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Our Finalists for Domestic-Stock Manager of the Year

Some old favorites make the list again.

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It's time to announce the final list of nominees for Morningstar Domestic-Stock Manager of the Year. As always, the list has been whittled down by our fund staff, and we'll announce the winner from this list in early January.

First, a short review of our criteria for Manager of the Year. We seek to reward managers who have done right by shareholders over the long haul. Therefore, we emphasize long-term returns as well as those for the calendar year. Having an outstanding year is important, but it won't get a manager anywhere unless he has made money for investors over time. In fact, that's why the likes of Davis and Feinberg, Lyon, and Dodge & Cox are again in contention this year.

We also place a high value on stewardship. Portfolio managers and the companies they work for are widely dispersed throughout the spectrum when it comes to being good stewards. Although a big short-term return may catch your eye, it's the managers who really are grounded in serving fundholders who will make you money over the long haul.

Finally, we look for managers who have added creative new approaches to the investment landscape rather than following what happens to be in fashion. In order to produce superior returns, a manager has to be willing to stray from the crowd, even if that means that he will be well off the leaders' charts for certain periods.

In any case, in alphabetical order, here are this year's finalists.

Bruce Berkowitz  Fairholme Fund (FAIRX)
It's refreshing to see a fund grounded in old-fashioned values. Bruce Berkowitz launched this fund right around the same time that trendy tripe such as Jacob Internet, Merrill Lynch Internet Strategies, and Stockjungle.com Community Intelligence Fund were launched. But what a difference: Berkowitz launched a low-turnover, focused fund that would only invest when it found cheap, value-based opportunities. Berkowitz invests in the Warren Buffett mold: He looks for good businesses selling for reasonable prices, and he's not shy about concentrating assets in his favorite ideas. Some of his picks are blue chips like  ExxonMobil (XOM) and Berkshire Hathaway (BRK.A), but others are unusual picks that he bought after intensive research. For example, the fund made a killing on  MCI (MCIP) debt, once it was transformed into equity.

The results of that approach have been awesome. The fund's five-year annualized returns of 15% top its peer group and just about any index you could find by a wide margin.

Chris Davis and Ken Feinberg  Selected American (SLASX)
Although financials could be a treacherous space in a rising rate environment, Davis and Feinberg have put up strong returns by finding winners among financials and in other places such as energy. To appreciate the fund, though, you have to step back and look at its long-term results. Its 10-year returns are an annualized 12.6%, compared with 9.3% for the S&P 500.

Davis and Feinberg maintain a tight focus on producing good long-term results for shareholders. To that end they trade seldomly, avoid short-term bets, and keep expenses low. You can see their focus in their stewardship grade. This is one of only a handful of funds that get excellent marks across the board. We're impressed by their compensation scheme, which partly rewards analysts and managers with shares of the funds if they produce superior performance. We're also impressed at recent efforts to lower fees. Davis and Feinberg have decided that they will charge a uniform management fee of 50 basis points to all clients. Then a fund can add on additional fees suitable for the sales channel. Thus, they rolled out  Selected American D (SLADX) which doesn't have the 12b-1 fee of the S shares and is available to those who invest directly. In addition, they were just hired to run  Clipper Fund (CFIMX) at a discount of 50 basis points to what the previous management charged.

The Team at  Dodge & Cox Stock (DODGX)
I bet you know the story here. Dodge has produced great long-term results by ignoring trends and focusing on what matters most. They have built a sound corporate culture that attracts some of the brightest minds in investing. They have built wonderfully boring funds that consistently outperform their benchmarks so that investors can make good use of them rather than getting whipsawed. They have also done so at an expense ratio that helps investors to compound their returns faster than most other stock funds.

In short, Dodge & Cox is among the very best fund companies around.

Rob Lyon  ICAP Select Equity (ICSLX)
Rob Lyon has shot the lights out at this fund and at  ICAP International (ICEUX) through an appealing relative value strategy. He builds a macroeconomic outlook that leads him to emphasize different sectors, but company fundamentals really drive the fund. This portfolio is also focused, and because Lyons trades around individual positions, turnover is much higher than at other value funds. The end result are portfolios unlike any other out there and returns that have smoked the competition.

I'm also impressed by ICAP's commitment to shareholders. All of their funds launched with expenses of just 0.80% even though that meant ICAP was losing money on them. The idea was to treat shareholders right from the beginning and wait for assets to catch up with expenses. That's a novel idea, but, not coincidentally, it's one that all five of this year's nominees have put into practice.

Sig Segalas  Harbor Capital Appreciation (HACAX)
Sig Segalas and the rest of the team at Jennison apply a classic growth strategy to investing. It's not the strategy but the execution that stands out. The team produces superior results because they've attracted excellent analysts and because they maintain a strict discipline. Segalas and crew buy large-cap firms that are growing revenues faster than the S&P 500 average and that boast traits such as strong R&D and defensible franchises. They don't throw that discipline overboard just because someone argues that this time it's different, and that's why the fund has produced strong 10-year returns of 9% annualized and 15% for the year to date. This year, names such as  Google  (GOOG),  Apple Computer  (AAPL), and  Whole Foods Market (WFMI) have driven success.

Lots of Other Good Performances
Although only one manager will win the award, there are quite a few who deserve recognition for strong single and long-term performances. You could make a good case for Will Danoff of  Fidelity Contrafund (FCNTX), Marty Whitman of  Third Avenue Value (TAVFX), Steve Romick and Bob Rodriguez of  FPA Crescent (FPACX) and  FPA Capital (FPPTX), respectively, Tom Marsico of  Marsico Focus (MFOCX), Clyde McGregor and Ed Studzinski of  Oakmark Equity & Income (OAKBX), Saul Panell of  Hartford Capital Appreciation (HCAYX), and John Keeley Jr. of  Keeley Small Cap Value (KSCVX).

Russel Kinnel has a position in the following securities mentioned above: HACAX. Find out about Morningstar’s editorial policies.