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Investing Specialists

Morningstar Runs the Numbers

We take a numerical look through this week's Morningstar research. Plus, our most popular articles and videos for the week ended Dec. 9.

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Inspired by Harper's Index (with a tip of the hat to FiveThirtyEight's Significant Digits blog), Morningstar Runs the Numbers uses a numbers-based approach to highlight recent Morningstar research, along with some outside news stories.

Morningstar director of economic analysis Bob Johnson thinks there are four areas of economic concern that investors should have on their radars: trade, job growth, China, and oil prices.

"I think everybody is … worried about what Trump is going to do with trade…but even before he changes his policies, we had some relatively bad news this week on the October trade data. We'd been doing relatively well on the trade front. Exports had been growing relatively slowly as we expected, but imports had also been very slow. And in October, we kind of changed that, the dynamics that exports were down, but imports were up and up a fair amount, which widened the trade deficit from $36 billion to $42 billion, and now--again, this is only the first month of the quarter so we can't totally panic--but it looks like trade will be something as early as the fourth quarter that has a negative impact on GDP again instead of a positive aspect."

2 Bears, 2 Bulls
Morningstar director of manager research Russ Kinnel this week looked at active funds over a period encompassing the 2000-02 bear market and the 2008-09 financial crisis, as well as the two ensuing rallies, to get a better picture of funds that have delivered for investors over full market cycles.  

"I looked at funds by Morningstar Category versus an index fund on a total-return basis and on a risk-adjusted basis as measured by the Sortino ratio … . To be sure, there are no guarantees that past is prologue, but some solid funds rose to the top while others failed to keep up with a comparable index fund. For many, the path to better risk-adjusted returns was through superior risk-reduction rather than high returns, and that's worth remembering this long into the current market rally."

Morningstar healthcare sector analyst Damien Conover explored two drug companies whose innovation is being underappreciated by the market. Conover believes these firms' shares are trading at a discount to their fair value estimates. 

"In today's environment, when looking at drug companies, it's becoming increasingly important to have innovation, because we're seeing a lot of pushback on prices for drugs. And as we look at the large-cap pharmaceutical stocks, there's a lot of companies out there developing next-generation products that are major advancements over older drugs. And when we see this innovation, we think it's underappreciated when we look at the stock prices."

446 Years
The world's oldest bell factory has decided to close its doors, The Telegraph reported. The Whitechapel Bell Factory, which was formed in 1570, is responsible for many acclaimed bells worldwide, including Big Ben, the Liberty Bell, and the bells for St Mary's Cathedral in Sydney.

"The Whitechapel Bell Foundry, based in London's Whitechapel, has long been the international centre for bespoke bells but the family run business has announced it is now set to close due to the 'changing realities' of running a niche business."

The market prices in inflation expectations on an ongoing basis. Highlighting investors' heightened concerns about inflation, the so-called break-even rate--the yield differential between nominal (noninflation-adjusted) Treasuries and Treasury Inflation-Protected Securities--has jumped from 1.71% on Nov. 7 to 1.97% just three weeks later. Morningstar director of personal finance Christine Benz this week takes a look at some of the key inflation-protective investment categories, along with Morningstar analysts' top picks within each.

The most undervalued sectors in our global coverage list this week were healthcare and communication services, each trading at a price/fair value of 0.88. By contrast, the ratio for all stocks we cover was 1.01. The most overvalued sector was energy

"The most overvalued sector is energy at 1.21--that's 21% above our estimate of intrinsic value. The OPEC production-cut deal has sent the stocks of energy producers higher, but our energy analyst team thinks the positive impact could be short lived, and they haven't changed their long-term view of oil prices." 

Katie Reichart examined the prevalence and magnitude of private-equity holdings in U.S.-domiciled open-end mutual funds, to gauge whether these investments present risks or challenges. Her conclusion was that while fund managers have shown greater inclination toward investing in private-firm equity over the past few years, the impact for most fund investors is minimal. A small percentage of funds invest in private-firm equities, and those that do tend to limit exposure to these investments, she said. 

"As of 2016's second quarter, we found 194 funds that had some level of investment in 133 private companies on the screening list. Those 194 funds equate to 3.6% of the 5,378 equity and allocation funds in Morningstar's database and account for $11.48 billion in assets in aggregate, or about 0.13% of the industry's $8.6 trillion tally, as of June 2016. To put that $11.48 billion in perspective, U.S. equity and allocation funds had about $254 billion staked in publicly traded biotech stocks as of June 2016, or 22 times the sum invested in private-firm equity."

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