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By | 06-18-2014 12:00 PM

Danoff, Davis, Lynch: Stock-Picking Ahead of the Crowd

The past Morningstar Manager of the Year winners favor credit card firms, split views on Facebook, address China's importance, extol executives' foresight for future growth and disruption, and much more in this panel presentation at the Morningstar Investment Conference.

Janet Yang: Hi there. Good evening. Thank you everyone for joining us today. I am so excited and proud to present to you this next panel. The three managers here are really some of the best stock-pickers in the industry. All three have won Morningstar's Manager of the Year Award, so suffice it to say, they've made a lot of money for a lot of people over a long period of time.

To my left is Chris Davis from Davis Advisors. Chris has a few portfolios and funds under his belt, and one of them is Selected American Shares. He's run that fund for, going on 20 years now, and over that time its outperformed well over 90% of its large blend peers.

Next to him is Will Danoff. Will is probably best known for his work on Fidelity Contrafund, over his 24 years there. That fund has outpaced the large-growth peer by more than 400 basis points a year.

Finally last, but not least is Dennis Lynch from Morgan Stanley. Dennis and his team have amassed a pretty nice record, as well, and a particularly strong 2013 allowed them to become one of the most recent Manager of the Year Award winners. And he received that award just this past January.

So, the three managers here to some extent have gotten that success, I think, by focusing on companies that have strong competitive advantages. We're here today to talk about those companies, talk about those competitive advantages, which companies have them, which don't, how that competitive edge gets sharpened over time or maybe dulls, and who are the winners and losers.

We'll make sure to save the last 15 minutes or so for audience questions. But for now, let's start with the kind of big picture.

The three of you look for, I think, companies with strong competitive advantages, but you do approach it in different ways. Let's start with you, Will, first. You keep a pretty arduous schedule, I think, where you are meeting with four or five companies and their management teams every day; that goes to about 20 a week or more. Can you tell us what are you trying to suss out during those meetings about a company's competitive edge that you might not be able to find from filings or from an investor presentation?

Will Danoff: Janet, that's a really good question. I will say that I once talked to Warren Buffett. The first time I met Warren Buffett, and I said, "You must have a good gig. You get to talk to lots of companies. Your CEOs tell you what's going on." And he says, "Don't listen to any CEOs because a good CEO is going to tell you what they think you want to hear." And he said it's all in the numbers.

I guess, if you play to your strengths, Fidelity, as you said, Janet, sees a lot of management teams. They come around and give us updates because if we are not the largest shareholder, we could be the larger shareholder, and I just try to make sure I understand what management is trying to accomplish.

I'm sure Dennis and Chris feel the same way. What are you doing? What are your highest priorities? What do you think of China? How is the Internet going to affect you? Issues that we all read about every day, how are these going to affect your businesses? But mostly, what is your strategy? What is your competitive differentiation? What is a real value proposition to your customers? And you know, you want to try to assess the management team.

We have all sat across the table from managements. Are they engaged? Are they excited about their business? Do they know their business really well? Do they think long term? Do they think about their customer? And you'd be surprised. Over the course of a month, if you are seeing 80 companies, there are one or two that do stand out.

Chris Davis: And sometimes they just jump of a page. We were talking backstage about Bobby Kotick and Activision, a company that we own together, and every once in a while, you meet somebody and they really do just jump off the page in terms of their numeracy, their energy, their engagement, their value discipline, and you're exactly right. You see 20 and one jumps out of you, and you think about the outsider CEO. That sort of culture, when you see it, boy, you know it.

Danoff: Yes. And then I mean also part of it is, you get to monitor what these executives are saying, and we've all been doing this for a long time, so, over 10 or 15 or 20 years, you start to realize this management team, Chris goes way back with the Sandlers. They do what they say they are going to do. They've got a very profitable model. They reinvest their capital wisely. They don't overspend at the top. They tend to acquire and get stronger at the bottom. Part of it is just watching what these companies do, part of it is just looking at the long-term record, and saying, "Wow." I was with a company today which has been around for about 20 years, and they've done a really nice job. And you can just sort of say, "I better pay more attention." I kind of missed the first 20, but I don't want to miss the next 20 years.

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