On Jan. 4, Morningstar presented its annual Fund Manager of the Year awards. The 2011 winners are ...
Domestic-Stock Fund Manager of the Year
Scott Satterwhite, James Kieffer, and George Sertl
International-Stock Fund Manager of the Year
William Browne, John Spears, Tom Shrager, and Bob Wyckoff
This fund and its management team stood out for limiting losses in a brutal year for international-stock investing. Tweedy, Browne Global Value lost 4.13% in 2011, which was roughly 800 basis points better than rival funds and the MSCI EAFE Index.
The fund’s biggest help came from heavy positions in tobacco and alcohol stocks, which had a standout year. The portfolio held sizable positions in Philip Morris PM and British American Tobacco BATS plus spirits-maker Diageo DGE, all of which were up double digits in 2011. But the real key to the fund’s resilience in 2011 was the portfolio’s distance from banks, the epicenter of Europe’s problems. The fund has one of the smallest bank weightings in its category, with a few non-European banks holding measured spots in its portfolio.
Fixed-Income Fund Manager of the Year
This fund focuses on buying emerging-markets bonds denominated in U.S. dollars, and 2011 was a good year for that mandate. But its stellar results owe much to manager John Carlson’s experience and deft management in what was a rocky environment for emerging markets.
Plenty of managers paid for being on the wrong side of interest rates in 2011, but Carlson got it right. He doesn’t typically make big interest-rate bets, but he was concerned about deflation and lengthened the fund’s duration, a measure of its interest-rate risk, in response. The fund’s duration peaked near 7.5 years in October, well above the index’s level of 6.75 years, just in time to benefit from the rally for long-dated, dollar-denominated debt. He has since brought the fund’s duration closer to that of its index.
Costco Boss Wins CEO of the Year
James Sinegal, CEO of Costco Wholesale Corp. COST, was named Morningstar’s 2011 CEO of the Year on Jan. 4. The other nominees for the award were Jeffrey Bezos of Amazon.com AMZN and John Pinkerton of Range Resources RRC.
“This year’s nominees each have added intrinsic value to the companies they run,” said Paul Larson, chief equities strategist and editor of Morningstar StockInvestor. “James Sinegal, who has served as CEO since co-founding Costco in 1983, has created and maintained value for all company stakeholders during his tenure. The average Costco employee is attractively compensated relative to other retail workers, keeping employee turnover low and productivity high. Although its topnotch benefits package and superior wages are costly on the surface, the firm is reimbursed handsomely, generating more than $500,000 in sales per employee.
“At the same time, the company remains a low-cost producer for its customers. Costco also has reasonable management compensation levels and a high level of communication and transparency with investors. The company has grown considerably over the past few decades, and we think it’s well positioned to continue expanding internationally.”
While the total annualized return of the S&P 500 has been nearly flat over the past five years, Costco shareholders have seen a return of nearly 12% annualized over the same period. Notably, in fiscal 2011, Sinegal helped Costco achieve comparable-club sales of 10%, 10 basis points of operating margin expansion to 2.8%, a 14.2% return on invested capital, and more than $1 billion returned to shareholders in repurchases and dividends.
2011 Fund Flows Show Drop for U.S.-Equity Funds
Morningstar’s final fund flow data for 2011 came out on Jan. 11, and overall, U.S.- equity funds shed $93 billion for the year.
International-stock funds took in $3 billion, while balanced funds took in $11 billion. Taxable-bond funds took in $135 billion, and munis shed $11 billion though that trend reversed by the fourth quarter. Alternative funds took in $12 billion net, and commodities funds took in $9 billion.
On a fund level, the top draws were Templeton Global Bond TPINX: $13 billion; DoubleLine Total Return DBLTX: $11 billion; and MainStay Large Cap Growth: $8 billion. The most redeemed funds were American Funds Growth Fund of America AGTHX: negative $33 billion; American Funds Capital World Growth & Income CWGIX: negative $9 billion; and Fidelity Diversified International FDIVX: negative $8 billion.
These Funds Face a Make-or-Break 2012
Morningstar takes a long-term, fundamental approach to investing and fund analysis. Morningstar fund analyst Greg Carlson recently took a look at four funds where poor performance in 2011—and, just as important, the reasons for their struggles—is causing Morningstar analysts to re-evaluate their prospects.
Janus Fund JANSX, Janus Twenty JAVLX
Jonathan Coleman and Ron Sachs took over Janus’ two flagship funds—Janus Fund and Janus Twenty, respectively—in November 2007 and January 2008 in what represented a changing of the guard at the firm. They replaced the departing David Corkins and Scott Schoelzel, who had both amassed impressive records running Janus funds since 1997.
Each manager has struggled. Overall, Janus Fund and Janus Twenty have trailed 70% and 85% of large-growth funds, respectively, during Coleman’s and Sachs’ tenures.
Brandywine BRWIX, Brandywine
These funds, which seek out companies that management believes are poised to beat Wall Street’s earnings expectations, have performed terribly for the past four years.
Lead manager Bill D’Alonzo and his team contend that the funds’ poor performance is largely the result of stock prices being driven by macroeconomic sentiment, rather than by corporate earnings, for the past several years. But four years of wretched returns is a long time to pin on a single factor. It may be the case that the extensive channel checks that the team performs to estimate companies’ prospects are no longer effective, leaving the funds without a long-term edge.
VA Sales Hold Steady
New sales of variable annuities held steady in the third quarter, totaling $38.5 billion versus $39.4 billion in the second quarter and $33.8 billion in the third quarter of 2010. On a year-to-date basis, sales were solidly ahead of the previous year, coming in at $116.7 billion versus 2010 third-quarter year-to-date new sales of $99.5 billion, a 17.2% year-over-year increase. Assets under management of $1,422 billion were down 9.3% from secondquarter assets of $1,567 billion because of negative market performance, as evidenced by a 14.3% decline in the S&P 500, and virtually unchanged from third-quarter 2010 assets of $1,418 billion. A very bright spot in the third-quarter data was the significant increase in net cash flow, to $8.9 billion from $5.7 billion in the second quarter and $6.4 billion in the third quarter of 2010, increases of 54.3% and 38.4%, respectively. In fact, net cash flow of $8.9 billion is the highest reported since the fourth quarter of 2007. We expect continued strong sales and net cash flow in the fourth quarter, and 2011 full-year new sales of at least $155 billion.
Robust sales and rising net cash flow reflect a surge of new money into variable annuity products offering lifetime income benefits enhanced with guaranteed growth features such as MetLife’s GMIB Max II, Prudential’s HD Lifetime Income, Jackson National’s Lifeguard Freedom 6, Lincoln National’s Lifetime Income Advantage and i4Life, and Nationwide’s Lifetime Income Options. The income benefits offered by these five companies, whose combined sales account for 64.8% of all retail variable annuity sales, include features geared not only toward securing income but also to increasing income over time on a guaranteed basis through withdrawal deferral bonuses and/or fixed percentage increases. While not the only firms to offer such features, these firms actively market their products, sell through multiple channels, and carry strong credit ratings to provide investors with confidence that they will be able to back guarantees that may need to provide insured income over multiple decades.
Dividend-Paying ETFs for 2012
Morningstar ETF analyst Michael Rawson recently highlighted dividend ETFs that Morningstar analysts recommend.
Vanguard High Dividend Yield
Index ETF VYM
Vanguard has two funds on this list, and of the two, this one offers a higher yield and a large-cap-value tilt. It is low-cost and widely diversified, so it could serve as a core fund and will likely have a fair amount of overlap with your other large-cap funds.
WisdomTree DEFA DWM
This is but one from a stable of high-yielding international ETFs from WisdomTree. This one weights firms by the amount of dividends paid, resulting in a large-cap-value tilt. While dividends are more common overseas, they are also a good check on corporate governance, particularly when investing in foreign markets where due diligence is more difficult.
PowerShares FTSE RAFI US 1000 PRF
This ETF is also not marketed as a dividend fund, but it incorporates dividend information, along with sales, book value, and cash flow. The result is a more stable approach than using dividends alone—after all, many top-performing companies pay no dividends at all. Of all the funds mentioned in the list, PRF is the most well-balanced core fund.
Vanguard Dividend Appreciation ETF VIG
VIG is a perennial favorite, and while this fund does not have a high yield, it earns points for stability. Firms in this fund need to increase dividends for 10 consecutive years, which limits exposure to more-cyclical industries.
iShares High Dividend Equity HDV
(Morningstar licenses HDV’s index to BlackRock and earns asset-based fees.) This is another 2011 new launch that has quickly gained assets, but it is still much smaller than iShares’ other dividend-focused fund, iShares Dow Jones Select Dividend Index DVY. HDV screens for high-yielding stocks that pass both qualitative and quantitative tests for stability. This results in a high yield without sacrificing quality.