Every year in late June, some of the smartest invest-ment minds in the world come to Chicago for theannual Morningstar Investment Conference, wherethey discuss their investing philosophies and thoughts on the current market.

As it happens, this year’s conference featured three ofthe managers in Morningstar’s Focused 10: JohnRogers of Ariel Appreciation CAAPX, Ken Feinberg ofClipper CFIMX, and David Katz of Matrix AdvisorsValue MAVFX. Here are some highlights from the conference discussions involving these threeoutstanding managers, along with a look at how they’ve been implementing their ideas lately.

John Rogers was part of a panel called “Safety First,”alongside Mason Hawkins of the Longleaf funds. As the title implies, the focus of the discussion wason long-term investing with a margin of safety, inkeeping with Ariel’s motto, “Slow and steady wins therace.” Rogers summarized his investment philosophywith the letters QEV—meaning quality, expertise, andvalue. In other words, he only buys high-qualitycompanies that he can know very well, and only if hecan buy them at a 40% discount to his estimate oftheir value. In this way he’s very much like investing-legend Warren Buffett, whom Rogers mentioned as an inspiration.

When asked what sets him apart from other valuemanagers, Rogers mentioned the amount of time heand his team spend getting to know the people at the companies they invest in. He thinks it’s importantto know and be comfortable with management, and he sometimes uses outside investigators tosupplement personal visits and interviews. He makesa point of asking tough questions, invoking a quote from Lyndon Johnson: “The most important thinga man has to tell you is what he least wants to talk about.”

Ultimately, however, valuation is key for Rogers. Thatrequirement is illustrated well by the handful ofstocks that he added to Ariel Appreciation’s portfolioin the first half of 2007. In the first quarter he addedUSG Corporation USG, a solid company that has beenweighted down by asbestos liability; here, he’sfollowing in the footsteps of Warren Buffett, who alsorecently bought the stock. He also added Constella-tion Brands STZ, which has already recovered nicelyfrom an earnings warning, and wire distributorAnixter International AXE, which has gone on a tearthis year after a temporary dip at the end of 2006.The one new stock Rogers added in the second quarterwas Countrywide Financial CFC, which dippedbecause of the subprime-mortgage meltdown.

The emphasis on finding cheap, high-quality stocks wasalso a key theme echoed by Ken Feinberg and David Katz, who appeared together on a panel called“Will Large Caps Rise and Shine?” along with Ron Canakaris of Montag & Caldwell. Large-cap stocks

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Three Focused Managers Sound OffThe FundInvestor Focused 10 | David Kathman

Top 10 Holdings Sector P/E % Net Assets

Tyco International, Ltd a 15.60 10.52American International Group y 13.39 9.20ConocoPhillips r 7.45 8.74American Express Company o 20.16 8.47Costco Wholesale Corporation d 22.42 7.44

Wal-Mart Stores, Inc a 16.56 6.49Ameriprise Financial, Inc a 21.46 5.67Procter & Gamble Company i 23.04 5.65Harley-Davidson, Inc o 17.92 5.11Microsoft Corporation u 25.32 4.64

Clipper CFIMX

Portfolio Holdings as of 3/31/2007.

Top 10 Holdings Sector P/E % Net Assets

Accenture, Lt. r 21.83 4.8Mohawk Industries, Inc s 11.17 4.45Pitney Bowes In. d 18.42 4.31Carnival Corporation o 17.70 4.27CBS, Inc. B y 17.42 4.15

Northern Trust Corporation a 20.24 4.09Baxter International Inc i 21.79 4.00IMS Health, Inc i 17.92 3.63Gannett Co., In y 12.35 3.55Black & Decker Corporatio d 12.21 3.55

Ariel Appreciation CAAPX

Portfolio Holdings as of 6/30/2007.

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have been in the doldrums ever since the market fell in 2000, and all of the panelists agreed that largecaps as a group have become quite cheap rela-tively and are due for a rebound. Much of the discus-sion centered on identifying favorite prospects from the large-cap universe.

One of Feinberg’s current favorites is consumer-prod-ucts giant Procter & Gamble PG. He thinks it will be a big beneficiary of the growing middle class inemerging markets such as China and India, ashundreds of millions of consumers start buying morelaundry detergent, coffee, and toilet paper. Bigcompanies such as P&G have an advantage here, inFeinberg’s view, because they have the tools andexpertise to get into new markets and their diversifiedproduct mixes mean they can afford to try new things. On top of that, P&G and other stocks like it arecheap on a historical basis, and Feinberg thinks theyshouldn’t have much trouble increasing their earningsfast enough to justify a higher valuation.

Feinberg also mentioned some quality large caps thathave become even cheaper than usual because of factors that he considers temporary, much like themid-caps that John Rogers has found for his fund.Feinberg likes American International Group AIG forsome of the same reasons he likes Procter & Gamble:namely, the rise of a middle class in emergingmarkets. But the stock has been held back by concernsabout management. He’s also a fan of oil-giant ConocoPhillips COP, which is cheap partly becausethe firm’s oil reserves in Venezuela may be in

legal danger. Feinberg argues that even if you assigna value of zero to its Venezuelan holdings, the stock is cheap. This is another stock that WarrenBuffett has been buying, so Feinberg is certainly in good company.

On the same panel, David Katz similarly sang thepraises of mega-cap stocks, which have continued tolag the market even though the underlying companiesare doing better than ever. He remarked that 2007is psychologically the opposite of 1999, when mega-caps ruled after a long period of dominance whilesmall caps were shunned. He expects a large-capbounceback eventually. He also likes AIG as well asother diversified financial giants such as Bank of America BAC and Citigroup C. He’s also a fan ofcable operators Comcast CMCSA and Time Warner TWX, and some selected health-care names,such as Pfizer PFE. And while most of his port-folio consists of mega-caps, he holds some smallerstocks that are potential takeover targets, such as the former Tyco (now split into three parts) andWestern Union WU.

Like the rest of the Focused 10 managers, Rogers,Feinberg, and Katz are all long-term investors whosefunds have low turnover. That means that theserecent moves of theirs are likely to affect the fundsfor a long time to come. œ

Morningstar FundInvestor August 2007 17

The FundInvestor Focused 10

We shine the spotlight on 10 funds from the FundInvestor 500 that follow a focused, low-turnover strategy.

Manager Name 5-Yr Total 5-Yr Cat # of Turn- Expense Fund Name Category (Tenure Years) Return% Rank% Holdings over% Ratio Top Three Holdings

Ariel Appreciation CAAPX Mid-Cap Blend Rogers Jr./Sauer (4.9) 11.4 93 33 25 1.16 Accenture, Mohawk Industries, Pitney BowesClipper CFIMX Large Blend Davis/Feinberg (1.6) 6.9 97 19 63 0.62 Tyco International, AIG, ConocoPhillipsFMI Large Cap FMIHX Large Blend Kellner/English (5.7) 15.5 5 22 29 1 Accenture, Berkshire Hathaway, Wal-MartFairfolme FAIRX Mid-Cap Blend Management Team (7.7) 17.3 22 24 20 1 Berkshire Hathaway, Cndn Nat Res, EchoStarTorray TORYX Large Blend Torray/Eby (16.7) 9.3 86 41 22 1.1 Markel, Level 3 Convertible Debt, EMCJensen JENSX Large Growth Management Team (14.6) 7.7 84 26 10 0.85 GE, Emerson Electric Company, McGraw-HillMairs & Power Growth MPGFX Large Blend Frels/Henneman (7.7) 12.2 29 45 4 0.69 Target, 3M, Emerson Electric CompanyMatrix Advisors Value MAVFX Large Blend David A. Katz (11.1) 12.7 23 35 28 0.99 MedImmune, First Data Corporation, GENeuberger Ber Fasciano NBFSX Small Growth Michael Fasciano (18.8) 10 94 71 39 1.2 Tetra Tech, Bucyrus International, Idex CorpOakmark Select I OAKLX Large Blend Nygren/Berghoef (10.8) 10.1 75 20 22 0.99 Wa Mu, Yum Brands, McDonald's Corp

Data through July 31, 2007.

Contact David Kathman at david_kathman@morningstar.com

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