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Morningstar's 2010 Managers of the Year

These managers had more than just the wind at their backs.

Karen Dolan, 01/05/2011

Have an opinion? Express it ibn the comments section at the end of the article!

The markets were good to mutual funds in 2010, as most managers continued to climb their way back from losses incurred between 2007 and early 2009. Growth led value. Small caps led large caps. Emerging markets shone brighter than many developed ones. And equities were well ahead of fixed-income investments. Funds with healthy doses of industrial, consumer discretionary, and real estate holdings were rewarded. Meanwhile, lagging financial and health-care stocks created a drag for funds with significant stakes in those sectors.

As with any investment backdrop, some fund managers' styles were in favor and helped elevate them to the top of the performance charts. Yet, our winners' great returns cannot solely be explained by an ephemeral stylistic tailwind. We look for managers who nailed the past year on the heels of much lengthier success, and we measure this success not only by observing trailing performance, but also by reviewing managers' research and actions over time.

Morningstar gives three awards each year: Domestic-Equity Manager of the Year, International-Stock Manager of the Year, and Fixed-Income Manager of the Year. In early December, fund analysts specializing in those fields narrow down the universe to five nominees for each award, and the winner is then selected by Morningstar's entire team of mutual fund analysts. To make the most informed decision, we comb through portfolios, returns, stewardship, and our own long institutional memory of these funds as we debate and vote. While the award has always distinguished the past calendar year, we've never simply chosen the highest-returning funds. We favor managers who have achieved strong risk-adjusted performance through the careful execution of a solid investment strategy. And we esteem good stewards of investors' capital.

The award is more an acknowledgement of managers' past achievements than a prediction of future results. This is not an attempt to pick the best manager for the following quarter or year. Even so, we're confident this year's winners--and past ones--have great long-term prospects because our selection process focuses not only on results, but also on how those results were achieved.

Domestic-Equity Managers of the Year
Robert Goldfarb and David Poppe of Sequoia Fund
SEQUX
You can't point to one savvy move or big bet that clinched the award for Goldfarb and Poppe. Sequoia is rooted in decades of deep individual-company research and deft execution of a winning, time-tested investment formula. The managers look for companies with enduring competitive advantages, strong balance sheets, and quality management. They buy when valuations look compelling and hold for the long term. The fund's turnover regularly clocks in below 15%.

Sound like a strategy from Warren Buffett's playbook? It is. Buffett has played a role in the fund's success by not only inspiring management's investment philosophy from the very beginning, but also by running Berkshire Hathaway BRK.A, one of Sequoia's largest holdings since 1990. Anyone could have bought Berkshire 20 years ago and held on, but very few have. It's far easier for scores of investors to play lip service and point to Buffett as a guiding light, but it has proven very difficult to emulate him with true investment success. The Sequoia team has done it.

Many of the fund's large positions and biggest winners in 2010--TJX TJX, Idexx Laboratories IDXX, and O'Reilly Automotive ORLY--have been held in the portfolio for more than five years. So 2010 was less about recent maneuvers or new picks panning out, and more about a compact, long-held portfolio firing on all cylinders.

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