Morningstar Fund Managers of the Year 2001

None of Morningstar's three Fund Managers of the Year made you rich quick in 2001. We’ve just suffered through the worst year for the markets in nearly 30 years--leaving most funds in the red. However, in tough times like these, managers really earn their keep. Our Managers of the Year made money for shareholders though the sky was falling and lesser managers were suffering horrendous losses.

When choosing a Manager of the Year, we don't just look for funds that have scored great gains in a single year--or even over the long haul. In addition to prizing a manager's ability to generate exceptional returns, we look for those who have shown a willingness to align their interests with shareholders’. Additionally, we favor those managers who have exhibited the courage to stay with their strategies in order to produce superior risk-adjusted returns in the end.

As it turns out, a surprisingly large number of strong candidates exhibited those qualities in spades in 2001. Three clear themes emerge from the names we selected this year. Not only are all three winners value managers who prize Benjamin Graham's "margin of safety," but they have all exhibited a willingness to be extremely candid with their shareholders. Finally, they're all experienced hands who reacted with calm amid the squalls of 2001.

Domestic-Stock Manager of the Year
Bill Nygren--Oakmark Select Fund
Bill Nygren’s performance in five years at the helm of Oakmark Select (OAKLX) has been flawless. We’ve had a tremendous variety of market environments over that span, yet he has surpassed his peers by a wide margin in each year. In 2001, he beat his category average by more than just about any other manager: Oakmark Select returned 19 percentage points more than the typical mid-cap value fund last year, and a full 38 percentage points more than the S&P 500 index. Over the past five years, the fund has returned an annualized 26.75% per year, that's 16.05% better than the S&P 500 per year. This year’s killer picks include H&R Block (HRB), Tricon Global Restaurants (YUM), and Office Depot (ODP).

Over time, Nygren has scored with both typical and nontraditional value picks. Some of his earliest successes were with true-blue value stocks such as First USA and McDonnell Douglas, both of which were taken over at huge premiums to the price Nygren paid for them. Although Nygren doesn't specifically seek takeover targets, it's no surprise that many of his holdings get acquired: He looks for companies that are trading at 60% or less of what a rational businessperson would pay for them. That may seem a recipe for deep-value investing, but Nygren has exhibited more flexibility than the typical value hound. He scored an enormous gain in 1998 with a bet on biotech giant Amgen (AMGN), for example. And when cable stocks took off in the late 1990s, as investors began to consider them backdoor Internet plays, Nygren holdings such as MediaOne posted huge gains.

Nygren has also shown a commitment to shareholders’ bottom line. He manages with taxes in mind, and that has enabled shareholders to enjoy nearly all of Oakmark Select’s returns, even after paying taxes on distributions. In addition, Oakmark closed Select before it got too big for Nygren’s concentrated style.

Finally, Nygren deserves kudos for his contributions to Oakmark Fund (OAKMX), which he has helped to turn around since taking over in 2000. He also deserves partial credit for the fund’s early record because he served as Harris Associates’ director of research until early 1998.

International-Stock Managers of the Year
Jean-Marie Eveillard and Charles de Vaulx--First Eagle SoGen Global
Few managers are as focused on capital preservation as these two. They only buy stocks with solid downside protection, and if they can’t find enough that qualify, they’ll hold cash or bonds. Owing to their caution, the fund was left out of the party in 1999, but it has made up for that weak showing more recently. First Eagle SoGen Global (SGENX) returned 10.45% in 2001's terrible market, even as nearly every other international fund was in the red, and it also returned 9.7% in 2000.

This team's long-term record is equally impressive. Eveillard and de Vaulx have whipped their peers over the trailing five- and 10-year periods. Talk about experience: Eveillard has been at this fund since 1979 and de Vaulx since 1987. (They also run First Eagle SoGen Overseas (SGOVX), which has a similarly admirable record.)

One reason these managers have succeeded is their patience. Even if a company they own remains overlooked by the stock market for years, they're confident that corporate investors will eventually take an interest in their mispriced picks. And they’re right: In the past two years, many of their holdings have risen sharply in price after takeover bids by other companies.

We also commend Eveillard and de Vaulx for their honesty with shareholders. In a recent semiannual report, Eveillard described top holding Buderus as a "dull" business that simply "manufactures residential boilers." No hype there. And in a chat with shareholders on Morningstar.com, Eveillard said that when his contract is up in three years, "I’m out of here." It will be a well-earned retirement.

Fixed-Income Manager of the Year
Bob Rodriguez--FPA New Income
Like Eveillard, Rodriguez absolutely hates to lose money. In his 17 years at the helm of FPA New Income (FPNIX), he hasn't finished a single year in the red. In 1994, when bonds got crushed, he still came through with a small gain. (We handed Rodriguez our Manager of the Year award for that year, too--back when we were just picking one winner.)

Rodriguez makes bold moves, but they’re usually designed to increase the safety level of the fund. To guard against inflation, he buys inflation-protected bonds and maintains a moderate level of interest-rate sensitivity. To avoid defaults, he evaluates junky credits with care. Despite that caution, Rodriguez has still put up big returns in rallies. The fund gained 12.33% in 2001, while the average intermediate-term bond fund was up 7.28%. If you look out over the trailing one-, three-, five-, and 10-year periods, the fund's returns rank in the top echelons of the intermediate-bond category.

We also like Rodriguez’s refreshing candor. Ask him about fund managers who bought into the Internet hype and he’ll tell you most of them should be fired for buying such ridiculous stocks. On top of that, the guy’s one heck of a stock-picker. We seriously considered him for 2001 Domestic-Stock Manager of the Year honors, too, because of his 32% return at FPA Capital .

Domestic-Stock Manager of the Year Runner-Up
Joel Tillinghast--Fidelity Low-Priced Stock
It’s a shame we couldn’t split the award in two. Few managers have made more money for more people than Tillinghast has. Fidelity Low-Priced Stock (FLPSX) passed the $2 billion mark nine years ago, yet it has continued to produce great risk-adjusted performance all the way to its current $12 billion in assets. Nearly every other small-cap fund that has passed the $2 billion mark has seen performance suffer or changed mandates to invest in mid- or large-cap stocks.

Low-Priced Stock's success is all the more amazing when you consider that the fund was growing larger even as Tillinghast's analyst support was shrinking. In the mid- to late 1990s, Fidelity's industry analysts were focusing more on the large-cap stocks that drove performance for all of the other big Fidelity funds. Fidelity has since built up its small-cap team, but Tillinghast has still shown tremendous willpower--and skill--in keeping his massive fund on the right path.

Fixed-Income Manager of the Year Runner-Up
Margie Patel--Pioneer High-Yield
Margie Patel has strung together three remarkable years at Pioneer High-Yield (TAHYX). She focuses more on issue selection than top-down concerns, and that has helped her to avoid some of the high-yield market’s disasters. Some larger high-yield funds that bet big on telecom issues lost more than 20% in 2000, yet Patel gained 15.86% because she downplayed that hard-hit sector.

The fund was similarly successful in 2001, which is all the more amazing when you consider that Patel invests about half the fund in busted converts--convertible bonds that trade like conventional bonds because their equity-option components are nearly worthless. Although convertibles didn't perform very well as a group in 2001, Patel has managed to pick some winners.

International-Stock Manager of the Year Runners-Up
Richard Pell and Rudolph-Riad Younes--Julius Baer International
While our winners produced outstanding absolute performance, these managers have done a great job on a relative basis. Since Pell and Younes took over Julius Baer International Equity (BJBIX) in 1995, the fund has put up top-third returns in every calendar year. When growth was hot in 1999, the fund smoked its peers with a 76.6% return. Yet unlike lots of 1999's winners, the fund didn't melt when tech got whacked in 2000. The fund lost 8% and landed in the top fifth of foreign funds, and it held up better than the competition in 2001, too. Pell and Younes have pulled it off by blending growth and value strategies in a fund driven by top-down calls.