Early Contenders for Domestic-Stock Manager of the Year

The market's revival in 2009 has been a welcome sign after last year's fiasco, but uncertainty about the near-term health of the economy remains at the forefront of investors' minds. Every day a new commentator, industry pundit, or fund manager predicts the sustainability of the current rebound. Their takes range from the "the worst is over; get excited" to "this rally is a false start." If not overshadowed by the S&P 500 Index's crushing 37% loss last year (driven by a 22% loss in the fourth quarter), 2009 would seem to be a far better year. Through August, the S&P 500 is up almost 15%, while the Wilshire 5000 Index, a proxy for the entire U.S. stock market, has performed slightly better with a 17% gain. All Morningstar equity fund categories are in positive territory as are the fixed-income groups, except for the long government group.

As is the case every year, there are more than the handful of managers listed below that have the potential to win the award for Morningstar Domestic-Stock Manager of the Year. More importantly, this is not the official nominee list. That will be created by Morningstar's fund analysts in December, and after extensive debate we'll select the winner. As 2008 showed, things can change drastically in the year's final quarter. As always, we look for managers who have delivered superior returns in the current year while also proving they're not just one-hit wonders by consistently outperforming over time. We also look for strategies that are sound, and more importantly, repeatable going forward. Aligning interests with fund shareholders' also carries significant weight in the debate.

With those criteria in mind, here is a small list of current favorites.

Bruce Berkowitz and Team of Fairholme FAIRX
As my colleague Mike Breen recently noted, following the cash is this large-blend fund's mantra. Investors have heeded that advice, and inflows have been robust. Since 2006, assets have grown from $3.8 billion to more than $9.3 billion--and that includes the fund's 30% decline last year. Those joining the party haven't been disappointed; the fund's 27.8% gain for the year to date through August 2009 trounces the S&P 500 Index's 15% rise, positioning it for another calendar year of outpacing its peers (which would make it nine for 10). Simplicity works for Berkowitz: His stock selection is driven not by complicated models, but rather by whether a stock, or, more importantly, its business, is trading cheap relative to its free cash flow. A willingness to hold cash helped cushion returns in 2008, and also provides flexibility to pounce on new ideas such as Pfizer PFE, now 14% of assets. Big bets are nothing new here--and almost required when holding just 20 stocks and a handful of bonds--but Berkowitz has proved to be one of the best.

James Kieffer, Scott Satterwhite, and George Sertl, Jr. of Artisan Mid Cap Value ARTQX
This fund's tenured team of Kieffer and Satterwhite has been an enduring success, both here and at sibling Small Cap Value ARTVX. While the fund's annual category rankings aren't quite as spectacular as Fairholme's, this fund has delivered. Its three- and five-year returns are among the mid-value category's best, and management has shown a willingness to close the fund's doors rather than let new cash drown out its ideas. So far in 2009, its 25% gain lands in the group's top quartile, thanks to savvy picks such as tech distributors Ingram Micro IM and Arrow Electronics ARW. Over time, management has used its flexibility well, consistently identifying companies with good business models that are temporarily cheap. The team has also done well with hairy situations where valuations are so compelling that they aren't likely to run into deep trouble even in a tough macroeconomic environment.

Karl Brewer and Team of William Blair Small Cap Growth WBSNX
This small-growth fund's rebound in 2009 has been nothing short of spectacular. Its 54% gain through August tops the category and has softened its one-year decline to just 2%. Brewer and team are benefiting from both stock selection and portfolio positioning, as many of the fund's top holdings have been home runs so far this year. As of June, top holdings Jarden JAH and VistaPrint VPRT have gained more than 100%, while smaller positions in Imax IMAX and Sonic Solutions SNIC have done even better. The nice thing is that investors have actually stuck around for its volatile ride. The fund's Investors Returns--an estimate of how the typical investor in the fund has fared over time--also rank well, indicating fund holders wisely held on to the fund through its underperformance in 2007 and 2008 to reap the gains this year. Brewer's experience in micro-caps--a key driver of returns here--furthers its long-term appeal.

Steve Romick of FPA Crescent FPACX
First Pacific Advisors makes the early list yet again this year after sibling New Income FPNIX and skipper Bob Rodriquez captured Fixed-Income Manager of the Year honors in 2008. Steve Romick has guided this moderate-allocation fund since its 1993 inception and has consistently been well ahead of his peers. The fund's 18% gain through August lands in the group's top quartile, and its long-term returns are among the category's elite. Like others on the list, Romick has the flexibility to parade across the market for ideas and let cash rise when they are scarce. That's been the norm rather than the exception, as the fund has historically kept a lower equity and higher cash stakes than its peers and will look high and low for value. Late last year Romick scooped up multiple high-yield bonds at distressed levels and rode the wave of their rebound this year. As my colleague Chris Davis recently noted, the fund's eclectic portfolio isn't for everyone, but atypical can certainly be worthy.

Bill Fries, Connor Browne, and Ed Maran of Thornburg Value TVAFX
Like William Blair Small Cap Growth WBSNX, this fund has come roaring back versus its category peers in 2009. The fund's 41% slide landed in the large-blend category's basement in 2008, but it's back in the black this year so far through August. Its 33% gain is one of the group's top marks, thanks to helpings of software and media names. This run builds on the fund's already impressive top-decile long-term record. The team will dive into mid-caps when they spy opportunity and generally hold just 40 to 50 stocks--one third the group norm. As seen this year, investors should be prepared for lumpy sector allocations and short-term relative returns, but over time this fund has delivered the goods. Stability in both management and investment staff is an added plus and will likely key the fund's continued success.