Five Nominees for Domestic-Stock Manager of the Year

Toward the end of each year, Morningstar fund analysts nominate their choices for domestic, international, and fixed-income managers of the year, and at year's end we choose the winners.

Although it's called manager of the year, we look at much more than single-year returns. We seek to reward managers who have made a lot of money for people over the long haul.

We look for managers who are great stewards of shareholders' money, meaning they always do the right thing. They keep expenses and trading costs down. They write thoughtful shareholder letters that explain what's really going on at the fund. They close a fund in a timely fashion. They invest a substantial sum of their own money in their funds.

Finally, we look for managers with well-designed strategies who aren't afraid to do something different from the crowd. So, with that preamble, here are our five finalists for Domestic-Stock Manager of the Year. We'll announce our international and fixed-income nominees in separate articles.

Bruce Berkowitz
Fairholme Fund FAIRX
Lead manager Bruce Berkowitz has done a remarkable job applying the teachings of Ben Graham and Warren Buffett. He runs a focused, low-turnover portfolio where the strategy aims to find great owner-managers whose businesses are trading at fair prices. It's very much about the jockey more than the horse, but Berkowitz and comanagers Larry Pitkowsky and Keith Trauner are generally quite choosy about both. That said, they also invest a slug of the portfolio in special situations such as compelling turnaround plays. Finally, they have long held a big cash stake to enable them to be nimble and aggressive if most investors get spooked.

This year, performance has been driven by investments from both the main and secondary strategy. In the great managers camp there's top holding Berkshire Hathaway BRK.A and Sears SHLD; in the special situations fold there's Phelps Dodge PD. Fairholme bought Phelps Dodge because its planned acquisitions had depressed the share price. However, the hunter became prey, and the copper giant agreed to be bought by Freeport-McMoRan Copper & Gold FCX.

Mason Hawkins and Staley Cates
Longleaf Partners LLPFX and Longleaf Partners Small-Cap LLSCX
Few managers embody the ethic of making money for shareholders over the long haul and putting shareholders' interests first better than Mason Hawkins and Staley Cates. Take a look at their 10 Principles, which is right on their home page. I think every money manager should put their principles on their home page, too. Another thing few if any managers can match is the extent to which Hawkins, Cates, and the rest of the firm's employees invest in their funds.

Bill Miller is a believer that you have to risk investor scorn and buy controversial stocks in order to beat the indexes over the long haul, and Longleaf embodies that idea, although their brand of value is different from Miller's. The idea is to protect shareholders' money by insisting on a discount of at least 40% to the team's estimate of intrinsic value. If not enough stocks make the cut, management will hold cash, and if that state continues for a while, they'll close a fund. In fact, both Partners and Partners Small-Cap are closed.