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The 2008 Managers of the Year

These managers served shareholders well.

Russel Kinnel, 01/13/2009

No matter how you slice it, fund investors and managers alike suffered a setback in 2008. Outside of a handful of bond funds, just about everyone lost money--and not just a little but staggering amounts. The average fund lost more than 30% in 2008.

So, why give out awards when everyone's year-end statement is swimming in red ink? Because limiting losses was difficult to do, yet incredibly valuable. Consider that our winning Domestic-Stock Manager of the Year lost just under 20% when the stock market as a whole lost 37%.

Limiting losses makes it much easier for an investor to get back in the black. To make up for a 20% loss, an investor would need to gain 25%. And to make up for a 40% loss, an investor would need to gain 67%. That's tough to do. Vanguard 500 Index VFINX has produced three-year gains of 25% or greater in two thirds of the rolling three-year periods since 1978, but it has produced gains of 66% or more in only about a third of those rolling periods.

Moreover, our Manager of the Year award recognizes much more than a single year's performance. It recognizes long-term performance and strong stewardship as well. In fact, it's more a hall of fame than a recommendation list.

Domestic-Stock Manager of the Year: Charlie Dreifus of Royce Special Equity RYSEX
A couple of years ago, we recommended Royce Special Equity as an Analyst Pick, and a few readers wrote to ask if we were serious/crazy/stupid. Maybe crazy and stupid, too, but we were definitely serious. Charlie Dreifus is the sort of investor we're confident in when the market turns south. He'll buy only stocks that trade at a steep discount to his intrinsic-value estimates. That means he'll miss out on some fast-growing companies, but his approach protects against losses in tough times. He also demands high returns on invested capital and is a stickler for clean accounting and strong balance sheets. In fact, accounting guru Abe Briloff of Baruch College was a mentor.

Thus, when accounting scandals hit and people lose faith in companies' risk controls, Royce Special Equity is a good place to be. The fund held up brilliantly in the bear market of 2000-02 and has done so once more. True, its strategy isn't one that lends itself to powerful rallies--hence the quizzical reader e-mails in 2006--but it has produced solid long-term returns with less risk than most. Moreover, Dreifus put shareholders' interests first when he closed the fund at a small asset base (unlike some Royce funds that got a bit bloated). He later reopened when redemptions shrunk the asset base. Dreifus' record extends well beyond that of Royce Special. He also produced strong returns at Lazard and Oppenheimer.

In 2008, the fund lost 19.5%. That's an impressive 1,400 basis points better than the category average. The fund's small-value stomping grounds were full of dangerous value traps, such as mortgage lenders, real estate plays, and a slew of cyclical stocks that were highly dependent on financing. Dreifus avoided all that quite nicely, and he even had a handful of winners like National Presto NPK, Watsco WSO, and Wabtec WAB.PAGEBREAK

Fixed-Income Manager of the Year: Bob Rodriguez and Thomas H. Atteberry of FPA New Income FPNIX
I can think of only two managers who can claim to have largely predicted the mortgage-led meltdown in financials: Jeremy Grantham and Bob Rodriguez. From his perch in Los Angeles, Rodriguez had a good view of the insane housing speculation and the crazy mortgages behind them. As someone who places capital preservation above all else, Rodriguez works furiously to squeeze all forms of risk out of his portfolio. So, even before 2007, he steered clear of default risk, interest-rate risk, and any other kind of risk out there. True, it meant passing up the chance for big returns and, as has been the case before, he did miss out on some rallies. But when everything hit the fan in 2007 and 2008, the fund was on safe ground.

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