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Five Domestic-Equity Managers Who Deserve Attention

These managers aren't as popular as they should be.

William Samuel Rocco, 02/20/2007

There are several topnotch managers who are household names among fund investors, and there are lots of pretty good skippers who are quite widely known--sometimes due to their own accomplishments and sometimes due to their fund companies' marketing efforts. But there also are a number of first-rate managers who aren't as well recognized as they should be (even though they may have received some external praise or taken on substantive responsibilities at their firms).

With that in mind, in a recent column we highlighted three international-stock skippers who aren't too well known yet but who have superior skills and attractive strategies. And now it's time to identify domestic-stock managers who have excellent talent and strong disciplines who haven't received as much acclaim as they deserve.

There are nearly four times as many domestic-equity funds as international-stock offerings, though, so it should come as no surprise that there are quite a few domestic-equity managers who fit the bill. Therefore, we'll save the underappreciated smaller-cap managers for a future column. Here we'll focus on five first-rate large-cap skippers who are anything but celebrity managers: Charles Bath at Diamond Hill Large Cap DHLAX, Diane Jaffee at TCW Dividend Focused TGDFX, John Montgomery at Bridgeway Large-Cap Value BRLVX, Arthur Moretti at Neuberger Berman Guardian NGUAX, and Eileen Rominger and the team at Goldman Sachs Large-Cap Value GSLAX.

Charles Bath
Charles Bath has used a distinctive approach to distinguish himself since taking the helm of Diamond Hill Large Cap DHLAX in late 2002. Bath runs a relatively focused portfolio of 30 to 50 names and readily builds big sector weights as he pursues larger caps that are trading at discounts to his estimates of their fair values and have high barriers to entry as well as solid growth rates. He's also a patient investor, who moves at a measured pace and isn't afraid to add to names he still believes in on weakness. Indeed, he took advantage of last summer's downturn in the energy sector to beef up his already-sizable stake in Devon Energy DVN. Bath's taste for concentration and willingness to overlook short-term issues does cause problems from time to time. The fund, in fact, finished in the large-value category's bottom quartile in 2006 primarily due to its energy names. But he has executed his discipline quite well overall, as Diamond Hill Large Cap's top decile three- and five-year returns attest. The success that Bath has had as a comanager at Diamond Hill Long-Short DIAMX and during a long tenure at a former charge is further evidence of his abilities.

Diane Jaffee
Diane Jaffee has certainly demonstrated her mettle at TCW Dividend Focused TGDFX. She has been part of the management team since 1995 and lead manager since 2001 at the oldest share class of the fund, and that share class has handily outpaced the typical large-value offering over the trailing three-, five-, and 10-year periods. She has accomplished this feat by focusing on dividend-paying companies that are attractively priced on a variety of valuation metrics and are poised for improvement. And while she does run a somewhat concentrated portfolio of roughly 50 to 60 names, which courts issue-specific risk, she also makes fuller use of the sector spectrum than many value managers, and the fund has had fairly average volatility for a large-value offering overall. Moreover, Jaffee has also produced strong results at TCW Diversified Value TGDVX, which is only half the size of TCW Dividend Focused.PAGEBREAK

John Montgomery
There's no arguing with John Montgomery and his comanagers' record at Bridgeway Large-Cap Value BRLVX. Indeed, the fund has posted a 17.7% annualized gain since opening in late 2003, while the typical large-value offering has earned a 14.7% annualized return during the period. Montgomery and his comanagers have produced these superior results by following a quantitative discipline that looks for bargains in the traditional growth sectors as well as in the usual value areas, spreads the portfolio across roughly 80 names, and keeps turnover modest. While the fund isn't tame--the computer models often lead to sizable stakes in individual sectors--the success Montgomery and his comanagers have had using similar approaches at several other Bridgeway funds is encouraging. And the fact that Montgomery is the founder and president of Bridgeway Capital Management, which is an exceptionally fundholder-friendly firm, bolsters our confidence further.

Arthur Moretti
Arthur Moretti has used an atypical approach to deliver the goods at Neuberger Berman Guardian NGUAX. Moretti runs a focused portfolio of 30 to 40 names and pays lots of attention to mid-cap and overseas opportunities as he pursues quality companies that have suffered temporary setbacks and are trading at attractive prices. His market-cap and geographic flexibility has certainly paid off in recent years, as mid-caps have generally outpaced large caps and foreign stocks have consistently outgained domestic ones, but his stock selection has also been quite good, and the fund has handily outpaced its average peer since he took the helm in late 2002. Moretti and his strategy certainly aren't for the faint of heart, but it is worth noting that he has managed Neuberger Berman Socially Responsive NBSRX since mid-2001 using a nearly identical approach and it also has thrived.

Eileen Rominger and Team
Eileen Rominger and her team have used a straightforward strategy to produce strong results at Goldman Sachs Large-Cap Value GSLAX. Rominger and her team look for stocks that are cheap relative to their industry peers or own histories and have solid fundamentals while constructing a portfolio that resembles the Russell 1000 Value Index from a sector perspective. This approach is designed to help the team moderate risk and add value through stock selection, and it has succeeded on both counts. The fund, which straddles the border between the large-value and large-blend sections of the Morningstar Style Box, has been significantly less volatile than both the typical large-value fund and the average large-blend offering. And it has outgained most of its large-value peers and walloped most large-blend funds since Rominger took charge in late 1999, as she and her team have regularly made good stock picks. Rominger is head of Goldman's value team, and the firm's other value funds are rather good--this enhances her credentials.

William Samuel Rocco is an analyst with Morningstar.

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