3 billion in 2012. Also,
Japanese launch should start ramping up during the next several quarters, so we during the next few years, we expect operating margins to rise to 23%, but we
could see some improvement in the segment's worldwide trends. expect margin declines because of increased competition for V.A.C. starting in late
2012. We think operating margins will settle around 19% in the long run. Despite
KCI's results looked solid on a cash flow basis, turning in $59 million of free cash this expected long-term operating margin decline, lower interest expenses (as KCI
flow during the first quarter. We think those cash flows could increase going pays off its debt holdings) should help earnings per share rise slightly even after

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Analyst Digest | marcelparcel Portfolio | May 01, 2010 - May 31, 2010 Page 34 of 55

2012's margin contraction.

Risk
Uncertainty surrounds the long-term competitive environment of KCI's top revenue
generator, V.A.C. Greater competitive threats have emerged since KCI lost its legal
battle with BlueSky Medical and Smith & Nephew purchased BlueSky. Third-party
payers have increased their scrutiny of V.A.C.'s costs, too, which could constrain
pricing in the long run. Even if KCI surpasses these hurdles, looming V.A.C. patent
expirations should encourage tougher competition in that product set. Given these
risks to V.A.C., KCI was forced to diversify by purchasing LifeCell. If LifeCell products
don't expand as we expect, KCI's returns would suffer.

Strategy
KCI aims to be a leading provider of wound-therapy products. The company
pioneered negative-pressure wound therapy and plans to keep competitors at bay
through product innovation and clinical evidence. KCI innovates in its therapeutic
surface segment, too, adding new products to reduce bedsores and move patients.
KCI is also diversifying into tissue regeneration with the LifeCell acquisition.

Management & Stewardship

We give KCI a B Stewardship Grade. In general, we think KCI's financial disclosures
are very candid and timely. We particularly appreciate its comprehensive financial
statements and segment data each quarter. KCI recently completed a major
management transition after Cathy Burzik joined the firm in 2006 as president and
CEO; most top managers joined the firm after Burzik. Although we think it is too early
to tell if this team can generate long-term shareholder value, we admire the firm's
initiatives under Burzik, so far. In particular, we appreciate the additional focus on
developing next-generation V.A.C. devices, investing in a tax-advantaged Irish
manufacturing facility, and diversifying with an acquisition. These activities could
help KCI withstand the storm that is brewing around V.A.C.'s earnings stream. We're
also glad that KCI splits its CEO and board chairman positions, so Burzik must answer
to someone besides herself should those tactics fail. Ron Dollens, former Guidant
CEO, serves as KCI's chairman.

Profile
KCI develops and manufactures medical devices and equipment, and it operates an
extensive distribution and service network worldwide. The firm derives most of its
sales from V.A.C. systems for the treatment of deep, complex wounds. It also sells
therapeutic beds and surfaces to prevent complications in a variety of patients,
including the critically ill and obese. The LifeCell acquisition adds tissue regeneration
products to the mix.

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2009.
Columbia Value & Restructuring Z
UMBIX | QQ

$40.72 x$4.50 | –9.95%

03-05-2010 | by Michael Breen

Morningstar Take
The more Columbia Value & Restructuring stays the same, the more it appears to be
changing.

This portfolio's calendar-year returns almost always land near its category's top or
bottom, giving the false impression that it is constantly changing. It isn't. Manager
David Williams has built one of the best long-term records in the group by making
and sticking with successful bets on firms that initially faced near-term challenges.
Turnover is glacial, with nearly 70% of the portfolio's names having been held for at
least five years; 30% have been around for at least a decade. The market may react
negatively to Williams' picks in the near term, but over time it has rewarded them:
The fund has gained an average of 11.7% annually over the past 15 year--tops in the
category.

Not surprisingly, nothing's changed lately here. Williams has tweaked a few existing
positions, but hasn't made any big buys or sells. He continues to believe rising U.S.
government deficits and spending will ultimately constrain the domestic economy
and cause inflation. So, the portfolio remains anchored in materials and energy
stocks, which together account for nearly half of assets--double the category
average. Williams thinks both areas are cheap compared with their long-term asset
values, benefit from the global economy, and can fare well if inflation occurs. In
2009, he also grabbed some new convertible debt from Citicorp C, Wells Fargo WFC,
and Ford F as they cleaned up their balance sheets. He says they have attractive
yields and carry little credit risk.

Because it's often out of step with its peers, the fund looks risky, but it isn't. It has
had less down months than its typical peer and the Russell 1000 Value Index over the
past decade and a half, although its average monthly loss is a hair worse. But a
glance at the fund's rolling three-month returns shows it landing in the category's
best quartile more than 50% of the time.

There's no reason to think this fund can't continue beating the pack by breaking from
it.

Role in Portfolio
Core. However, investors should note that the fund is more wide ranging than the
typical large-cap core offering. It includes large-cap, mid-cap, value, and growth
stocks to varying degrees.

Strategy
Manager David Williams looks for companies that he thinks can improve their bottom
lines through reorganizations, consolidations, management turnover, or acquisitions.
He isn't afraid to make significant sector bets, and the fund tends to hold some out-
of-favor growth companies. He also buys smaller companies than many of his rivals,
so the fund's median market cap is a fraction of the category average.

Management
Stock-pickers don't come much more talented than David Williams, who has
managed the fund since its 1992 inception. Guy Pope and J. Smith joined him in early

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Management
Vanguard Mid Capitalization Index Donald Butler is the manager here. He has been with Vanguard since 1992 and he

VIMSX | QQQ
has worked on this fund since its May 1998 inception. Butler also handles the day-to-
day management of Vanguard Extended Market Index VEXMX and Vanguard
Institutional Index VINIX.

$17.06 x$1.35 | –7.33%

05-11-2010 | by Katie Rushkewicz

Morningstar Take
Vanguard Mid Capitalization Index is on a roll, but keep your expectations in check.

Mid-blend funds have enjoyed a nice rebound since the market reached its low in
March 2009. The average mid-blend fund is up 74% since then through May 10,
2010, well ahead of the domestic large-cap categories, but trailing the small-value,
small-blend, and mid-value categories.

This fund, which tracks the MSCI U.S. Mid-Cap 400 Index, has done slightly better
than its category peers, up 79% during the rally. Big winners included Genworth
Financial GNW, newspaper publisher Gannett GCI, and REIT SL Green SLG, all of
which are up triple digits after plummeting during the credit crisis.

The fund's robust recovery means it's on its way to recouping the 46% loss suffered
during the bear market stretching from October 2007 to March 2009. However, it's
important to temper expectations about future performance. The fund's hot returns
likely aren't sustainable, especially when the market cools off.

That's not to say the fund's long-term prospects aren't bright. Exposure to mid-cap
stocks offers a nice complement to a portfolio skewed toward large-cap stocks. That
was especially apparent during the past decade, when the typical mid-blend fund
gained roughly 5% per year while the S&P 500 Index was flat. Even within the mid-
blend category, where there are some good active managers, this fund holds its own.
It's gained nearly 10% annually since 2003, when it switched its benchmark to the
MSCI U.S. Mid-Cap 400, beating two thirds of its peers.

The fund's low costs have undoubtedly kept it competitive and will continue to give
the fund an edge over more-expensive peers. Its low-turnover, tax-efficient approach
also is a draw. This Analyst Pick is a great choice for diversified mid-cap exposure.

Stewardship Grade
This isn't Jack Bogle's Vanguard, but it's still a fine steward of shareholders' wealth.
The family's mutual ownership structure helps it offer low fees and keep investor
interests paramount. A blemish free regulatory record, and loyal fund owners and
employees also help make this a trustworthy fund.

Role in Portfolio
Supporting Player. The fund is a good way to diversify a large-cap-heavy portfolio
without taking on risk from volatile small-cap stocks.

Strategy
The fund tracks the MSCI U.S. Mid-Cap 450 Index. Unlike indexes that follow the
S&P Mid-Cap 400 Index, this fund doesn't screen for firms with limited operation
histories. However, MSCI employs a more sophisticated methodology than the S&P,
and this fund should more closely approximate the group norm. It also uses buffer
zones to limit the migration of stocks between market-cap bands, which should help
limit turnover, promote tax efficiency, and keep trading costs low.

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Vista from 2004 to February 2008, having joined that fund's team in 1998 as an
American Century Heritage Inv TWHIX | analyst. Meanwhile, Greg Walsh was promoted from analyst to comanager of

QQQQ Heritage in early 2008. He has been a member of the Heritage team since 2003.
Glenn Fogle, Vista lead manager, had been a comanager on this fund as well but
stepped aside in February 2008 to focus on Vista. Three dedicated analysts provide
research support for Heritage.

$16.62 x$1.32 | –7.36%

05-25-2010 | by Gregg Wolper

Morningstar Take
For American Century Heritage in recent years, the trend has not been its friend.

This fund uses a fundamental approach combined with quantitative measures, with
the momentum element quite important. In order for the latter to work, managers
David Hollond and Greg Walsh say, trends in the market have to be identifiable and
stay in place for more than a couple of months. In the mid-2000s, such trends
cooperated, and this fund posted outstanding relative returns. However, since 2008,
the situation has been far less favorable for the fund. It lagged the mid-growth
category average in both 2008 and 2009, and for the year-to-date through May 20,
2010, it is around the middle of the pack, with a 0.8% loss.

Hollond and Walsh say their contacts with companies, as well as their other
research, indicate that pockets of the U.S. economy are showing impressive
improvement, though they hesitate to declare a strong widespread recovery. One
area where they've raised this fund's weighting is in travel-related stocks, because in
addition to economic recovery they see prices rising in that field. Priceline.com PCLN,
the online travel service, and Ctrip.com CTRP, a China-based counterpart, both were
in the portfolio's top 10 at the end of March.

The fund doesn't typically make rapid sector changes, however. Rather, the
managers are more likely to make shifts within sectors, as they say they have in the
past months to make the portfolio more sensitive to a mild economic rebound.

This fund's long-term record is solid. But Hollond only became a manager of this fund
three years ago, and Walsh in 2008, though both have had much longer experience
on this or other American Century funds. (Hollond joined the firm in 1998.) All told,
therefore, it would be wrong to write off the fund owing to its mediocre showing
from 2008 through the present, but it would be equally inappropriate to
overemphasize its excellent run in the prior three years.

Stewardship Grade
This offering's advisor has made some improvements on the stewardship front, but
some important concerns remain.

Role in Portfolio
Supporting Player

Strategy
Management looks for companies with sustainable earnings and revenue
acceleration, but it doesn't set minimum, absolute levels of growth. As a result, the
fund sometimes holds names with relatively low growth rates or some with negative
but improving earnings outlooks. The fund also pays close attention to other
quantitative and technical measures, such as relative strength.

Management
In February 2007, David Hollond took charge when his predecessor, David Rose, left
after a two-year stint at the helm. Hollond comanaged sibling American Century

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Sysco Corporation SYY | QQQQ

spread high fixed costs that no other competitor has been able to replicate.

The firm distributes more than 400,000 traditional food and nonfood products,
serving 400,000 customers in various industries and has expanded into other
profitable niche segments, such as health care, education, and lodging. In an effort to
$29.81 x$1.73 | –5.49% solidify customer relationships, Sysco has made it a priority to consult with clients on
Fair Value Estimate $35 how they can drive sales and minimize costs (an advantageous undertaking, given
that about 80% of its sales are derived from smaller customers).
Consider Buying Price $24.5
Consider Selling Price $49 Despite being a low-cost operator, Sysco is keenly focused on trimming additional
Fair Value Uncertainty Medium costs from its already-lean operating structure. For instance, Sysco is working to
improve its supply chain by more efficiently routing deliveries, as well as building
Economic Moat Wide
several redistribution centers. The firm is already realizing some initial benefits from
Stewardship Grade B these efforts. In fiscal 2009, Sysco's diesel gallon usage fell 7%, while the number of
cases delivered per trip increased 2%--a notable accomplishment. in our opinion.
04-13-2010 | by Erin Swanson, CFA Further, we contend that by taking complexity out of the organization and lowering
its cost structure, a whole new window of potential customers should open for
Sysco, as management intends to more effectively compete for large accounts on
Growth
price--a previously unprofitable endeavor. We contend that this is an appropriate
Although Sysco has produced 7% annual sales growth on average during the past
strategy that should drive new customer growth.
five years, we expect that weak economic trends and slow restaurant traffic will
result in a sales decline in fiscal 2010 before returning to 5% growth by 2013.
Even with these competitive advantages, Sysco is not without its share of
challenges. As price-conscious consumers rein in their spending in this difficult
Profitability economic environment, Sysco's volumes will probably suffer, particularly in the
Despite the high level of fixed costs in the food-service industry, the economies of restaurant sector. Further, the firm is exposed to highly volatile food costs, which
scale inherent in Sysco's expansive distribution network should enable the firm to could weigh on sales and profitability. Although we expect sales volumes to remain
generate operating margins of more than 5% in each of the next five years, leading soft over the near term, we believe Sysco's expansive distribution network will
to an average return on invested capital of 19%. enable it to remain the dominant North American food distributor, generating strong
cash flows and outsize returns for shareholders over the longer term.

Financial Health
We aren't concerned about the amount of financial leverage on Sysco's balance Valuation
sheet. At the end of fiscal 2009, total debt/capital amounted to around 0.42, and Our fair value estimate is $35 per share, which implies forward fiscal-year
operating income covered interest expense 16.1 times. Over the next five years, we price/earnings of 19 times, enterprise value/EBITDA of 10 times, and a free cash
forecast debt/capital to amount to average 0.39 and earnings before interest and flow yield of 4.0%. We expect soft consumer spending (because of continued high
taxes to cover interest expense more than 12 times. unemployment levels) will weigh on the firm's near-term sales, and we forecast
sales will slip about 1% in fiscal 2010 compared with the year-ago period. Longer
term, we forecast that Sysco will benefit as consumer spending picks up, resulting in
Analyst Note 05-03-2010 5% annual sales growth by 2013. In our view, the firm's constant focus on improving
Sysco's SYY third-quarter results support our thesis that with an extensive its cost structure will enable Sysco to offset volatile input costs. By fiscal 2014, we
distribution network and a focus on driving further efficiency improvements, this forecast an operating margins of 5.2% (about 10 basis points above fiscal 2009).
leading North American food-service distributor will generate solid cash flows. Our Through 2014, we expect return on invested capital to average 19% compared with
fair value estimate remains intact. our 8.8% cost of capital assumption, providing support to our opinion that Sysco
maintains a wide economic moat.
Third-quarter underlying sales were essentially flat with the year-ago period, as
higher case volume was offset by continued food cost deflation of 0.8%. Food
deflation has eased relative to the second quarter of fiscal 2010, when the firm Risk
reported food cost deflation of 3.5%, and we expect that more moderate levels of If global economic headwinds persist and food inflation picks up, Sysco's financial
food inflation will return. We forecast a 0.8% sales decline for fiscal 2010. In our results could be pressured. Furthermore, given that two thirds of sales result from the
opinion, lower procurement and delivery costs are resulting from Sysco's scale, restaurant industry, the firm depends on the strength of consumer spending, which
which is solidifying its position as the low-cost provider in this high-fixed-cost has been weak, partly as a result of high unemployment. Because input costs (such
industry. Efforts to reduce supply-chain complexity by more efficiently routing as food and fuel) are a significant component of Sysco's cost structure, high
deliveries and building redistribution centers led to a 20-basis-point increase in the commodity costs can also weigh on results.
operating margin, to 4.8% in the quarter. We are also encouraged that through the
first nine months of the fiscal year, Sysco's free cash flow amounted to 3% of sales.
Strategy
Sysco is attempting to expand its business through the addition of new customers,
The Thesis 04-13-2010 further penetration of existing accounts, and acquisitions. Beyond this, Sysco intends
Sysco is the leading food-service distributor in the United States and Canada, with to lower procurement and delivery costs as well as the cost structures for its
around 17% share of this estimated $200 billion market. Although food distributing is customer base. One of the firm's current initiatives is to build several redistribution
generally a low-margin, capital-intensive business, economies of scale have allowed centers to lower inventory levels and cost of goods sold.
Sysco to consistently post returns on invested capital in excess of our estimate of the
firm's cost of capital. Through more than 150 acquisitions since its founding about 40
Management & Stewardship
years ago, Sysco has developed a wide-reaching distribution network over which to

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Bill DeLaney, 53, assumed the role of CEO in 2009. With his more than 20 years at
Sysco, we believe DeLaney's experience will prove to be a huge asset to this food-
service distributor, particularly given the more challenging economic environment the
firm is facing. In our opinion, executive compensation appears reasonable, with
about 80%-90% of management's annual pay based on the firm's performance. We
commend executive management for taking a 5% reduction in its base pay in 2008 in
light of the challenging economic environment. We believe this is a strong signal to
the rest of its managers how committed the firm is to maintaining strict expense
control. DeLaney earned $1.5 million in salary, bonus, and stock awards in fiscal
2009; however, because he mostly served as CFO in fiscal 2009, we expect his
compensation will increase in his new role. In fiscal 2009, former chairman and CEO
Richard Schnieders, 61, earned $3.3 million in salary, stock, and option awards.
We're pleased that Sysco is now operating with different individuals holding the CEO
and chairman positions. Manuel Fernandez, 63, was appointed as Sysco's
nonexecutive chairman in June 2009. Since 2000, Fernandez has served as a
managing director for SI Ventures, a venture capital firm, and as chairman emeritus
of Gartner, an information technology research and consulting company. The board
consists of 11 members, 9 of whom are independent. We'd like to see directors
elected on an annual basis, rather than the current three-year staggered structure.

Profile
Sysco operates as the largest North American food-service distributor, controlling
17% of the market. The firm distributes more than 400,000 food and nonfood
products to 400,000 customers, including restaurants, health-care and educational
facilities, and lodging establishments. From its founding in 1969 through the end of
fiscal 2009, Sysco acquired 150 companies or divisions of companies to expand its
footprint. Nearly 100% of the firm's sales are derived in North America.

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edge. Bartolo is more comfortable with fast growers than his predecessor. He also
T. Rowe Price Growth Stock PRGFX | says he's more apt to let his winning picks run.

QQQQ Management
In October 2007, Rob Bartolo replaced longtime manager Bob Smith. Prior to coming
aboard, Bartolo comanaged T. Rowe Price Media & Telecommunications for about
$26.92 x$2.30 | –7.87% two years. Bartolo is not as experienced as Smith, but he was a skilled media and
telecom analyst and has impressed in his brief tenure at Media & Telecom.
04-26-2010 | by Harry Milling

Morningstar Take
T. Rowe Price Growth Stock is not scared to have a point of view.

This fund was started in 1950, pursuing a classic growth strategy of investing in
increasingly profitable firms. While the overall strategy hasn't changed, the fund is
more prone to opportunistic sector bets under its new manager, Rob Bartolo, who
took the helm in October 2007. Bartolo is well-schooled in T. Rowe's investment
process, having been a telecom analyst and a sector-fund manager before this. That
process centers around relying on T. Rowe's renown analyst pool to find firms that
have large market opportunities and strong competitive advantages to exploit them.

Many of his top holdings are also favorites with his peers, such as Apple AAPL,
Google GOOG, and Amazon.com AMZN, but he argues that these firms have long-
term growth prospects to support a high valuation. Still, he'll make shorter-term bets
if there is an opportunity for a price pop. For example, at the end of 2009, he
anticipated that the economic recovery will create a growth spurt in a raft of cyclical
firms, such as transport firms FedEx FDX and PACCAR PCAR and oil sands producer
Suncor Energy SU. These stock-by-stock opportunities tend to center within sectors,
and the fund is more prone to outsized sector bets than it was before. For example,
the fund's exposure to financials is almost triple that of the Russell 1000 Growth
Index's. The same was true with health-care stocks in 2008.

These large sector bets also stem from Bartolo's favoring his strengths, such as
telecom stocks, while decreasing exposure to areas with which he's less familiar,
such as international stocks. It's not clear whether the greater risk that the sector
bets may have given the fund will improve its edge over peers. In the less than three
years since Bartolo became manager, it has handily beaten its category, yet it's no
longer beating the Russell 1000 Growth Index as it had before his tenure.

We admire Bartolo's conviction, but it has yet to strengthen the fund's advantage.

Stewardship Grade
On most fronts, this fund is strong on stewardship, benefiting from a top-rate
investment culture, low fees, a manager with skin in the game, and a spotless
regulatory history. With a more-independent board of directors, it would score even
more highly.

Role in Portfolio
Core. Given its broadly diversified portfolio of large-cap stocks, seasoned
management, and moderate expenses, this offering has the makings of a solid core
holding. The fund's returns have been closely correlated with those of the S&P 500
Index, so investors will want to avoid overlap with other S&P 500-like funds. Still, its
growth-oriented style may make it too volatile for the most conservative investors.

Strategy
New manager Rob Bartolo has continued to employ the same valuation-conscious
approach used by his predecessor, Bob Smith. Like Smith, he also will invest a
decent chunk of the portfolio overseas. The portfolio remains better diversified than
most large-growth funds, but investors should expect a slightly more aggressive

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Janus T JANSX | QQQ

$25.31 x$2.06 | –7.53%

04-23-2010 | by Andrew Gogerty

Morningstar Take
Janus Fund has long-term appeal.

This large-growth offering has a leg up on many of its peers--even before getting to
its portfolio. Its modest expense ratio gives it a head start on the competition, and its
proposal to add a performance fee adjustment to the management fee would further
align Janus' and comanagers Jonathan Coleman and Dan Riff's interests with long-
term shareholders'. Riff and Coleman already have indicated their personal
alignment, each investing more than $1 million in fund shares.

That appeal is coupled with one of the more staid ways to access the firm's research
heft. By design, the team looks to keep a notable balance in the portfolio, meaning
investors can expect to see blue-chip stalwarts such as IBM IBM, Coca-Cola KO, and
Colgate-Palmolive CL rubbing elbows with growth standards Apple AAPL, Cisco
CSCO, and Oracle ORCL. And while the fund maintains a noticeable non-U.S. stake--
currently 19% of assets--it is well below that seen at in-house alternatives. Even
then, firms with global brands and distribution access, such as consumer products
maker Reckitt Benckiser RBGPY and health-care concern Roche RHHVF, dominate
that stake. That profile will keep the fund's performance record from going to the
extremes, while allowing Coleman and Riff's best ideas do the heavy lifting.

Coleman and Riff took over during the calm before the storm in late 2007. As
expected, the fund fell back to the pack in 2008 but still lost less than its peers and
spared investors the brunt of the market's swoon that hit other large-growth
offerings--even some of this one's siblings. In 2009, the fund again outperformed, as
an overweighting to energy and technology combined with strong stock selection
pushed gains forward. Its predicable profile offers a stability to long-term
shareholders looking to step into the growth space without jumping in.

Stewardship Grade
This fund's stewardship has improved. The investment staff has stabilized, manager
ownership is high, and fees are reasonable.

Role in Portfolio
Core

Strategy
Coleman and Riff strive for a healthy balance between risk and reward. They stress
balance sheets and high returns on invested capital, and rely heavily on Janus' team
of shared research analysts to contribute ideas for the portfolio.

Management
Manager David Corkins, who has managed this fund since February 2006, resigned
from Janus in November 2007. Jonathan Coleman, Janus' co-CIO, took the reigns
here along with Dan Riff in November 2007. Coleman moved up the market-cap
ladder after a successful stint at mid-cap sibling Enterprise JAENX. Riff also
manages a portion of Janus Long/Short JALSX.

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DWS International S SCINX | QQ

Management
Nikolaus Poehlmann took the helm of this fund in October 2009, thereby becoming its
fourth lead manager in the 2000s. He's supported by comanager Udo Rosendahl (who
also came on board in October 2009) as well as comanagers Mark Schumann and
Andreas Wendelken. Michael Sieghart, who served as lead manager for roughly 14
$38.67 x$5.26 | –11.97% months before Poehlmann, remains part of the fund's management team, but he will
depart at the end of 2009.
12-05-2009 | by William Samuel Rocco

Morningstar Take
DWS International continues to evolve.

This foreign large-blend fund has seen more than its share of manager turnover in
the 2000s. Over the first nine years of the decade, it lost several comanagers, and it
experienced three lead-manager changes: in the spring of 2002, in the fall of 2005,
and in the summer of 2008, when Michael Sieghart took the helm.

The management turnover hasn't let up in 2009. Joseph Axtell, who also came on
board last summer and served in an oversight role, left his comanager position in
July. Nikolaus Poehlmann took over as lead manager in October, while Udo
Rosendahl became a comanager at the same time. Michael Sieghart will give up his
current position as a comanager and leave the firm at the end of 2009.

Not surprisingly, this fund's strategy has evolved in the 2000s. It began the decade
with a fairly bold and theme-based growth strategy, but switched to a moderate
blend style after the first lead manager change in 2002. The fund has followed a
rather mainstream, growth-at-a-reasonable-price discipline since then, but the lead
managers have varied in how they have executed it. (Sieghart did so in a reserved
way and significantly reduced the emerging-markets and mid-cap exposure he
inherited.) The exact manner in which Poehlmann will implement this growth-at-a
reasonable-price approach won't be clear until after he runs the fund for some time.

Poehlmann has had success as a comanager of several offshore funds that focus on
financials, Italian stocks, and large-cap European companies, respectively. But this
fund's overall record since it switched to a moderate blend approach in the spring of
2002 is uninspiring, and while Poehlmann may well make some adjustments, he is
sticking with the overall approach that has been in place for several years. That
uninspiring record, along with all the manager turnover, raises serious issues at this
time.

Stewardship Grade
This fund has made some improvements on the stewardship front, and its pluses
include oversight by a highly independent board of directors. But the fund could be
supported by a stronger corporate culture, and its parent's regulatory history isn't
very strong.

Role in Portfolio
Core

Strategy
New lead manager Nikolaus Poehlmann employs essentially the same strategy as his
two immediate predecessors. Specifically, he shares their preference for companies
that trade cheaply relative to the cash flow they generate and the returns on
investment they earn, and he shares their commitment to diversifying the portfolio by
owning companies in different stages of their life cycles. It remains to been seen
whether Poehlmann will execute this approach in a slightly different manner than his
immediate predecessor (who implemented the strategy in a modestly different
manner than his own predecessor).

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SSgA S&P 500 Index Instl SVSPX |

QQQ
$17.97 x$1.56 | –7.99%
10-02-2009 | by Ryan Leggio

Morningstar Take
SSgA S&P 500 Index is a decent choice for those who want to track the S&P 500.

For those looking to track the investment results of the market-cap-weighted S&P
500 through an open-end mutual fund, this is one of the better choices. The Schwab
S&P 500 Index SWPPX, our new Analyst Pick, is half the price, though (0.09% versus
0.18% here). For most investors it may not make sense to switch funds because of
the added commission costs and tax implications.

Expenses are not the only consideration, however, as investing in the S&P 500 is not
the only option for those who want passively managed large-cap domestic-equity
exposure. On one end of the spectrum is the even larger-cap iShares S&P 100 Index
OEF. This portfolio sports a greater percentage of companies with economic moats
that Morningstar stock analysts think are durable and has a greater slug of consumer
staples companies (14.5% versus 11.5%) but less in consumer discretionary stocks
(6.5% versus 9%). There's also the Schwab 1000 Index SNXFX, a more diversified
version of the S&P. But that index has similar sector weightings and still a fairly
large average market capitalization ($26.5 billion versus $35 billion here). These
attributes have meant that the fund has more closely tracked the S&P 500 than the
S&P 100. We expect the same going forward, so investors looking for more small-
and mid-cap exposure should look to funds like Schwab Total Stock Market Index
SWTSX, which, though it still lands in the large-blend category, sports a smaller
average market cap ($20.2 billion).

There's also the question of value. Many managers tell us the S&P 500 is now
trading near its fair value. That could mean it's not in as precarious a position as it
was before it plummeted in 2000 and 2007. It may not be the bargain it was in March
2009 when the trailing 12-month dividend yield approached 3.5% (now 2.5%) for the
first time since 1991. That said, it does what it says it will, and at a decent price.

Role in Portfolio
Core. Investors seeking diversified, low-cost exposure to large-cap stocks will be fine
here.

Strategy
The fund's goal is to replicate the returns of the S&P 500 Index by buying all stocks in
the index. Management buys futures contracts to minimize the effect of the fund's
cash stake and to keep the fund exposed to the index.

Management
James May has managed the fund since 1995. He also runs GE Institutional S&P 500
Index GIDIX.

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Longleaf Partners LLPFX | QQQ

the helm since 1987 and 1994, respectively. They also run Longleaf Partners Small-
Cap LLSCX and Longleaf Partners International LLINX. Hawkins and Cates work with
a small group of in-house analysts. The team members keep all of their own invested
assets in this fund and its siblings.

$25.28 x$1.68 | –6.23%

04-05-2010 | by Gregg Wolper

Morningstar Take
Anyone who thinks a fund following a value strategy must be tame hasn't seen
Longleaf Partners.

This fund has had quite a ride in recent years. It suffered far more during the recent
bear market than most large-value and large-blend funds did: Its cumulative loss of
about 65% was roughly 10 percentage points worse than the S&P 500 Index and the
two category averages. Hefty amounts of money in two energy firms didn't help.
Then, from the start of the stock market revival on March 10, 2009, through April 1,
2010, the fund has soared. Its gain of 106% beats those of the index and both
category averages by 25 to 30 percentage points. Those same energy firms, plus
Liberty, played big roles this time. In each period, this fund's return was much closer
to the diversified emerging-markets category average than those of the U.S. large-
cap groups.

What to make of this roller-coaster ride? Although the extreme levels of the numbers
are shocking, it's not surprising to see this fund performing well outside the norm, for
its portfolio never looks like those of other funds. It's very compact and can devote
large stakes to individual companies. Moreover, managers Mason Hawkins and
Staley Cates prefer firms with real or imagined problems that they can get for prices
far lower than they think the firms are truly worth. A current example is Mexican
cement giant Cemex CX, whose debt issues and reliance on construction markets
scared off many investors. Hawkins and Cates, however, had confidence that its
strong management and dominant position would help it weather the storm.

Their courage and confidence is not always well-placed, as with former holding
Sprint Nextel S, among others. Shareholders here must be prepared to hold on
through rough periods that can last a while. The managers have been at this for
decades, though--the fund began in 1987--and over the very long term it pays off.

Stewardship Grade
With a top-rate culture, independent board, and management with skin in the game,
this fund shines.

Role in Portfolio
Supporting Player. The fund could be a core holding for patient investors with long-
term horizons. However, it does not offer broad market exposure and, with its
concentrated, deep-value approach, can lag substantially at times.

Strategy
This fund takes value seriously. Its comanagers look for companies that trade at
discounts of 40% or more to the team's estimates of their intrinsic value, using
discounted cash-flow analysis, asset values, or sales of comparable firms to
determine the latter. The managers place much importance on the ability of a
company's management to run the business on an operational level and to effectively
allocate capital. They often take sizable positions, and the fund typically holds 20-25
names. The turnover rate is typically very low.

Management
Mason Hawkins and Staley Cates of Southeastern Asset Management have been at

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William Blair International Growth N

WBIGX | QQQ

$17.54 x$1.68 | –8.74%

01-11-2010 | by Courtney Goethals Dobrow

Morningstar Take
William Blair International Growth is getting back on track.

Veteran manager George Greig started 2009 in a big hole after this fund lost 52.0%
the previous year and lagged most of its rivals. He says he thought emerging markets
and industrials would be safe harbors in 2008. They weren't. But he stayed the
course and those areas rebounded strongly in 2009, helping lift the fund to a 42.3%
gain, ahead of three fourths of its peers. Greig has since pared back this stake by
reducing the fund's emerging Asia stake on valuation concerns. Emerging Asia had
soaked up 24% of the portfolio in July 2009, significantly more than the typical peer.

Greig often breaks from the pack. For example, a big emerging-markets stake is
common as he buy firms from almost anywhere around the globe as long as they
have strong earnings growth prospects, expanding margins, and good management.
Market-cap allocations can also differ significantly from the benchmark's and the
typical peer's.

The team is taking a prudent stance. Team member David Merjan says that in March
they saw signs that the downturn was ending but weren't fully convinced the
recovery was real. They stayed cautious by adding to sectors like health care and
consumer staples while keeping financials and materials underweight versus the
benchmark. The latter two sectors recovered strongly in the rally, and Merjan says
these underweights held the fund back a bit.

This fund has the occasional misstep but gets it right more often than not. Its
emphasis on high-quality growers, mixed with tactical bets most peers won't make,
gives it appeal. The damage caused by 2008 has hurt the fund's near-term record, but
it still handily beats the category and the MSCI EAFE Index over the past decade. And
it has delivered eight top or near-top quartile calendar-year returns since 1999.

Role in Portfolio
Core. This wide-ranging foreign large-growth offering can be used as a stand-alone
international fund or as a complement to a mainstream foreign large-value offering.

Strategy
Manager George Greig looks for companies with good growth prospects, high returns
on equity, and low debt. He also considers qualitative elements such as corporate
culture and strength of management. Greig isn't solely a top-down investor, but he
often uses themes such as Asian economic growth to help drive his stock picks. A
sizable emerging-markets stake is not uncommon here. Greig looks across the
market-cap range for his picks, and multinationals often rub shoulders with tiny,
unknown names in this portfolio. William Blair instituted a fair-value-pricing policy
on this fund in 2003.

Management
George Greig is on his second stint with this offering. He helped launch the fund in
1992 and has done well since returning in 1996. Before joining William Blair, he was
a founding partner of PBHG.

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Linear Technology LLTC | QQQQ

selectively compete for design wins (in the consumer market and elsewhere) where it
can maintain its high-margin profile. The firm's healthy growth and profitability this
quarter imply that Linear's design win with Apple and the iPad met this profile.

$27.96 x$2.08 | –6.92% The Thesis 12-10-2009

Linear Technology is a highly profitable firm that specializes in high-performance
Fair Value Estimate $33 analog (HPA) semiconductor design and manufacturing. We think the firm's
Consider Buying Price $23.1 disciplined strategic focus and chip design expertise should enable Linear to deliver
Consider Selling Price $46.2 excellent profitability for investors for years to come.

Fair Value Uncertainty Medium Linear is a leading designer and manufacturer of HPA chips. HPAs are used in
Economic Moat Wide products that require extreme precision and reliability, such as devices in the
Stewardship Grade B industrial, automotive, military, and satellite industries. Because HPAs make up only
a small portion of the total cost of these products, buyers in these end markets tend
12-10-2009 | by Brian Colello, CPA to make purchasing decisions based on performance rather than price. HPA design
expertise is not easy to come by, so firms that have spent years developing
proprietary designs have an advantage over new entrants. Meanwhile, HPA designs
Growth do not rapidly evolve and do not rely on leading-edge manufacturing techniques, so
Linear has not achieved exceptional revenue growth in recent years, mainly because Linear's chips tend to have long product lives and low capital requirements. All of
of the firm's decision to avoid chasing high-growth markets that are less profitable these factors lead to high profitability in the HPA space, and Linear's returns have
than the firm's corporate average. We expect sales to improve in fiscal 2010, and in outpaced its peers' over the past decade. The firm's HPA expertise and ability to
the longer term, Linear should achieve moderate revenue growth as it maintains its retain its top engineering talent are the source of Linear's wide economic moat.
strong position as a leading supplier to a broad array of end markets.
On top of Linear's strong chip design capabilities, the firm has maintained a
disciplined approach to its product portfolio that has made Linear one of the most
Profitability
profitable companies we cover. Linear's HPA know-how could be applied to a host of
Linear has routinely generated stellar annual operating margins in excess of 40%.
adjacent end markets and products. However, the firm will only compete for a design
We anticipate that Linear will continue to deliver excellent profitability for investors,
win if it can ensure a strong return on investment. If Linear has to concede on price
particularly if it maintains its current strategy of focusing on high-margin businesses
or recognizes that analog chips in a given segment are becoming commoditized,
and avoiding competitive end markets that lead to lower margins.
Linear will walk away from the business. In contrast, Linear's main rival in the HPA
industry, Maxim Integrated Products MXIM, has shifted attention toward higher-
Financial Health growth, yet less profitable, consumer-related businesses.
Linear has a significant debt balance of $1.3 billion as of September 2009, as the
firm took on debt to fund a stock buyback program in 2007. However, we don't expect Linear's strategy has made the firm a cash-generating machine, as the firm routinely
Linear to have a problem servicing this debt. The firm has a cash balance of $0.9 generates operating margins in excess of 40%. We expect Linear to match these
billion and routinely generates free cash flow that can be used to service interest and outstanding results going forward, as we don't see the company losing its foothold
principal payments. on the high-end HPA market any time soon. However, there are negatives with
Linear's strategy as well. By forsaking lower-margin businesses, such as the handset
market, Linear has less of a presence in some high-growth industries. In contrast,
Analyst Note 04-14-2010 many of Linear's rivals are focused on these end markets today, and Linear would
Linear Technology LLTC reported fiscal third-quarter results that exceeded our have to play catch-up if it ever wanted to break into these segments down the line.
expectations. Analog chip sales were $311 million for the March quarter, Similarly, Linear's decision to stay out of high-volume chip segments leaves the
representing a 21% sequential increase and a 55% increase from the firm's dismal company less diversified than many of its peers. In turn, the firm's HPA chip sales are
March 2009 quarter at the height of the credit crisis. Linear saw healthy chip sales particularly tied to the health of a handful of industries, such as the automotive and
across all of its end markets. However, it saw particular strength in the computer end military end markets.
market, driven by notebook and tablet devices. We suspect that Linear received a big
boost from Apple's AAPL iPad launch; EE Times reported that two of Linear's power-
management chips are included in each device, and Linear hinted that new customer Valuation
design wins contributed to its sales growth. Profitability was also stellar this quarter. Our fair value estimate for Linear is $33 per share. We project revenue growth of 8%
The gross margin improved 190 basis points to 77.9%, while the operating margin in fiscal 2010 (year ending June 2010), as Linear's sales should begin to recover from
was an exceptional 49%. the 18% revenue drop experienced in fiscal 2009. In the longer term, we project
average revenue growth of 7% from fiscal 2011 to fiscal 2014 as Linear's chip design
Linear painted a rosy picture for the June quarter, expecting a 7%-10% increase from expertise should allow the firm to remain a preferred chip supplier to a wide array of
March's strong revenue results. The company again anticipates healthy growth end markets.
across all end markets. We expect Linear's revenue to receive another shot in the
arm from the iPad, and we wouldn't be surprised if this design win allowed the firm Linear's profitability has been exceptional in recent years, and we expect this trend
to grow at a faster pace than its analog peers in the short term. However, Linear to continue as we project operating margins in the high-40% range during our five-
remains focused on the industrial and telecom infrastructure markets, and we don't year forecast period. We also anticipate that Linear will maintain its healthy dividend
expect it to make a huge shift into consumer-related markets anytime soon. The firm policy. Although Linear competes in the cyclical semiconductor industry, we think the
has stepped aside from the consumer market in recent years, as shorter product life company's track record of generating stellar operating profits on a regular basis
cycles and pricing pressure from device makers have led to lower margins and warrant a fair value uncertainty rating of medium.
profitability for consumer-related chipmakers. Linear has been clear that it intends to

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Risk
Linear's greatest risk is the firm's exposure to the highly cyclical semiconductor
industry. The firm does not outsource production, so Linear is on the hook for the
fixed costs associated with running chip manufacturing facilities. Linear also earns a
significant portion of its chip sales from the industrial and automotive end markets,
so continued weakness in these sectors could spell trouble for the firm. Finally,
Linear competes in the fragmented analog chip segment and faces several rivals with
strong balance sheet positions and extensive product portfolios.

Strategy
Linear has maintained a focused strategy through the years. The chipmaker
selectively chooses markets and products where the firm can attain strong
profitability. Similarly, the company avoids competitive markets that may be high
growth but result in lower margins for the firm. Linear also understands the
importance of retaining its key engineering talent and keeping its proprietary
manufacturing secrets to itself, stating that the firm is unlikely to outsource much of
its production to third-party foundries. Linear also does not intend to make bolt-on
acquisitions, instead preferring to generate growth organically.

Management & Stewardship

Lothar Maier has been CEO of Linear since January 2005. Before joining Linear,
Maier spent 16 years at Cypress Semiconductor CY in a variety of roles. Maier
succeeded cofounder Robert Swanson, who remains on staff as chairman of the
board. We like that Linear has maintained a separation of the chairman and CEO
roles, which we think better protects minority shareholders. Executive compensation
also appears reasonable, as Maier earned $3.6 million in 2008. However, neither
Swanson nor Maier own more than 1% of shares outstanding, and we would prefer
to have Linear's leaders control a bigger stake in the company. The firm also still
faces litigation, filed in 2007, that alleges stock option backdating within the
company from 1995 through 2002.

Profile
Linear Technology designs and manufactures standard high-performance analog
integrated circuits for a diverse customer base spanning industrial, automotive,
communications, and high-end consumer electronics. The firm offers more than 7,000
types of products to more than 15,000 original-equipment manufacturers globally.
Most of its products support functions like power management, data interface, and
conversion. More than 70% of its revenue comes from international markets.

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Analyst Digest | marcelparcel Portfolio | May 01, 2010 - May 31, 2010 Page 48 of 55

Because ADC has the largest telecom carriers covered, its growth options are to
ADC Telecommunications, Inc. ADCT | expand into new areas through acquisitions or into new product lines. These

QQ strategies carry substantial risks and uncertain benefits.

The most significant opportunity for ADC during the next several years stems from a
push by carriers to install fiber optic networks closer to customers. U.S. carriers
Verizon and AT&T --and other carriers worldwide--have been upgrading their
$8.26 h$0.26 | 3.25% networks to increase bandwidth, accelerating demand for fiber-related equipment.
Fair Value Estimate $6 Because the bulk of ADC's product lines are used in the "last mile" (connecting the
edge of the carriers' networks to homes or offices), these types of projects present
Consider Buying Price $4.2
big opportunities. However, we believe that the latest Verizon and AT&T network
Consider Selling Price $8.4 expansion projects are winding down, so ADC may be forced to depend on other
Fair Value Uncertainty Medium customers for additional projects. The size and the limited numbers of these types of
large-scale initiatives tend to attract a lot of competition. This gives the carriers
Economic Moat None
plenty of leverage to negotiate on price.
Stewardship Grade C
The bargaining power of ADC's customers is reflected in the firm's financial
05-06-2010 | by Joseph Beaulieu statements. Gross margins run in the low 30s, which is typical for commodity
hardware. Operating margins are mired in the low-single-digits, and returns on
invested capital have rarely met our estimate of the firm's cost of capital.
Growth
We expect long-term growth averaging 3%-5% annually, approximately in line with
the rate of telecom infrastructure spending. Valuation
After reviewing ADC's second-quarter results, our fair value estimate remains at $6.
Management's ongoing cost-control efforts continue to bear fruit, and the company
Profitability
is benefiting from stronger customer demand as the economy improves. With
We expect gross margins to remain in the low 30% range, as the company's newer
second-quarter revenue growing both sequentially and year-over-year, and with
products carry lower margins than its legacy products, and as the company's
margins improving, we remain confident that full-year revenue growth will show
customers have substantial bargaining power. We think non-GAAP operating margins
strong improvements, and that the company will swing to a slim full-year operating
will creep back to the high-single-digits.
profit.

Financial Health Over the long term, we expect ADC's sales growth to match the low-single-digit rate
ADC's balance sheet is in decent shape, with around $550 million in cash and of telecom infrastructure spending. We anticipate operating losses for the next two
equivalents, and $650 million in debt coming due in nearly equal installments in years as sales decline amid the recession, outpacing ADC's ability to cut operating
2013, 2015, and 2017. The debt consists of low-interest-rate convertible bonds due expenses. Longer term, we expect the company's non-GAAP (generally accepted
2013 through 2017. We expect EBITDA to cover interest expense 3-4 times during the accounting principles) operating margin--which excludes amortization expenses from
next five years. purchased intangibles--to return to the high-single-digits.

The Thesis 05-06-2010 Risk

Although ADC Telecommunications has taken many steps to navigate the changing Capital spending by telecom carriers on network equipment is cyclical and often
telecom market and the current recession, our view is that the company's weak influenced by political and regulatory issues. ADC's operating results have become
position relative to its customers and the commoditylike nature of the bulk of its increasingly volatile because of carrier consolidation and increased exposure to
products will limit long-term opportunities for growth and profitability. project-based capital spending like fiber rollouts. ADC has significant customer
concentration; its 10 largest customers account for half of revenues, and AT&T and
ADC operates three business segments. The bulk of revenue (about 80%) is Verizon represent about a third of revenue. Intense competition and pricing pressure
generated from its connectivity unit, which sells equipment that physically are a constant threat to profitability in this industry.
interconnects telecommunications networks, including cabinets, cables, connectors,
cards, and patch panels. ADC's network solutions business (about 10% of sales) sells
Strategy
equipment that extends the reach of wireless phone networks. Finally, ADC has a
ADC is attempting to consolidate fragmented equipment markets in China, India, and
services business (about 10% of revenue) that helps carriers design and build their
other emerging countries. The company believes it can improve profitability as it
networks.
gains scale, and by shifting production to newly acquired manufacturing facilities in
low-cost regions. ADC makes bolt-on acquisitions to expand geographically and to
Demand for ADC's equipment is primarily driven by carrier investment in network
strengthen its product offering.
upgrades. ADC has relationships with nearly all of the top 100 global carriers, and
the company is positioned to benefit as carriers expand their networks. Although the
company's customer base is broad, it is important to note that nearly half of revenues Management & Stewardship
come from its 10 largest customers, and the combination of AT&T T and Verizon VZ Robert Switz has served as ADC's CEO since 2003. His long tenure at the company
represent a third of the total. includes a 10-year stint as CFO and an executive role as the head of ADC's former
broadband access and transport group. Switz's promotion to CEO coincided with a
Moreover, telecommunications infrastructure spending is increasing at a slow pace, gradual pickup in industry demand following several challenging post-bubble years.
and even when the current downturn is over, we'd be surprised to see spending (at His CEO tenure to date has been marked by a wide-scale restructuring resulting in a
least in the areas that ADC competes) grow faster than the mid-single-digits. leaner and more narrowly focused company. James Mathews was named CFO in

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April 2007. Mathews previously served as vice president and controller at ADC after
joining the company in December 2005. Before joining ADC, Mathews served in
several financial leadership positions at Northwest Airlines, Delta Air Lines DAL, and
CARE USA, the world's largest private relief and development agency. Executive
compensation looks slightly higher at ADC than at similar firms. However, the firm's
bonus compensation is tied to clear performance metrics, including sales growth,
operating income, and free cash flow. We believe executives' interests are aligned
with those of shareholders.

Profile
ADC Telecommunications manufactures network infrastructure equipment used by
telecom carriers, cable providers, broadcasters, and large enterprises. Its products
consist primarily of network-connectivity equipment, including cabinets, cables,
connectors, cards, and patch panels. The company also sells equipment to extend the
reach of wireless phone networks.

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Analyst Digest | marcelparcel Portfolio | May 01, 2010 - May 31, 2010 Page 50 of 55

Mairs & Power Growth Inv MPGFX |

QQQQQ
$65.47 x$5.08 | –7.20%
03-19-2010 | by William Samuel Rocco

Morningstar Take
Little has actually changed at Mairs & Power Growth--and that's a good thing.

Bill Frels and Mark Henneman did make some portfolio moves in the latter part of
2009. They trimmed a few large caps that were sizable holdings and that had done
well in last year's surge, such as Emerson Electric EMR and Target TGT. They also
purchased or added to a few smaller caps that have the strong industry positions and
other attributes they seek. For example, they bought Badger Meter BMI because
they're keen on its technology and growth prospects. And they added to this fund's
stake in the electronic-sign manufacturer Daktronics DAKT, which was beaten up
because of concerns about its short-term outlook, because they like its cash flows
and business mix. But the moves were modest in number and moderate in nature
overall, so the turnover rate was just 3% here in 2009.

A single-digit turnover rate is nothing new here, while most large-blend offerings
have 70% to 90% turnover rates. The fund consistently stands out from its peers in
other respects as well. Frels and Henneman have never been shy about buying
smaller stocks that meet their standards, so this fund's average market cap is
normally less than half the group norm. They let the fund's sector weights fall where
they may and own 40 to 50 names. Thus, the fund is usually far more focused by
sector and issue than most of its rivals.

This patient and distinctive strategy has paid off over the short, mid, and long runs.
Several of the managers' picks have thrived of late--including top-holding 3M
Company MMM--so this fund has posted superior gains over the past 12 months. The
skippers' stock selection has been similarly good in many markets in the past, so this
fund also boasts topnotch three, five, 10-, and 15-year returns.

The fund's consistency and other strengths make it a fine option for investors who
are at ease with the risks that come with its concentration and other atypical traits.

Role in Portfolio
The fund's multicap approach, concentrated portfolio, and preference for Minnesota-
based companies are unique enough to likely warrant a supporting role. But given its
low volatility and blend characteristics, investors would not be too far afield in
contemplating it as a core holding.

Strategy
Manager Bill Frels and the investment team at Mairs & Power buy what they know.
They look for well-managed companies with strong market share in their industries,
and they keep the portfolio in fewer than 50 companies, most of which are located in
or around the firm's home state, Minnesota. Once a stock is added to the fund, it
usually stays. The turnover rate is microscopic.

Management
William Frels succeeded longtime manager George Mairs III in June 2004. Frels has
been a comanager here since December 1999 and has delivered strong results at
Mairs & Power Balanced since 1992. Mark Henneman was named as a comanager
on the fund in January 2006.

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Analyst Digest | marcelparcel Portfolio | May 01, 2010 - May 31, 2010 Page 51 of 55

Transocean, Inc. RIG | QQQQ

rates for deep-water rigs, but we think we'd need to see about 10-15 rigs released of
the 33 rigs affected before we'd start seeing more of an impact on the global rig
market. Our forecast would change if the moratorium is extended beyond the initial
six months, which we think could take place if BP BP is unable to plug its well
successfully by October.
$56.77 x$15.55 | –21.50%
Fair Value Estimate $116 The long-term impacts of the moratorium for the drillers are still fairly murky. Still,
more testing and upgraded blowout preventers are almost a certainty, as the
Consider Buying Price $46.4
Minerals Management Service is clearly taking hints from the oil industry's recent
Consider Selling Price $290 draft report. The MMS requirement that BOPs now have two sets of blind shear rams
Fair Value Uncertainty Very High instead of one appears to be following existing industry practice, as nearly all of the
deep-water rigs we reviewed meet this requirement. We expect the industry to
Economic Moat Narrow
develop tougher requirements in future, which could impact many of the older
Stewardship Grade A midwater rigs that haven't been upgraded for some time. In addition, we think that
drillers will hire more drilling, risk, and reservoir engineers so the driller can fully
03-26-2010 | by Stephen Ellis understand what is going on with the well rather than let the operator's company
man risk the driller's rig. The increased input from the driller makes sense, as we
believe future drilling contracts will include more sharing of the environmental and
Growth
cleanup costs between the driller and the oil and gas company.
Transocean has increased revenue 34% annually (on average) since 2004. We expect
the firm's backlog of over $30 billion to provide a stable source of revenue, and help
Services firms will also be affected by the moratorium, but the impact could be fairly
the firm achieve modest revenue growth during the next few years.
minimal in the short run. Baker Hughes BHI and Halliburton HAL indicated this week
that the deep-water Gulf of Mexico accounts for 4% and 8% of their revenue base,
Profitability respectively, and they are already relocating employees to international markets. If
The company more than quadrupled its operating margin since 2003, to nearly 43% operators decide to pursue the alternatives the MMS has allowed, the actual impact
in 2008, in part because of one-time gains. We expect Transocean's operating on the services firms could be reduced further. In the long term, we believe increased
margin to average 37% during the next five years, as higher operating expenses safety regulations such as requiring the cement bond log test to be run will become
should limit further margin expansion. standard, but the intense competitiveness of the services industry likely means that
any profitability increases will be competed away.

Financial Health
We're forecasting that Transocean's debt load will be around $9 billion at the end of The Thesis 03-26-2010
2010. We think its debt/capital ratio will be 28%, and its EBITDA will stand at 11 In our opinion, Transocean is the best-positioned driller to capitalize on numerous
times its interest expense. The firm's backlog provides ample free cash flow to cover drilling technology breakthroughs, as well as higher oil and gas prices. These have
the near-term debt maturities coming due in 2010, 2011, and beyond. We remain led to strong secular trends supporting high levels of offshore exploration and
unconcerned about the company's financial leverage. development well into the next decade. Because Transocean owns the world's
largest offshore drilling fleet, it will collect billions from customers eager to exploit
large discoveries under the sea floor.
Analyst Note 06-04-2010
The six-month deep-water drilling moratorium in the Gulf means that no new permits Transocean controls one of the world's largest deep-water fleets, which it contracts
for deep-water wells will be approved, and no new wells, sidetracks, or wellbore to oil and natural gas companies worldwide. In 2008, Transocean's revenue was
bypasses will be allowed until at least November. However, the oil and gas fairly evenly divided among its deep-water, midwater, and jackup operations.
companies can still drill workover, completion, waterflood, gas injection, and However, we estimate that by the end of 2010, Transocean's deep-water business
disposal wells. Existing oil and gas production is also unaffected. Gulf producers can will account for more than half of its revenue. A limited supply of deep-water vessels
choose to drill one of the allowed well types, move the rig to shallower waters has led to day rates topping $630,000 a day, and contract lengths stretching out up to
where there are no drilling restrictions, or move the rig internationally if there is a a decade. Rig demand from Brazil's pre-salt regions, where tens of billions of barrels
need. It will take a month to move a rig to Brazil, and about two months to move the of oil have been found, promise to keep the supply of rigs tight for several years,
rig to West Africa. Operators can also cancel the rig contract but in the vast majority which should allow Transocean to extract considerable economic rents.
of cases will have to pay a contract termination payment to the driller that is equal to
the value of the remainder of the contract. Thus, the driller will be made whole. In our view, the source of Transocean's moat lies in its deep-water expertise, which
helps insulate it from the more volatile shallow-water rig markets. Given that
To date we have seen four rig contracts canceled due to force majeure. The first offshore operating costs can top $1 million per day, Transocean's extensive
contract was Diamond Offshore's DO Monarch rig, as Cobalt CIE had sublet the rig experience at limiting downtime is extremely valuable. Unfortunately, the company is
from Anadarko APC on a 75-day contract. As a result of the cancellation, Cobalt owes still vulnerable to the cyclical nature of its industry, as the current downturn shows.
Diamond $15 million. Anadarko has also declared force majeure on three rigs: the Transocean is stacking rigs due to lower customer demand, as well as seeing higher
Monarch, Transocean's RIG Discoverer Spirit, and Noble's NE Amos Runner. levels of contract defaults. For the jackup and midwater markets, the majority of rigs
However, Noble is currently disputing whether Anadarko can actually cancel the that are being delivered over the next few years do not have a contract, which means
contract through force majeure. The Amos Runner and the Monarch were under considerable downward pressure on day rates in the near term. However, the deep-
contract until March 2011 and March 2013 for around $440,000 a day. The water market is more resilient, thanks to huge demand from customers such as
Discoverer Spirit was retained through two separate contracts until November 2013 Petrobras PBR.
at day rates of just over $500,000 a day. Anadarko is retaining the Ensco ESV 8500,
which is under contract at a below-market day rate of around $300,000 a day until The biggest long-term threat to Transocean, in our view, is the rise in importance of
June 2013. Depending on the number of future cancellations, we could see lower day national oil companies such as Petrobras, which control the majority of the world's

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Analyst Digest | marcelparcel Portfolio | May 01, 2010 - May 31, 2010 Page 52 of 55

reserves, could mean weaker long-term bargaining power for Transocean. Rather relative to peers over two years. We like the fact that directors and executives are
than risk overpaying for rigs on the global world market, Petrobras is seeking to build required to own multiples of their compensation in stock, aligning their interests with
many of its needed rigs and associated infrastructure in Brazil, and then contract the those of shareholders. To improve its governance, Transocean could remove director
rigs to Brazilian contractors. We think the challenge will prove to be too much for classes. Overall, we think Transocean's stewardship practices are excellent.
Brazil's nascent rig-building industry, and it will eventually have to outsource the rig
construction to more experienced shipyards and drilling contractors. Otherwise, the
Profile
national oil company runs the risk of badly mismanaging the region's production
Transocean is an offshore drilling company. Its fleet of 138 vessels includes
potential. On the flip side, if Petrobras is successful, other national oil companies
drillships, semisubmersibles, and jackups, which operate in technically demanding
may follow its lead, which would limit the opportunities for Transocean in some of
environments, such as Brazil, Nigeria, and Italy. It contracts primarily with some of
the world's largest deep-water markets.
the largest global exploration and production companies. In November 2007,
Transocean completed a merger with offshore driller GlobalSantaFe in a $53 billion
Valuation cash and stock transaction.
Our fair value estimate for Transocean is $116 per share. We believe the jackup and
midwater rig markets will suffer from rig oversupply in 2009 and 2010 as there are
over 100 rigs being delivered over the next few years without a contract in place. In
the jackup market, nearly 90% of the rigs delivered over the next few years do not
have a contract. We expect Transocean will continue to stack rigs as they roll off
contracts to help arrest the decline in day rates for the rigs, which have already
fallen 30%-50% in some cases. For the least-capable class of jackup rigs, we expect
to see day rates below $100,000 a day in 2010. In turn, we believe typical mid-water
day rates will fall to $300,000 a day in 2011 from over $400,000 a day in 2008, as
more mid-water rigs roll off their long-term contracts.

However, we think the deep-water rig market will continue to perform relatively
better, with day rates stabilizing in the near term at $500,000-$550,000 per day, as
many of the industry's rigs currently under construction are contracted for years of
work upon delivery. The long-term contracts and strong market fundamentals should
lead to Transocean's deep-water revenue increasing to 51% of its revenue by 2013,
up from 35% of its revenue during 2008. Deep-water rig availability is still extremely
low across the industry during 2010-2012, which places the drillers in a relatively
stronger contract negotiating position for any new contracts. Over the long term, we
believe Transocean's operating margins will settle around 36%, as by the end of our
explicit five-year forecast we think the supply picture for deep-water rigs will have
improved from the current extremely tight levels. As a result, we believe
Transocean's pricing power will diminish slightly.

Risk
The primary risk facing Transocean is that oil and natural gas prices could fall
substantially, which would depress day rates for noncontracted vessels. In addition,
if a Transocean vessel fails to perform as specified, lucrative contracts can be
canceled. Also, further industry consolidation could limit Transocean's control over
the deep-water market as its fleet size advantage in deep-water vessels would be
reduced.

Strategy
Transocean's aim is to be the best deep-water operator worldwide. To achieve that
goal, the firm has focused on building both its reputation as a skilled operator, and
its fleet size of drillships and semisubmersibles. The firm has differentiated itself
from others in the industry by its strong operational processes in safety,
environmental concerns, and delivering new ships.

Management & Stewardship

Transocean's executive team is headed by CEO Robert Long, who has been with the
firm since 1976. Long stepped down in early 2010, and has been replaced by the
company's former president, Steven Newman. We think Long's 2008 compensation
was reasonable, at $8.6 million, with other executives receiving compensation in the
$1 million to $2.5 million range. The firm's relative model of compensation, which
focuses on total shareholder return and cash-flow return on equity when compared
with peers, sets a tougher standard than setting an absolute target. The company
places an emphasis on the long term by granting options contingent on performance

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pricing when it thinks such an approach is warranted.

Dodge & Cox International Stock
DODFX | QQQ Management
This fund is run by the Dodge & Cox International Investment Policy Committee. The
members of this nine-person team have been at Dodge & Cox for an average of 20
years. Several members also serve on the committees that run Dodge & Cox Global
$28.93 x$3.72 | –11.39% DODWX or Stock DODGX. In addition, all the firm's analysts are involved to a certain
extent with this fund because they cover sectors on a global basis.
06-01-2010 | by Gregg Wolper

Morningstar Take
Dodge & Cox International's rankings have varied dramatically over the past few
years, but its process and management have not.

This fund had an even rougher time than most of its foreign large-cap peers in the
bear market from late 2007 to early 2009, as it was hard-hit by several forays into
beaten-down financial stocks that fell much further. The damage showed up most
clearly in 2008, when the fund's 47% loss put it behind more than 80% of its foreign
large-value rivals. That was the fund's first visit to the bottom quartile in a calendar
year since its 2001 inception.

But when markets perked up beginning in March 2009, the fund's process paid off
once again; it has been near the top of the charts since. More important, since its
May 2001 inception, the fund's return more than doubled those of either the foreign
large-value or foreign large-blend category, and also trounced both the MSCI EAFE
Index and the MSCI All-Country ex-USA Index. (The latter index, like this fund,
includes emerging markets.)

A look at the fund's portfolios over the past few years indicates it did not make
wholesale changes. Comanager Diana Strandberg says the management team has
kept its long-term value strategy in place, with a special emphasis on trying to take
advantage of the long-term growth of emerging markets, whether the companies are
based there or in developed markets. (The team did, however, increase its attention
paid to events in Washington, D.C., and also to debt issues, in response to the
financial crisis.)

She said the managers retain their long-held opinion that excellent values are
available in health care (particularly pharmaceuticals) and in telecom, where she
says investors are underestimating the continuing potential for growth in both
emerging and developed markets. One market Strandberg doesn't find attractive,
though, is China. She says the companies trading on the mainland are simply too
expensive.

All in all, this is a sound choice.

Stewardship Grade
This fund incorporates many of the industry's best practices for stewardship: It's
backed by a strong fundholder-focused corporate culture, it charges a low fee, and it
has a clean regulatory history.

Role in Portfolio
Core

Strategy
This fund's management team invests in stocks that it considers undervalued on a
range of variables. It favors companies with good management, dominant
competitive positions, and good growth potential. Because management takes a
long-term view, turnover is generally low. Management will hedge part of the fund's
currency exposure at times, though the fund is often unhedged. It uses fair-value

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Analyst Digest | marcelparcel Portfolio | May 01, 2010 - May 31, 2010 Page 54 of 55

1998 inception. Comanager Jeff Kautz was promoted to his current role in February
Perkins Mid Cap Value T JMCVX | 2002 after spending five years as an analyst at the firm. The managers are part of the

QQQQQ firm's larger team that manages siblings Large Cap Value JAPAX and Small Cap
Value JSIVX in a similar style.

$20.00 x$1.46 | –6.80%

05-13-2010 | by Andrew Gogerty

Morningstar Take
Investors following the mid-value crowd have chosen wisely.

Strong relative performance during 2008's market swoon and participation in 2009's
recovery peaked investor interest in Perkins Mid Cap Value. Since the start of 2009,
Morningstar estimates that the fund has taken in more than $2 billion in net inflows
through April 2010, in addition to the $1 billion added to its coffers in 2008. It now
sits atop the mid-value category, and investors following the crowd have chosen
wisely.

That said, understanding the fund's investment philosophy is key to reaping its full
reward. As the fund's 11% cash stake indicates, comanagers Jeff Kautz and Tom
Perkins let investment merit of new ideas, not fund flows, dictate the portfolio's
profile. They often let cash build when new ideas are scarce rather than dilute the
quality of their current picks. At the same time, they are quick to trim winners as they
approach the team's fair-value estimates, rather than invite undue volatility in the
portfolio. That focus on both protecting investor capital during swoons--the fund was
one of the best performers during the 2000-02 downturns and again in 2008--and
participating in market upswings has made it the envy of its peers. A focus on
compounding capital has led to consistent long-term outperformance, despite not
topping the charts on a year-in, year-out basis.

Patience, though, is required. Currently, the fund's lack of exposure to surging low-
quality small caps and some regional banks has weighed on relative returns, but
steadfast investors will be rewarded. The team focuses on strong cash flows, solid
balance sheets, and proven management teams, and the portfolio's metrics back up
the team's philosophy as its profitability and return metrics consistently rank above
the group norm while its portfolio holdings, in aggregate, take on less leverage than
most. All told, this is an easy long-term choice.

Stewardship Grade
A strong investment culture, stable management team, and investment alongside
fundholders burnish Perkins' appeal.

Role in Portfolio
Supporting Player

Strategy
Management hunts for stocks trading at or near their historic lows and begins with
an analysis of the downside risk, then turning to the upside potential. Firms making
the list typically have strong cash flow, little to no debt, and proven management.
Investors can expect to see both high-dividend payers as well as fallen growth
stocks--if those companies meet the other criteria. The portfolio typically contains
120-150 stocks, and individual positions are generally capped at about 3% of assets.

Management
Janus controls an approximate 80% stake in this fund's subadvisor, Perkins
Investment Management. Manager Tom Perkins has run this fund since its August

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Analyst Digest | marcelparcel Portfolio | May 01, 2010 - May 31, 2010 Page 55 of 55

Ray Mills managed this fund since late 2002, but a new manager is set to take over
T. Rowe Price Intl Gr & Inc TRIGX | in July 2010. Jonathan Matthews joined the firm in August 2008 as an energy

QQQ analyst covering Europe and Russia, and he previously ran the energy sleeves of two
institutional accounts at Pioneer. Mills will turn his full attention to T. Rowe Price
Overseas Stock TROSX, a foreign large-blend fund that he has skippered since late
2006.

$11.02 x$1.39 | –11.20%

05-28-2010 | by Karin Anderson

Morningstar Take
A cloud of uncertainty hangs over T. Rowe Price International Growth & Income.

Raymond Mills, who ran this foreign large-value fund for more than seven years with
average results, will hand over the reins to Jonathan Matthews in July 2010.
Matthews joined the firm as an energy analyst in August 2008, and some of his picks
garnered enough attention to lead to the promotion.

For instance, he encouraged Mills to add to an already sizable position in BP BP in

late 2008. Although the firm was good at finding natural resources, he believed that
the oil major had room to make its upstream business operate more efficiently. This
played out, and BP was a top performer for the fund. But since the firm's recent oil
spill in the Gulf of Mexico, the stock has been hammered. Now, Matthews believes
this is a real value play and has been nibbling at the stock because he sees the firm
handling litigation and cleanup costs over the next two to three years.

Meanwhile, Matthews has indicated that he'll be using the same playbook as Mills--
a valuation-sensitive, dividend-focused style. He'll also rely on the firm's seasoned
squad of foreign analysts, which has grown and improved in recent years. And he'll
continue to work with Mills, who remains at T. Rowe Price Overseas Stock TROSX, a
foreign large-blend fund he has skippered for more than two years.

The portfolio may still have a new look come July. Matthews lacks experience
running a core foreign fund, as his prior experience running money was limited to the
energy sleeves of two Pioneer institutional accounts, with a focus on Europe, Russia,
and the United States. Given that, T. Rowe Price built in several months of transition
time so that Matthews can build up expertise in other areas, but it's unclear exactly
what that will yield.

All told, it's too early to get on board.

Stewardship Grade
On most fronts, this fund is strong on the stewardship front, benefiting from a top-
rate investment culture, moderate fees, and a spotless regulatory history. If
management invested more and if the fund had a more-independent board of
directors, it would score even more highly.

Role in Portfolio
Core. The fund has a broadly diversified portfolio largely invested in established
companies in developed countries.

Strategy
Bottom-up fundamental research provided by the firm's squad of global analysts
determines stock selection and is complemented here by a quantitative scoring
system. The portfolio is broadly diversified. The fund does not hedge currency
exposure, so it benefits from a falling dollar.

Management

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