New blood and old favorites fill out this list.
Now that the end of summer is in sight, it's time to write our first preview of managers who have a decent shot at winning Morningstar's Domestic-Stock Fund Manager of the Year Award. Mind you, this isn't a nominees list--I'm just naming some good candidates. There are many other good managers who will be considered when we sit down in December to choose the winner.
First, a short review of what we're trying to reward. We want outstanding managers who have done right by shareholders over the long haul. To that end, we want managers with strong single-year and long-term performance. We want managers who have been good stewards of shareholder money and who chose to do the right thing even when there was a more lucrative short-term alternative.
To build my list I took some shortcuts to narrow the choices. I screened for funds with top quartile year-to-date and five-year returns, manager tenure of more than 5 years, and a Stewardship Grade of A or B. I also skipped over past managers of the year so that I could focus on managers who are a little less heralded. Let's have a look at those early favorites.
Bruce Berkowitz and Larry Pitkowsky of Fairholme Fund
Since launching this fund in the waning days of 1999, Berkowitz and Pitkowsky (who was named manger in 2001) have had a remarkable stretch of performance. With a 10% gain so far in 2006, the fund is well on its way to producing returns in its category's top third for the sixth time in seven calendar years. Their strategy is to buy great companies cheap and turnaround plays even cheaper. They run a focused portfolio, and they're willing to hold lots of cash in order to take full advantage of new opportunities. They also earn points for starting the fund out with a 1.00% expense ratio and keeping it there--rather than expecting early shareholders to bear all the costs of starting up a fund. As my colleague Christine Benz pointed out last week, it's a practice that's all too rare in the industry.
Will Danoff of Fidelity Contrafund
Your first reaction to seeing Danoff's name is probably that you're surprised he hasn't already won. I am too, but it shows how much good competition is out there that one of the best in the business hasn't yet won. Fortunately, Danoff isn't the type to rest on his laurels. He just keeps beating the competition year in and year out. Very few managers could run a huge fund as the sole manager and still produce world-beating returns like Danoff has in 16 years at this fund. The fund's 2.5% return this year might not sound like much, but most large-growth funds are in the red this year. This highlights the fact that Danoff has outperformed in up years and down years through outstanding fundamental research to keep one step ahead of the markets.
Arup Datta of N/I Numeric Investors Small Cap Value
Quantitative managers rarely get much attention, but Arup Datta and the team at N/I have produced great long-term returns, so why not? Managing a quant fund isn't just a matter of testing models and then letting them loose to run for the next 10 years. It requires updating and testing to develop new ideas and keep ahead of the competition. Datta and his team also get points for keeping expenses low and closing the fund early on to protect existing shareholders.
Mason Hawkins and Staley Cates of Longleaf Partners
It's kind of remarkable they haven't won either. Not only have they produced great returns but they always show that they have shareholders' interests in mind. They have large sums of their own wealth at stake in the funds, they communicate clearly and honestly with shareholders, and they close their funds when they can't find enough good investments. Hawkins and Cates seek out companies trading at steep discounts to their estimates of intrinsic value. Because this often leads them to companies and industries currently under fire, Hawkins and Cates patiently wait for the companies to turn around. That approach has produced outstanding long-term returns that handily outpace the S&P 500.
David Lee of T. Rowe Price Real Estate
Like all good T. Rowe Price managers, David Lee's record looks great only when you stand back and look back at the big picture. By beating his peers by modest amounts nearly every year, Lee has now amassed an outstanding record since 1997. Lee takes a low-turnover approach to finding good management that can get more out of their properties.
Ed Owens of Vanguard Health Care
While Lee's sector has been red-hot for years, Owens has been investing in the treacherous health-care space with aplomb. This year the fund is up 7.4% while many health-care funds are flat or in the red. Owens' conservatism has made this a great sector fund that investors are able to hold onto even when the sector has troubles. That may sound simple but very few sector funds can make that claim, and few, if any, can claim to match Owens' 22-year performance.