A mix of growth and value candidates.
It's a new year and that means award season here at Morningstar. Each year since 1987, we have crowned a new Fund Manager of the Year. Since then, the award has expanded to five categories. We kick things off by announcing our nominees for Morningstar's Domestic-Stock Fund Manager of the Year. Tuesday's Fund Spy will unveil our International-Stock Fund Manager of the Year nominees, with the Fixed-Income, Allocation, and Alternatives nominees to follow. The winners will be announced live on CNBC on Jan. 15.
Even though the Fund Manager of the Year award is based largely on what a manager accomplished in 2013, it's also a lifetime achievement--or tenure achievement--award. Our goal is to recognize long-term success rather than a comet blazing across the sky. With this in mind, we often look for cases where a manager has succeeded despite headwinds, as opposed to someone who's simply benefiting from market momentum. With the S&P 500 Index up nearly 32% in 2013, we had to be especially mindful of this, as there wasn't much--outside of gold miners--that didn't work.
In alphabetical order by fund name, the nominees are:
William Martindale and Robert Mitchell, Conestoga Small Cap CCASX
2013 Return: 49.26%
Morningstar Category Rank (Percentile): 9
There was certainly plenty of positive momentum within Conestoga Small Cap's growth realm. In 2013, the small-cap stocks that tended to do best were more speculative in nature, with lower margins and higher levels of debt. Such characteristics run counter to managers William Martindale and Robert Mitchell's preference for high-quality companies. Such standards should have worked against the fund in 2013, which makes its results all the more impressive and speaks to the duo's excellent stock-picking.
Historically, the fund's high-quality holdings have tempered volatility and have helped it typically outperform in down markets. The managers invest with conviction and for the long term. They tend to hang on to their picks for three to four years. Two top-five holdings bought in early 2008, CoStar CSGP and Tyler TechnologiesTYL, both doubled last year, helping to fuel 2013's excellent results.
Note that Martindale plans to retire in the summer of 2014. Mitchell remains on board and will be joined by Joe Monahan, who joined the firm in 2008 and is a manager on sibling Conestoga Mid Cap CCMGX.
Dodge & Cox Investment Policy Committee, Dodge & Cox Stock DODGX
2013 return: 40.55%
Morningstar Category Rank (Percentile): 2
Dodge & Cox Stock is on track for its second-consecutive top-decile showing in the large-value category. After poor results during the financial crisis, this team has largely redeemed itself. A number of longtime holdings, some of them contrarian plays, paid off this year. Hewlett-Packard HPQ is the most notable example; Softbank's investment in Sprint S was another vindication. (Dell and C. Penney JCP are recent exceptions, but these were also very small positions that did not do much damage.) Overall, the managers added significant value with their tech picks, as Microsoft MSFT was another major contributor. The fund's large stake in financials was another advantage, with Schwab SCHW its leading pick.
Despite occasional hiccups, Dodge & Cox practices thoughtful, deliberate value investing, and this fund benefits from one of the deepest, most consistent investment teams in the business. Shareholders willing to ride out the bouts of underperformance that come with contrarian stock-picking have been rewarded over the long term.