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By Don Phillips | 01-05-2009 05:44 AM

Managers of the Year Navigate Rough Waters

These managers' focus on what could go wrong limited the damage for investors in a rough 2008.

Don Phillips: Hi, I am Don Phillips with Morningstar and I am happy to be here today to talk about the Morningstar Fund Manager of the Year Awards. We are making the announcement live here on Morningstar.com and we will start off first by asking Russ Kinnel, Russ, you're heading up this project for us this year, what is the criteria, what are the things we are looking at. It's not just the manager or the highest return for the year, right?

Russ Kinnel: That's right, we look at long-term returns, we look at stewardship, we look for managers who have really done something extra especial for shareholders and speak clearly to them and treat them with respect, so it's a lot more than just one year's returns.

Don Phillips: OK, so but this year might be you look for a manager who had a good year and one that highlights some of their strengths but not necessarily just who have the highest return that year.

Russ Kinnel: That's right, we want a manager who's got good long-term returns, who's really done a good job over a long term for people, ideally one who has made a lot of money for a lot of people. So this year's performance is important but it's not the whole deal.

Don Phillips: Now in 2008 those managers might have actually lost money for people because I mean no one was making money, right?

Russ Kinnel: That's right, two of our winners actually lost money but we feel like losing less in a down year is just as important as making a lot in an up year because the funds that really limited losses means investors will be able to make their money back a lot quicker.

Don Phillips: Well, that's a great point, you think that your fund is down double digits this is terrible but if you're down 33% you only have to go up 50% to get whole again, if you're down 50% you have to go up a 100%, so limiting losses can do a lot towards helping investors for the long run.

Russ Kinnel: Yeah, one of the biggest ways managers can add value is limiting risk and playing good defense, that's something that's very hard for the average individual investor to do, but the really good managers can do it.

Don Phillips: Great. Well let's get to the winners. So Karen Anderson you are here to announce the Equity Fund Manager of the Year for 2008, who won the award this year?

Karen Anderson: That's right, it was Charles Dreyfus who runs Royce Special Equity RYSEX, it's our Analyst's Pick--one of our Analyst's Picks in the small value category. Mr. Dreyfus has been in the industry for 40 years and running this fund for 10 but all told, his record in the industry is excellent and here we wanted to recognize his careful attention to downside risk.

Over the past 10 years he has shown that limiting losses in down years creates a great long-term record compared to all small-cap funds he has basically outpaced them by about three times in terms of annualized returns.

Don Phillips: And how well did he limit losses last year? What was his performance relative to his peers?

Karen Anderson: He lost about 19% over the past year which is very unusual throughout his career but looking at the total stock market index which was down about 37%, it looks a great deal better and he is going to have a much easier time getting shareholders' returns and getting them back on track sooner.

Don Phillips: Yeah, a much smaller hole to climb out of. And what's the key to his strategy? What type of investor is he? A growth investor? Is he looking at momentum or is he looking at the balance sheet more than Ben Graham investor.

Russ Kinnel: He is a Ben Graham investor, he is an account--balance sheet's skeptic, he basically wants very little, very little down on the balance sheet and high returns on invested capital. So basically he wants very low-risk companies that maybe will be taken over, but also those that he can hang onto for a long time and feel very comfortable with.

Don Phillips: Russ, now we're going to turn to the international market. Who is Morningstar's choice for the Manager of the Year of the international managers in 2008?

Russ Kinnel: Our winner is David Samra and Dan O' Keefe of Artisan International Value ARTKX. They are the second international managers from Artisan, following Mark Yockey who won a few years ago.

Don Phillips: And Artisan isn't one big shop, is it--I mean there are a lot of isolated managers who work alone and then have been putting some really good records but it's not a very big shop like Fidelity where everyone's in one building, right?

Russ Kinnel: That's right, Artisan collects a bunch of little boutiques across the country, in fact, Samra and O'Keefe are in San Francisco like Yockey but they are about four blocks away and in a completely separate group. So Artisan likes to have these little pods that work well together and they feel like that keeps things entrepreneurial, it keeps things small enough so that it's a place people like to invest.

Don Phillips: And what about their strategy that worked so well during 2008?

Russ Kinnel: Well there is a lot of similarities with what Karen was describing with Charlie Dreyfus they look for low debt, clean balance sheets and what that means is that kept them away from a lot of the banks and investment banks that blew up in the last year.

So they did have some financials, but it was much cleaner. They also had a lot of high-quality names like Unilever and so they really owned a lot of stable companies that generated their own cash who aren't very dependent on banks and they stayed away from most of the blow ups.

Don Phillips: And how successful were they? What was their return relative to their peer group?

Russ Kinnel: Well they lost 30% which sounds awful but its actually very good relative to their peer group. Again I mentioned you know protecting in the downside and they limited the losses a lot better than most of their peers.

I think that's very valuable even though no one is going to throw a parade for someone losing 30% but if you look out since inception, 2002, the fund has actually made really nice return for people. So even over that fairly short period of time, they've made a good return for people just not last year.

Don Phillips: So a lot of people are talking about stocks being flat for the last decade, well, here is the case where managers are making money and part of that is losing less in a tough year like last year.

Russ Kinnel: That's right, you'd have doubled your money in this fund if you had invested in 2002 even after that 30% hair cut.

Don Phillips: And it really does pay to shave the losses in the bad years?

Russ Kinnel: Yeah and I think it paves the way for strong performance and when I talke to them, I really get them excited about what they bought--you know the potential for those stocks in an up market.

Don Phillips: Great. Well let's turn to fixed income, Chris Davis is here to announce our fixed income manager of the year, hopefully here we are looking at some positive returns?

Chris Davis: We are actually looking at positive returns here and our winners are from FPA New Income FPNIX, Robert Rodriguez and Thomas Atteberry, his co-manager and they actually made money last year, they were up 4% which is great by any standard it beats the typical intermediate bond fund by over 9% points. So that's a pretty big deal in the bond world where often a percentage point or less separates the best and worse performing funds.

Don Phillips: That's right, usually in the fixed income world we are talking about basis points here, we're talking like here what, 900 basis points. That phenomenal, what did they get right that other managers missed?

Chris Davis: Well Bob Rodriguez is very famously outspoken, he loves to talk about what he thinks and in all of his shareholder communication and his public speeches, he decried a lot of the excesses and the housing market he's been doing so for years. He really started ringing the alarm bells in 2007: talked a lot about badly rated, wrongly rated sub prime mortgage securities and predicted quite rightly the effects that would have on the bond markets. He battened down the hatches in his portfolio, he invested a lot of the portfolio in cash and his portfolio is almost entirely AAA where it is invested.

So you know, he really played it safe and not only made money for share holders this year, in every single calendar year since 1984 when he took over the fund, the fund hasn't lost any money. So I think that's really a credit to him.

Don Phillips: That's a virtue that gets forgotten in bull markets but sure was nice to have last year.

Chris Davis: Definitely.

Don Phillips: Now Bob's our repeat winner, right?

Chris Davis: Right this is actually Bob's third time winning, he won earlier in this decade for his efforts here at this fund and I think in the 1990s he won as well. Overall, he is actually sort of a jack-of-all-trades. He also runs an equity fund FPA Capital and we have acknowledged his success at both of those funds.

Don Phillips: Great. Well it sounds like a year where focus on quality, paying attention to balance sheets, and thinking about what could go wrong, not just what could go right, really paid off for these managers.

Russ Kinnel: Yeah, it really did.

Don Phillips: Great. Well thanks for sharing your thoughts with us today and congratulations to all of the winners. Thank you.

[END OF RECORDING]

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