Wed, 21 Dec 2011
Our Manager of the Year Award is meant to recognize managers whose time-tested long-term strategies have really shined in the past year, says Morningstar's director of fund analysis.
Jason Stipp: I'm Jason Stipp from Morningstar. Morningstar recently announced its nominees for the 2011 Fund Manager of the Year Awards.
Here with me to offer some more depth on that selection process, as well as how investors should view the award winners, which will be named on Jan. 4, is Morningstar's Karen Dolan; she's director of fund analysis.
Thanks for joining me, Karen.
Karen Dolan: Thanks, Jason.
Stipp: So, I wanted to talk to you about the selection of the nominees and then the naming of the winners.
We've seen a few articles [in the financial press], where writers will compare the winners and ask, "Well, how did they do in the year after they were named?" And that's really ... not a time period that you folks only look at when you're thinking about the nominees and naming the winner.
So, I wanted to get your take: How do you think about short-term performance and long-term performance when you're nominating and eventually naming the winner of this award?
Dolan: That's a great question, because I think it does raise a lot of confusion on the part of folks who are following these winners and looking at the nominees. This is an award of 2011, or an award of 2010; however, it's not just looking at the straight, raw returns. It's not just saying, "What did you do for me this year?" It's really using that one-year period, that calendar year, as a lens into the broader strategy at play, the risk profile, the longer-term returns, the stewardship. A lot of the things that our analysts look at when they're analyzing funds, generally speaking, definitely come into play in our ... discussion.
Now, what we like to do with the Fund Manager of the Year Award ... is [ask], "What was it about this year, however, that really made them shine?" That should show through in performance, but also we'd like to see something about their strategy, where it really was a year that this fund really showed itself and this manager showed themselves ... that it was time when they really shined.
Stipp: So [you ask], was it an exemplary year for a long-term strategy that we think is sound going into the future?
Stipp: So a follow-up question then for you: Have you looked at the long-term track record of the award winners--because we're not saying that they are going to do well in the coming year, necessarily. We know managers have their periods of ups and downs. But how have our winners from years past, many years past, how have they performed going forward after they were named winners?
Dolan: That's also a good question. I think, one of the things that I'd want to make sure people understand is this is not a projection of what next year is going to bring. We don't have a crystal ball to know exactly what kind of market environment we're going to have. We clearly know what everybody else is talking about and what economists are saying. But [we're not claiming] "this is the manager of this year, and we think they're going to do great in the next three months or the next year." That's not our core strength, core set of skills. But we do think that there are enough strong fundamental factors that these should be good investments moving forward.
Now a good test is to look and see, how have we done? I brought our Hall of Fame, which we publish every year. So, you not only can see who won for that year, but you can see all the way back to the beginnings in the 1980s of doing this, who the winners have been. John Rekenthaler ... [who] heads up corporate research here at Morningstar, he's also studied this. In fact, I think he has plans to publish something on this in the next few weeks.
So, let's take them in order: Domestic Stock--we've been kind of hit or miss here. I go through and see some of our successes. Charlie Dreifus, '08, continued to do very well. Will Danoff, 2007, had a really rough '08, but really came out of that looking really strong.
There were some managers on here--actually, one of our nominees for this year, Bill Nygren, he won in 2001, and then he went on to have a period of underperformance. I think we can all remember Washington Mutual and how badly that hurt his returns in the '06-'07-'08 time periods. So, he had a stretch of down and out, but he's kind of back again. So, it depends on the time period that you look at. I think, the longer you can stretch that, the better the noise tends to come out of it.
We've had some flops, though. 1999, we gave the award to Jim Callinan, RS Emerging Growth. '99 was a year where growth was at the top of its game, and we gave the award to a growth manager who was really shooting the lights out. That ... did not pan out well on a forward-looking basis.
We gave the award to Bill Miller in '98, Legg Mason Value Trust. I think, clearly, he was a very accomplished manager. He went on to accomplish a lot, really up until 2005. So, for the seven years after that award, he continued to do very well, and then we saw his returns really fizzle out after that.
So domestic equity, you know, there are also successes in there, which I've already talked about, but it really is mixed, and it's something we're really thinking deeply about. One of the things that we've thought about internally is just the nature of the award. Because it's looking at the one year, you tend to sort of go for the really high performer. And as we know with any active manager, the higher you are in one year, the lower you can be in the next, and so we're very cognizant of that, and I think, we're looking at our process to make sure that that filters in.
International, we've done really well. Actually our winners have done very well consistently, repeatedly over time. And the same with fixed income; our award winners have continued to do well. Again, not if you measure it in a 12-month period, but if you look at 3-, 5-year and longer periods, they have done well.
Stipp: So, Karen, you mentioned the importance of looking over that longer time frame, and also I think that one thing we want to keep in mind and you've also mentioned a couple of times is that it's not a market call. It's not necessarily a fund that you should jump into right away, but these are managers that we do have conviction in when we name this award.
So how, as an investor, should I use the naming of the Manager of the Year? Is this a fund that I should strongly consider? Should I dollar-cost average in? What's your recommendation for what I might think about these winners when they are announced in January?
Dolan: These are all funds that we think are good long-term investments, but we're not saying that they are good investment for next year. So, I do think if somebody has a need in their portfolio for one of these asset classes, these are all funds you can look to. One way that we can now talk about that is through our new Analyst Ratings. So, all of the funds that we've nominated [have] gone through this Analyst Rating process, and so it's been a fuller process than just looking at the one year. But I really do think people, if they think it's a hot tip or it's a fund you need to get into and you may need to get out of it in six months, it's not going to succeed for folks if it's used in that way.
Stipp: Thank you very much for the candid explanation of the past winners; I really appreciate that.
But let's take a look now ... at the nominees for 2011. We do have three areas: domestic, international, and fixed income. Let's start with domestic. It has been a very volatile market in 2011, a lot of ups and downs, but at the end of the day, the market is relatively flat for the year. Not the easiest market to invest in. What are some of the big themes in domestic equity that you looked at and a couple of examples from the managers that really [had] their strategy shine last year?
Dolan: ... I think for a lot of the managers, it's been a continuation of what they've been doing, quite frankly. You look at Don Yacktman--it's not like he turned over that portfolio drastically and made a ton of moves in 2011. ... I'd say actually where he made a lot of his moves was in '08, when he started to really move up quality and more into dividend payers and little bit even to growth, just a bit. That move, I think, has really fueled very good returns for him over that period.
Sequoia, they won last year. It's not a whole different portfolio than what it took for them to win last year. So, again, it's more of the same and sticking with these high-conviction picks. With the volatility, I think, these managers have taken some opportunities to add to losers, get out of their winners, and they've done that adeptly.
Bill Nygren, I think he is a manager who, like I said earlier, he had a hard time in that '05, '06, '07 stretch, but he has really come back very nicely after '09, 2010, and 2011. So, we've gotten to see more from him of what we've seen over that longer [period of] his career.
Stipp: In fixed income, we also know that it was not an easy environment for managers. We saw a lot of great managers on the wrong side of Treasuries, especially when the market did a big correction in August when all the international turmoil was coming to a head, and the domestic debt issues as well.
What were you looking at in such a tough fixed-income environment? And which managers really stood out there because of their great longer-term strategies?
Dolan: This was a really tough one. Like you said, a lot of managers were on the wrong side of the treasury trade this year--not all of them. And so, we ended up with a list of a lot of specialists, actually, and it's not to dodge the fact that this more macro type of thing [occurred], but I think this was a year when the folks who really focus on their bread and butter, focus on what they did well in their respective sleeves, really shined.
So, we have two Ginnie Mae funds in there. We have New Markets Income, which is a hard-dollar currency fund. PIMCO Global Bond--global is increasingly [and] definitely an area of investor interest. And I think this was a challenging environment for global bond investing. We saw a lot of global bond investors do very poorly.
So, I think, those are some of the themes. It's ... those areas where the folks had specialty and really shined, despite some conditions that could have hurt them otherwise.
Stipp: Lastly are international nominees for Fund Manager of the Year. International, again, not an easy market. We still had the continuing troubles in Europe, and emerging markets, which had been ... so strong, really took a tumble in 2011. How did ... your nominees stand out in this really rough year?
Dolan: International, this was the toughest one. From an absolute-return perspective, international funds lost a lot of money, especially those that were highly focused on emerging markets--China, India--those were very tough markets for folks. A lot of global managers shined partly because being in the U.S. was a good thing, and being maybe not as levered up to those emerging markets was a good thing.
But I also think beyond that we've got some managers like David Winters from Wintergreen, who actually, his U.S. stake is lower than it has been in a while, and he really shines through stock-picking. A lot of tobacco has really worked well. Actually, tobacco and alcohol were a theme, an interesting theme, kind of coincidental maybe ...
Stipp: It was a rough market so…
Dolan: …in what worked ... in international market. So, a nice selection of managers who have done a good job over time, and ... have had more flexible strategies and have managed that well.
Stipp: Well, Karen, thanks so much for offering more context around the 2011 nominees, and around the process in general. I really appreciate your time.
Dolan: Thank you.
Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.