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Our 2006 Fund Managers of the Year

These three managers have delivered for shareholders over the long haul.

Christine Benz, 01/03/2007

Morningstar's fund analysts cover 2,000 mutual funds. Their full analyst reports are available in Morningstar Principia Mutual Funds Advanced and Morningstar Advisor Workstation Office Edition.

With so many stock and bond funds delivering handsome gains in 2006, we had one of the deepest fields of contenders for our Fund Manager of the Year awards in recent memory.

But, as always, we winnowed the list of nominees to our three winners by focusing on those managers who not only had a great year in 2006 but had also served their shareholders extremely well over long time periods. All of the managers who garnered our award this year use highly disciplined strategies and have demonstrated courage in their convictions, sticking by their approaches even when it has left their funds out of step with rival mutual funds over short time periods. In addition to looking for managers with demonstrated investment prowess, we favor those who have served as excellent stewards of shareholders' capital.

Longtime Morningstar readers are apt to see some familiar names among this year's winners. We're proud to point out that we've been recommending funds run by our domestic- and international-stock winners for more than a decade, and our fixed-income winner has been garnering our endorsement since we began covering his fund in 2002.

Domestic Equity: O. Mason Hawkins and Staley Cates 
Longleaf Partners Fund LLPFXLongleaf Partners Small-Cap LLSCX
In his latest Analyst Report for Longleaf Partners, Gregg Wolper reports that "smarts, guts, and patience" sent that fund to the top of the charts in 2006. Those characteristics have also marked the whole of Staley Cates and Mason Hawkins' remarkable tenure here. The pair are value managers in the Buffett mold, seeking companies that are trading at a discount of 40% or more to their estimates of intrinsic worth.

Invariably, the companies that clear Cates and Hawkins' valuation hurdles have taken a beating due to some fundamental factor, whether it's missed earnings or an inhospitable macroeconomic environment. The pair has shown an uncanny knack for separating the temporarily downtrodden from the permanently down and out. In 2006, many of these once-unloved stocks, ranging from Disney DIS to DirecTV DTV to Comcast CMCSK to General Motors GM (finally!), bounced back strongly. We wish more investment managers would recognize--as Cates and Hawkins seem to--that consistent calendar-year returns aren't everything if your long-term risk/reward trade-off is a good one.

We also see a lot to like in Longleaf from a stewardship perspective, and as principals of the firm, Cates and Hawkins can take much of the credit for their funds' good governance. Southeastern Asset Management lays out its 10 key principles on its Web site, and first among them is, "We will treat your investment in Longleaf as if it were our own." That's not just a sound bite. The firm's lineup--a core stock fund, a small-cap offering, and an international fund--is as utilitarian as they come, and Longleaf has pre-emptively shut its funds to prevent inflows from slowing them down. (Both Partners and Small-Cap are closed to new investors.) We've also long appreciated Longleaf's clear shareholder missives and applaud the firm's requirement that its employees keep all of their equity investments in Longleaf funds.PAGEBREAK

International Equity: David Herro 
Oakmark International OAKIXOakmark International Small Cap OAKEX
Just like Hawkins and Cates, David Herro is a value maven who looks for budget-priced stocks trading at a big discount to what he thinks they're worth. Herro's valuation-consciousness moderates the fund's downside, but the funds he manages are far from meek. He runs a relatively compact portfolio of names, isn't afraid to load up on individual sectors and countries, and is more comfortable pursuing emerging-markets bargains than most of his peers are. More often than not, that bold approach has paid off.

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