From the September 2007 issue of Boomer Market Advisor • Subscribe!

Finding alpha

One - Alpha is to be found where people misunderstand businesses, and fear creates opportunity with stocks that are unduly punished (like some companies that are currently associated with the sub-prime market). We look for large-cap stocks that are misunderstood and small caps that are undiscovered. We're interested in this global growth of middle class wealth and the businesses that can address it. Mexico has some global leaders that are great. But right now we're underweight tech. The reason is that I look for businesses that have a wide moat; those that have long-term potential. You could disappear for a few years, come back and they delivered on what was promised. As a result, the bar is set pretty high when it comes to getting technology companies into my fund. -- Ron Sachs, Janus Orion Fund

Two - The Internet media/advertising space is doing well and there's a lot of consolidation there at the moment. Google is one of our top holdings. There were some issues of over-hiring, but their core business is solid. They had over 50 percent growth of $15 billion in revenue. That's like nothing we've ever seen. And they're trading at less than 30 times forward earnings. Our Chinese exposure is also doing well. Sohu.com is a major holding. They're No. 2 in Internet traffic, but they have an exclusive sponsorship for the 2008 Olympic games, so their numbers will rise. We invest in growth and value and we split the two. As a technology fund, that differentiates us. The growth side entails companies like Google and Sohu. The value side is less thematic, but the opportunities are there. -- Ryan Jacobs, Jacobs Internet Fund

Three - We've been on technology for about a year now. Valuations have compressed enough to make it worthwhile. We're in a lot of the larger caps. We run a global equity fund so we're in BRIC countries and we invest heavily in infrastructure. We do it in three ways. The first is in owner/operators, the guys that own the assets like the ports and railways, companies like Hutchison-Wampoa. The second is with system integrators, the guys with the know-how to integrate all the assets. These are companies like Chicago Bridge and Iron. The third way is in basic materials. Overall, we can go anywhere in our search for alpha and invest in all caps. I should also say that we've been investing in global consumers. We can benefit from Heineken's distribution system in China. That way, it's not as risky as a direct investment. Also, Campari Group as been making moves recently that we like. They just bought Sammy Hagar's Cabo Wabo Tequila. -- Dave Rappa, Austin Investment Group

Four - We look at the big decisions for guidance; the yield curve, the fed funds rate and what currency is doing. We are not in the mind-set that the sub-prime market will cause a market slowdown. Internationally, things are better than expected and in the U.S. the job market remains strong. When the yield curve steepens you want to look to the middle of the yield curve. That's what we've been doing. We've been selling the wing parts of the curve to buy things in the six- to eight-year range. Our underweight in corporates has been great recently, but has hurt us longer term. Corporates are getting cheap again and we'll look to put that money back to work for us again. -- Joe Balestrino, Federated Total Return Bond Fund

Five - The industrials and materials sector values are high, but the fundamentals are still strong. It looks like Bernanke will not ease rates, which is not good for regional banks, and we're reducing our weightings in financial services. Technology is currently better than average. Apple has a halo effect from the iPod. It's a product that's causing people to change behavior, and we're seeing an increase in the use of Macs in corporate settings. Daktronics is a company that makes Jumbotrons that you see at sports stadiums. We think they have very good prospects with a country-wide municipal stadium build out. Also, the country is converting to digital billboards. The company is well positioned for that conversion. There are hundreds of digital billboards now, but will soon be thousands. Lastly, THQ is a company that's strong with the Wii product, and we like their positioning. -- Samuel Dedio, Julius Baer U.S. Small Cap Fund

Six - Right now, we're a multi-cap investor. We don't confine ourselves to size. We always know we can find something, but we don't market time. We're contrarian (and some of our natural gas investment fits this well). We look for growth at reasonable prices in companies that are catalysts for change. We're long-term oriented, and have names in the portfolio that have been there since 1990. We look for investments that we're comfortable holding for three to five years. Forest products currently fit our contrarian and catalyst requirements, companies like Weyerhaeuser Paper. They're currently selling at around $80 per share and we feel the stock could be well north of $100. Russian timber exports currently account for 35 percent of the worldwide log market, but they're increasing their tariff. This will make companies like Weyerhaeuser even more attractive. Other companies in this position include Plum Creek and Potlatch. We also like Telecom. We never say never. I never thought I'd own some of these companies after the bursting of the last bubble. But fiber demand is catching up to supply, driven mainly by video, and video is a capacity hog. -- Kent Croft, Croft Leominster Value Fund

Seven - The international real estate space was pretty much ignored up until three years ago. We started in 1989. We didn't see the great ascent of the U.S. real estate market and foreign real estate was really a bust, but in 2002 the foreign market started to take off. Real estate is completely dependent on local economies. We see a trend rising in urbanization. For example, Japan's population is stagnant, but Tokyo's population is booming. We're also looking at the BRIC countries. Advances in globalization are creating more opportunities for greater return, and capital will flow to where the returns are. In Brazil, for instance, there were three real estate companies to invest in 20 months ago; now, there are 26 companies. The economy in Germany was dead for a decade, but now we're seeing opportunity there. Russia is a BRIC country where we have two investments, but we're sensitive to the political situation on the ground. But in Moscow, there's been a 60 percent appreciation in urban real estate in the past two years. People are literally selling individual rooms in an apartment. So we can't ignore Russia, we just have to study it and get the lay of the land. We take small positions in a number of emerging markets so we can better diversify the risk. We design our portfolios in a way that reaches for alpha, but in a way that's controlled and disciplined. -- Sam Lieber, Alpine International Real Estate Fund

Eight - The bulk of seeding for New Covenant comes from the Presbyterian Foundation, which has been nationally endowed since 1799 and managing money for about 50 years. We are a manager of managers. Our investment pillars are making solid investments and taking care of what we do with the money while we have it. The guides we use come from Scripture, which essentially says do good with money. Our shareholders have to be good shareholders, meaning active shareholders. We give them an opportunity to have a dialogue with the companies in which we invest. We encourage them to vote proxies. We screen out companies that have majority holdings in alcohol, gambling, tobacco, firearms and some defense companies. We're all for a strong defense of our country, but we want to give witness that when you look at the amount of money spent on defense, maybe our priorities
are off. Part of what we're seeing with socially responsible investing is that the children of boomers are, to an extent, driving the movement. Their parents took this flower-power approach and tried to instill it in their kids. Now the kids are older and coming back and saying, "What about your investments, what about these mutual funds?"
-- George Rue, New Covenant Funds

Nine - The sweet spot in the market has shifted from large-cap value to large-cap growth. This is significant because in each of the last six years managers have said, "This is the year it will happen." Well, this year it is happening. Internationally, it will continue to do well across the board. The dollar will continue to be weak, valuations are generally cheaper and foreign economies are growing faster than the U.S. We've been extremely low in our technology weightings, so we'll begin to bring those weighting up. -- Mark Coffelt, portfolio manager
of the Empiric Core Equity Fund

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