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Our 2007 Fund Managers of the Year

These veterans have enriched many shareholders.

Christine Benz, 01/08/2008

Philosophy 101 students are often asked to consider whether a tree falling in the forest makes a sound if no one is around to hear it. Morningstar analysts have often pondered a similar question in relation to fund investing. If a manager puts up great returns that real human shareholders weren't around to earn--either because the fund was ultrasmall at the time or because the fund was so volatile that investors bought and sold at poor times--is he or she really a great manager?

Maybe. After all, closing a fund to preserve future returns for shareholders is one of the most shareholder-friendly actions that a fund could take.

But those managers whose efforts have enriched many shareholders over a long period of time also deserve praise. Morningstar's three Fund Managers of the Year for 2007 fit that description. All have delivered strong absolute and relative returns for huge numbers of investors over many years. Their terrific Morningstar Investor Returns, which demonstrate that their shareholders have actually pocketed the lion's share of their published total returns, attest to their ability to steer steady ships that have kept shareholders aboard in all types of weather.

When making our Fund Manager of the Year selections, our deliberation process doesn't stop with a consideration of the number of shareholders that a fund has enriched and a fund's investment results in the current calendar year and over the long haul. We look for managers who show courage in their convictions and who aren't shy about differing from the consensus, even if that comes at the expense of short-term performance. After all, to be better than the competition, you've got to be willing to differ from it. We also favor managers from shareholder-friendly firms. Good stewardship is an important factor in successful investment management, and it stands to reason that top managers would exert a strong influence over their firms' cultures, fee-setting policies, and so forth.

Without further ado, here are this year's three winners.

Domestic-Stock Manager of the Year: Will Danoff
Fidelity Contrafund FCNTX and Fidelity Advisor New Insights FNIAX
When it comes to enriching real human shareholders, Fidelity Contrafund's Will Danoff sets the gold standard. A fixture in 401(k) plans, Contrafund has been enormous for more than a decade, yet Danoff hasn't been content to put the fund on autopilot and hug the S&P. Instead, he prides himself on staying a step ahead of the competition and berates himself on the very few occasions when he has not. In 2007, for example, Danoff's embrace of long-unloved growth-oriented firms has helped Contra and Advisor New Insights leave the S&P 500 and the typical large-growth fund in the dust. The funds' long-term results have been similarly impressive: Both have bested the index and rival funds by breathtaking margins during Danoff's tenure. Even more impressive has been Danoff's consistency. The fund's showing in 2002's dreadful market, when it lost 10% even as the S&P 500 posted a devastating 22% drop, testifies to his sharp maneuvering and commitment to growing and preserving shareholder capital amid all market environments. Whereas rival large-growth managers were content to excuse their losses that year by saying, "Our style was out of favor," Danoff was not.PAGEBREAK

Danoff's success here has created a virtuous circle for shareholders. Simply put, the fund has been easy to own, and that, in turn, has prompted investors to add to their holdings at opportune times. As a result, the typical Contrafund shareholder has actually bested the fund's published total returns over the past decade, pocketing a handsome 11.5% return versus the fund's stated return of 10.9%. True, we've voiced concerns that Contrafund isn't as nimble as it once was, but it's impossible to deny the magnitude of Danoff's achievement here.

International-Stock Managers of the Year: Hakan Castegren and Northern Cross Team
Harbor International HAINX
Hakan Castegren took home our Fund Manager of the Year award back in 1996, and we're happy to note that he and his team have continued to deliver great returns for investors over the subsequent decade. This year, we're giving the award not just to Castegren but also to the team that supports him: Jim LaTorre, Howard Appleby, Jean-Francois Ducrest, and Ted Wendell of Northern Cross. Under the watch of these talented investors, the fund notched a tremendous gain in 2007, owing to some well-chosen names in the energy and metals industries. Its long-run returns have been even more impressive: Bill Rocco recently noted that its 15-year return is the best of any foreign large-value fund.

Harbor International is one of those funds that we find ourselves recommending again and again. We're compelled by this team's experience level, respect for growing (and preserving) shareholder capital, and the discipline with which it continues to execute its sensible, bargain-hunting strategy. In addition to posting strong returns in the buoyant market environment of the past several years, its losses during the 2000-02 bear market were quite subdued, making it, like Contrafund, a remarkably smooth ride. Fabulous 10-year Morningstar Investor Returns are evidence that this fund's many shareholders have profited handsomely from this team's labors.

Fixed-Income Manager of the Year: Bill Gross
PIMCO Total Return
PTTDX and Harbor Bond HABDX
Bill Gross took home our Fixed-Income Manager of the Year honors twice before--in 1998 and 2000. This is a well-deserved three-peat, in that his showing in 2007 exemplifies what he and the brain trust at PIMCO do best. Back in 2006, long before "subprime crisis" and "credit crunch" entered the national lexicon, Gross was discussing the potential for housing-market weakness to damp the economy. He began positioning his portfolios accordingly, reducing their exposure to corporate bonds and increasing their sensitivity to interest rates so that they would benefit from the lower interest rates he expected. That positioning proved off at first, leading to an uncharacteristically average showing in 2006 and the first part of 2007, but in hindsight it was amazingly prescient. As the housing market went from bad to worse and the Fed ratcheted down rates in the second half of this year, Gross' charges reaped the rewards. In 2007, Harbor Bond and PIMCO Total Return smoked the typical offering in the intermediate-term bond category and topped the Lehman Brothers Aggregate Index by nearly 200 basis points--an astounding margin of victory in the bond world.

That sort of bold move is precisely what we're talking about when we say that we look for managers who show courage in their convictions. And fortunately for Gross' legions of shareholders, this is far from the first instance when he has risked short-term performance weakness with an eye toward improving long-term results. Both funds' returns over the past decade are among the very best in their peer group, thanks to the PIMCO team's keen evaluation of macroeconomic trends, considerable human resources, and derivatives capabilities. And owing to PIMCO's gigantic footprint in the mutual fund world, many shareholders have enjoyed the fruits of Gross' labors.

Christine Benz is Morningstar's director of mutual fund analysis.

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