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Fund Spy

Early Favorites for Fund Manager of the Year

Who's your pick for 2004's top domestic-stock fund manager?

As we head toward the end of the third quarter, I start thinking about our annual Fund Manager of the Year awards. We seek to recognize shareholder-friendly managers who have produced outstanding returns in the current year and over the long term. We also look for managers who stuck with their investment style through good years and bad rather than bending to the prevailing winds.

Mr. Spitzer and Mr. Market have combined to narrow the field quite a bit. Plenty of firms don't look as shareholder friendly as they did before Sept. 3, 2003, when news of the fund scandals broke. A rocky market since that time has also weighed heavily, creating difficulties for the whole industry but providing an environment in which these Fund Manager of the Year candidates have been able to prove their skills.

Here, then, is a review of some managers who appear to have a shot at winning Domestic-Stock Manager of the Year for 2004. It's not meant to be a complete list or a formal nomination. It's just a list of the early favorites--but many readers will notice that this year's list is full of veteran managers we've long held in high esteem. If I missed your favorite manager, please send me a note. High-cost, trend-chasing managers need not apply.

Management Team
 
Dodge & Cox Stock (DODGX)
Taken alone, they are merely Harry Hagey, A. Horton Shapiro, John Gunn, Kenneth Olivier, Bryan Cameron, Katherine Drake, Charles Pohl, Gregory Serrurier, Wendell Birkhofer, and David Hoeft. But together they are the force behind this perennially successful fund. Dodge & Cox wins big points for closing both this fund and Balanced Fund in order to ensure that they can continue to run money as effectively as in years past.

They also score big for keeping expenses low. Dodge & Cox Stock charges just 0.54%. If someone tries to tell you that higher expenses pay for better management, ask them how much better that management team is than Dodge & Cox. The firm's ability to unearth solid companies trading at low prices has consistently enabled it to put up great performances, a trait demonstrated once again throughout the past year. Dodge & Cox delivers all that--with considerably less risk than most stock funds.

Robert Lyon
 ICAP Select Equity  
We go from an extremely popular fund to one that has, remarkably, escaped investors' notice. The ICAP team has a long history of posting strong returns by blending large-value strategies with an eye for macroeconomic analysis. This analysis makes ICAP confident that the cyclical names it holds aren't about to fall off a cliff. Lyon has posted top decile returns this year and for the trailing five. ICAP also gets big points for capping fund expenses at just 0.80% even though the funds remain quite small.

Will Danoff
 Fidelity Contrafund (FCNTX)

It's kind of amazing that Danoff hasn't won Manager of the Year yet. Since taking over Contrafund in 1990, Danoff has generated annualized returns of 15.29% versus 11.53% for the S&P 500. That Danoff has been able to overcome a huge asset base makes his accomplishment even more impressive. (Although I wish the fund were closed.) Danoff has done this by being a stingy growth investor. He's looking for companies with decent growth rates, but he keeps an eye on valuations.

He's also good at staying ahead of the curve. He bailed on tech stocks a few years back but ratcheted his stake back up in 2003. The fund's 4% year-to-date gain won't enable anyone to retire early, but it's still 2 percentage points better than the S&P 500.

Chris Davis and Ken Feinberg
 Selected American (SLASX) and  Davis New York Venture (NYVTX)

These guys do fundamental investing the right way. The get to know management well, build detailed models like accounting geeks, and insist on a margin of safety when assessing a stock's price. They're also willing to stick their necks out by making unpopular investments. For example, they sometimes hold on to a stock that's made a spectacle of itself ( Tyco  and  Lucent Technologies  come to mind) if they think the stock will rebound. Meanwhile, you can bet other managers are jumping ship to avoid facing tough questions about why they're holding an ugly stock. Davis and Feinberg would rather field the hard questions and get back a little of the lost shareholder money.

They also have exemplified "shareholder friendly" in more ways than I can spell out here. A few of the highlights: They rolled out a cheaper share class even though that meant incurring the wrath of Schwab. They actively campaign against greedy corporate options grants. And they have a "best in breed" compensation structure that rewards managers and analysts based on long-term performance.

Brian Rogers
 T. Rowe Price Equity Income (PRFDX)
For nearly 20 years, Rogers has demonstrated that a dull strategy can be a beautiful thing. He looks for cheap stocks paying handsome dividends, and he avoids big stock or sector bets. When executed as well as he's done it, this strategy leads to wonderfully consistent returns. In a bear market this fund is your best buddy. It might lose some money, but much less than the overall market. Moreover, as T. Rowe's CIO, Rogers deserves a lot of credit for the high quality of work produced at the firm.

R. Michael Shanahan, Timothy Armour, Claudia Huntington, and C. Ross Sappenfield
 American Funds Amcap A (AMCPX)

Speaking of great fundamental investors, they've got quite a few at American. Shanahan and company have done a great job running a mild-mannered growth fund. American has some of the most experienced managers and analysts around, and it shows in this fund's results. Its 1.5% year-to-date return and 12% annualized 10-year return are crushing the large-growth competition. You could argue that 1.5% is nothing to write home about, but it's the hard years when money managers really earn their keep. They protect against losses, keep shareholders in the fold, and can add value in sideways markets. Oh, and expenses are nice and low.

Brian Berghuis
 T. Rowe Price Mid-Cap Growth (RPMGX)

Considering the kind of record he's built over the years, it continues to amaze us that Berghuis still manages to keep such a low profile. Over the years, he's adeptly maneuvered this fund to some of the best returns in its category. Not only is Berghuis good at spotting young firms with promise--which he then holds for years--but he runs a contrarian growth portfolio that's delivered nicely in up markets and protected the downside. The relative stability of the fund's asset base shows that he's made money for a lot of people over the years.

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