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Announcing Morningstar's Fund Managers of the Year for 2012

These skippers shone amid a challenging market environment.

Michael Herbst, 01/03/2013

Despite a steady stream of harrowing news--euro crisis, faltering economy, midyear market swoon, fiscal cliff--the markets had another strong year in 2012. Stocks continued to rally, as emerging-markets equities (as measured by the MSCI Emerging Markets Index) led the way with an 18% gain. International developed-markets equities and domestic stocks weren’t far behind, with the MSCI EAFE and S&P 500 indexes up 17% and 16%, respectively. Investors’ thirst for income and yield fueled strong returns for riskier bonds, with investment-grade corporate fare, high yield, and emerging-markets debt posting high-single-digit to nearly 20% gains and trumping government bonds.

No single bets propelled our Morningstar Fund Managers of the Year to the top of their categories, but if there is a unifying trait, it's that they're generally more willing to protect investors on the downside than to try to wring out that last penny of gains amid rising risks. Historically we've offered Fund Manager of the Year awards for managers investing in domestic stocks, international stocks, and fixed income. This year we introduce awards in two new categories--alternatives and allocation (for managers investing across multiple asset classes)--recognizing investors' growing interest in those areas.

Beyond a great year, our winners must be Morningstar Medalists, have generated strong long-term risk-adjusted returns, and be strong stewards of investor capital. While our Fund Manager of the Year awards are recognition of past contributions rather than predictions of future results, we’re confident in each one’s long-term prospects in part because of their deep research resources and willingness to stick with their discipline in good times and bad.

- source: Morningstar Analysts

Domestic-Stock Fund Manager of the Year 2012
Bill Frels and Mark Henneman From Mairs & Power Growth MPGFX
Morningstar Category: Large Blend
2012 Return / Category Return Rank: 21.9% / 3
Morningstar Analyst Rating: Silver
This $2.5 billion fund scored big wins in two of the tougher sectors in 2012--basic materials and industrials--with long-held positions such as Valspar VAL, Toro TTC, Pentair PNR, and H.B. Fuller FUL. Yet strong performance came across sectors, including wins with Baxter BAX and MTS Systems MTSC.

Skippers Bill Frels and Mark Henneman have a penchant for companies located within a stone's throw of the fund's St. Paul, Minn., office, yet many of those have a national or global footprint. The duo values firsthand interaction with company management teams, but ultimately it seeks profitable growers with sustainable competitive advantages and sells when valuations look rich. The fund is generally heavier on the basic materials, health-care, and industrials sectors versus its S&P 500 Index benchmark. It's also lighter in technology and consumer cyclical stocks and offers little or no exposure to energy, telecom, or real estate.

Those traits and management's ken for the slow and steady mean the fund might not keep up in sharp equity market rallies, but strong downside protection is one of its hallmarks. The fund held up better than most of its large-blend rivals in late 2012's swoon, and over the trailing decade it has captured only 85% of the S&P 500's losses. Because of that protection and management's strong stock selection, the fund has outpaced the S&P 500 in more than 90% of the rolling five-year periods over the trailing decade through December 2012. Its cumulative return since Jan. 1, 2000, is 198% compared with 31% for the S&P 500.

International-Stock Fund Manager of the Year 2012
Rajiv Jain From Virtus Foreign Opportunities JVIAX
Morningstar Category: Foreign Large Growth
2012 Return / Category Return Rank: 19.8% / 28

and Virtus Emerging Markets Opportunities HEMZX
Morningstar Category: Diversified Emerging Markets
2012 Return / Category Return Rank: 19.6% / 39
Morningstar Analyst Ratings: Silver
Rajiv Jain plies a similar approach at his two charges: fairly concentrated, little overlap with his benchmarks (less than 15% as of late), and a relatively cautious growth style. In both the $6.7 billion Virtus Emerging Markets Opportunities and the $1.3 billion Virtus Foreign Opportunities, he holds 50-60 positions, with roughly 40% of assets parked in his top 10. He favors a mix of consumer-leading Indian stocks and global firms with a big emerging-markets footprint. In Foreign Opportunities, he keeps one foot in emerging markets (nearly 20% of assets as of Sept. 30, 2012) but maintains a broader mix of consumer staples, financial services, and health-care stocks.

Michael Herbst is an associate director of fund analysis with Morningstar.

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