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2009 Managers of the Year

Jason Stipp

Jason Stipp: I'm Jason Stipp for Morningstar. As is our early January tradition, we announced our 2009 Fund Managers of the Year today. Here with me to talk about the winners is Morningstar's Karen Dolan. She's the director of mutual fund analysis here at Morningstar. Thanks for joining me, Karen.

Karen Dolan: Thanks, Jason.

Stipp: So, before we get started, the Manager of the Year award looks back over more than just 2009, over several managers' histories, but we do specifically want to look at 2009 and find an exemplary year. So as you were looking at the candidates this year, what themes from 2009 were popping up and were part of the discussion of choosing the winner?

Dolan: 2008 was a theme this year. Usually it's not the two-year award or the three-year award. It's the one-year award. We do want to look for good, risk-adjusted results over the long term: 5, 10 years. We like to see that.

But this year, we really did pay close attention to what happened in 2007 and what happened in 2008. The reason for that is because a lot of the winners, the ones that put up the most spectacular gains in 2009, were the ones that lost their pants in '08. And as you know, the arithmetic of losses means that it takes a lot bigger of a gain to make up for very big, 50%, 70% losses, which a lot of funds put up in '08.

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Stipp: OK. So the winners this year, we were looking at what they did in 2008 and how that paid off for them in 2009, and really seeing, through a longer cycle, what kind of value they were adding for shareholders.

Dolan: Exactly.

Stipp: OK. So for the 2009 Domestic-Equity Manager of the Year, who was the one who came out on top?

Dolan: Bruce Berkowitz, the Fairholme Fund. Bruce had another great year. In some ways, it was a surprise. It's because he did so well in '08. And his cash was his top holding in '09. So, given a 17% on average position in cash and the fact he owned no tech, he didn't get involved in any of those really beaten-up financials, a lot of the stuff that rallied, it was a bit of a surprise to see him post a 39% gain and do so well in '09.

But what happened with Bruce is he revamped his whole portfolio in '08. He actually did very well in '08 doing it. He cut back on energy just as it was about to fall off a cliff. He was very well-positioned in health-care and defense stocks. They were all very controversial at the time, especially as it was an election year, so there were a lot of political uncertainties surrounding those stocks. And he's just come back with a vengeance in '09. He didn't lose as much in '08, and then he has posted very, very strong gains in '09.

Stipp: So in 2009, you said he had a cash position as well, so what were some of the things that led to his outperformance in 2009?

Dolan: It's all stock-picking with Bruce Berkowitz. He has 20 stocks in the portfolio. He holds big positions in them. Some of the companies that did particularly well for him were Sears. Sears has been a controversial stock for a long time, but he really believed in the management. He likes the business model. He likes the cash flows coming from it. He liked that it was controversial.

AmeriCredit is another one that was in his top five and did very well for him. But if you look down the top 20, which there are only 20 stocks, there were a lot of success stories in there in 2009.

Stipp: So certainly very critical, with such a concentrated portfolio.

Dolan: Right.

Stipp: So, moving along to the International Stock Manager of the Year award, who came out on top on that front?

Dolan: American Funds EuroPacific Growth. And that's a team. There are eight members on that team, and American Funds slices the portfolio between those portfolio counselors. So they're each independently running a slice of the portfolio. It's a huge fund, $93 billion. It's the largest international fund out there. With so many managers, you'd think this fund might have a hard time really being at the top of the pack, but it's pulled it off. Pulled it off in '08, it pulled it off in '09.

A lot of the things that helped it in '09 are part of its DNA. The team has historically had a large emerging-markets position. They do very good research there. They've been doing international research for 50 years, longer than any other team we're aware of. And they picked the right companies. That was a handicap in '08, yet they still managed a top-quartile finish in '08, despite having a large emerging-markets stake.

So, their ability to pick the right places in emerging markets, avoid the big disasters, and come into 2009 well-positioned and sticking with their core strength really paid off for those many, many shareholders.

Stipp: So, certainly, it seemed like emerging market's one of the areas that some could consider overheated, but if they've got the stock-picking, perhaps even with a good emerging-market stake, they'll be able to show a better performance over time.

Dolan: Right. I think '08 was a big stress test, because clearly they had the wind at their back leading into that year, when emerging markets were hot before that point. They tanked hard. And I think that their picks were put to the test. Their research was put to the test. Not to say that they didn't suffer. They lost 40% in '08. That was still a top-quartile finish. But I think that that was probably the biggest stress test this team's going to face for a while.

If emerging markets suffer again, I do think this fund can have a hard time, but I think that their research really stood the test this last go-around.

Stipp: So, for the last award, the Fixed Income 2009 Fund Manager of the Year, who came out on top there?

Dolan: This was the Loomis Sayles Bond team: Dan Fuss, Kathleen Gaffney, Matthew Eagan, and Elaine Stokes. This team's a little different than the first two, the equity award and the international equity award. And it actually did struggle, from a relative-performance standpoint, in 2008. The fund lost 22% in '08.

They're deep value. They go anywhere. They were finding bargains. And arguably, they dove in too soon. They really liked what they were seeing in terms of values they were buying in late '07, early '08. They were starting to scoop up some junk bonds, high-yielding credits, emerging markets.

So, unlike some of our other teams, they struggled a little bit. But when you look over the 5- or 10-year period, and then you look at '09, it really showcases that this team knew what it was doing. It was putting good research behind its buys. It was buying the right securities, ones that really did pay off for them in 2009.

Stipp: So, really, they had to ride through a bit of a rough patch in 2008 because they sort of were early into some of those positions. So what has paid off for them then in 2009, after they sort of rode through that storm?

Dolan: Well, they bought a lot of bonds that were in deeply distressed situations from a liquidity standpoint. They were out there buying bonds that people had to offload. Some of those were high-yielding corporate credits. Others were a little bit higher quality, actually.

They were able to scoop up some bonds that had a higher quality nature as a result of the liquidity crunch. Their emerging-markets debt exposure paid off for them. They've also proven to be very good currency investors, so picking the right spots in currency has also been something that worked for them in '09 and has worked for them over the longer term.

Stipp: Well, Karen, thanks for joining us, and thanks for all of that context on the winners.

Dolan: Thank you, Jason.

Stipp: For Morningstar.com, I'm Jason Stipp. Thanks for watching.