Five candidates stand out from their counterparts.
Today, Morningstar reveals the nominees for its Domestic-Stock Fund Manager of the Year award. Columns on the nominees for other asset classes will follow next week, and the winners will be announced on Jan. 25.
In addition to delivering strong 2016 results, this year's five nominees boast notable long-term records and include past finalists and winners of the award. This is not unusual. The Morningstar Fund Manager of the Year awards have always strived to recognize both recent and career achievements. To qualify, managers' funds must have Morningstar Analyst Ratings of Bronze, Silver, or Gold; they also must have impressive absolute, relative, and risk-adjusted returns not only in the year ended Dec. 31 but over their tenures as well. It helps if the managers have delivered outstanding results for a significant number of shareholders over time and exhibited histories of close alignment with shareholders.
In evaluating the candidates, Morningstar analysts consider not just the managers' most prominent funds but also others they run (when applicable).
In a year full of wild headlines and unexpected geopolitical events such as Brexit and the outcome of the U.S. presidential election, the U.S. equity market rose. Value stocks led the way during the year, particularly within small and mid-caps, which rebounded after a poor 2015. Energy and financial stocks fared well and provided a tailwind following the election. After being the best-performing sector from 2013-15, healthcare suffered a setback in 2016, posting the only loss of the 11 major sectors.
The 2016 Morningstar Domestic-Stock Fund Manager of the Year nominees successfully navigated this fraught market environment. The five finalists span the market-capitalization and value-growth spectrum, and include both individually and team-managed offerings.
Phillip N. Davidson, Kevin Toney, Michael Liss, Dan Gruemmer, and Brian Woglom
American Century Equity Income TWEIX, American Century Value TWVLX, and American Century Mid Cap Value ACMVX
2016 Returns: 19.5%, 20.2%, 22.8%
2016 Morningstar Category Rank (Percentile): 11, 8, 15
Phil Davidson leads the American Century value team, whose members average 16 years' experience at the firm. Davidson's team, which was also nominated for Domestic-Stock Manager of the Year in 2014, searches for high-quality companies with good returns on capital, low leverage, solid management teams, and high barriers to entry. This emphasis on quality, combined with a sharp focus on downside protection and capital preservation, has led to solid long-term results across the team's various charges and helped the funds get ahead during short market pullbacks in 2016. American Century Equity Income, the group's largest offering, is income-oriented and invests in dividend-paying stocks, convertible bonds, and preferred stocks. Davidson's focus on downside protection is evident in the funds' attractive risk/reward profiles versus peers. Of these nominated funds, which all feature Analyst Ratings of Silver, only American Century Value is open to new investors.
Scott Brayman and Team
Champlain Small Company CIPSX
2016 Return: 28.0%
2016 Morningstar Category Rank (Percentile): 1
Silver-rated Champlain Small Company had a banner year in 2016, trouncing its Russell 2000 benchmark and 99% of its small-growth peers. Guided by lead manager Scott Brayman since its November 2004 inception, the fund's management team seeks companies with high returns on equity, low debt, predictable earnings, capable management, and stable business models. The managers typically focus on the five sectors where they feel they can add the most value: industrials, consumer defensive, healthcare, technology, and financials. Stock-picking in these sectors fueled the fund's 2016 result, particularly within financials, where the team preferred smaller regional banks, such as UMB Financial UMBF. The fund also received a nice boost from merger and acquisition activity, as one of the fund's top holdings, molecular diagnostics maker Cepheid, was taken out in the fourth quarter. Brayman and team employ a strict sell discipline and place a high regard on valuation, leading to a higher-quality bias than most small-growth peers. This profile has led to an attractive long-term track record for the $1.2 billion fund, which has been closed to new investors since October 2007.
Jerome Dodson and Team
2016 Return: 13.5%
2016 Morningstar Category Rank (Percentile): 1
Boasting top-decile trailing returns over both short- and long-term periods, Parnassus owes its success to its long-tenured, experienced lead manager and proven investment process. Jerome Dodson, firm founder and lead manager since the fund's 1984 inception, employs a rigorous environmental, social, and governance process that focuses on five main areas: environment, governance, workplace, community, and customers. Dodson's adherence to these criteria typically tilts the 40-stock portfolio toward technology. Stock selection within this sector was the largest driver of the fund's 13.5% gain in 2016, when the fund beat its average large-growth peer by more than 10 percentage points in a challenging market for growth. Semiconductor firms Micron Technology MU and Applied Materials AMAT were among the best performers, with both up over 50% for the year. While the fund resides in the large-growth Morningstar Category, its average market cap is far below that of its S&P 500 benchmark and average peer, with around 35% of assets invested in mid- and small-cap stocks. The fund, which features below-average fees, is open to new investors.
Vanguard Primecap VPMCX, Vanguard Primecap Core VPCCX, Vanguard Capital Opportunity VHCOX, Primecap Odyssey Stock POSKX, Primecap Odyssey Growth POGRX, and Primecap Odyssey Aggressive Growth POAGX
2016 Return: 10.6%, 12.4%, 10.6%, 12.8%, 8.4%, 11.7%
2016 Morningstar Category Rank (Percentile): 4, 2, 4, 18, 12, 13
The Primecap team's patient strategy paid off in 2016. Several technology picks--long one of the team's favorite areas--provided a boost, including Texas Instruments TXN, Nvidia NVDA, and Hewlett Packard Enterprise HPE. The funds' strong 2016 results were especially impressive given big stakes in healthcare, the market's worst-performing sector for the year. The managers' long-standing bet on airline stocks also worked in 2016, as it did in 2014, when the team last won Domestic-Stock Fund Manager of the Year (the team also won in 2003). These successes are hallmarks of Primecap's patient, contrarian growth approach, which, despite periodic bouts of underperformance, has produced superior long-term results. Not only did all six Gold-rated funds beat the vast majority of their peers in 2016, but their 10-year returns (and 15-year results for the Vanguard funds) are topnotch as well. The Vanguard funds and Primecap Odyssey Aggressive Growth are currently closed to new investors.
T. Rowe Price Mid-Cap Value TRMCX
2016 Return: 24.3%
2016 Morningstar Category Rank (Percentile): 8
Manager David Wallack has successfully used a contrarian approach at this Gold-rated fund (closed to new investors since 2010) for the past 16 years. In addition to relying on T. Rowe Price's deep analyst team, Wallack puts his own stamp on the fund, incorporating unique insights to find out-of-favor companies that are ripe for a turnaround. For example, Wallack upped the fund's energy stake in early 2016, driven by a handful of attractively valued companies that he considered to be financially strong enough to weather further pressure in the sector. This move stood out, not only for its effectiveness, but also because most of T. Rowe Price's equity funds were underweight the sector. Energy wasn't even the biggest driver of the fund's top-decile 24.3% gain in 2016. Successful stock-picking across a variety of sectors fueled performance and was especially impressive considering the fund's 6%-8% cash position during the year. The fund's contrarian nature can lead to lumpy short-term results at times, but it has added up to strong risk-adjusted performance during Wallack's tenure.
Morningstar analysts Gretchen Rupp, Wiley Green, David Kathman, and Katie Reichart contributed to this column.