Five Nominees for Domestic-Stock Manager of the Year

It's that time of year again--time to choose a fund Manager of the Year. Toward the end of each year, Morningstar analysts nominate the managers they feel are most deserving, and at year's end we choose the winner.

Although it's called Manager of the Year, we look at much more than single-year returns. We seek to reward managers who have made a lot of money for people over the long haul.

We look for managers who are great stewards of shareholders' money, meaning they always do the right thing. They keep expenses and trading costs down. They write thoughtful shareholder letters that explain what's really going on at the fund. They close a fund in a timely fashion. They invest a substantial sum of their own money in their funds.

Finally, we look for managers with well-designed strategies who aren't afraid to do something different from the crowd. So, with that preamble, here are our five finalists for Domestic-Stock Manager of the Year.

Bruce Berkowitz
 Fairholme Fund (FAIRX)
Lead manager Bruce Berkowitz has done a remarkable job applying the teachings of Ben Graham and Warren Buffett. He runs a focused, low-turnover portfolio where the strategy aims to find great owner-managers whose businesses are trading at fair prices. It's very much about the jockey more than the horse, but Berkowitz and comanagers Larry Pitkowsky and Keith Trauner are generally quite choosy about both. That said, they also invest a slug of the portfolio in special situations such as compelling turnaround plays. Finally, they have long held a big cash stake to enable them to be nimble and aggressive if most investors get spooked.

This year, performance has been driven by investments from both the main and secondary strategy. In the great managers camp there's top holding Berkshire Hathaway (BRK.A) and  Sears ; in the special situations fold there's  Phelps Dodge (PD). Fairholme bought Phelps Dodge because its planned acquisitions had depressed the share price. However, the hunter became prey, and the copper giant agreed to be bought by  Freeport-McMoRan Copper & Gold (FCX).

Mason Hawkins and Staley Cates
 Longleaf Partners (LLPFX)and Longleaf Partners Small-Cap (LLSCX)
Few managers embody the ethic of making money for shareholders over the long haul and putting shareholders' interests first better than Mason Hawkins and Staley Cates. Take a look at their 10 Principles, which is right on their home page. I think every money manager should put their principles on their home page, too. Another thing few if any managers can match is the extent to which Hawkins, Cates, and the rest of the firm's employees invest in their funds.

Bill Miller is a believer that you have to risk investor scorn and buy controversial stocks in order to beat the indexes over the long haul, and Longleaf embodies that idea, although their brand of value is different from Miller's. The idea is to protect shareholders' money by insisting on a discount of at least 40% to the team's estimate of intrinsic value. If not enough stocks make the cut, management will hold cash, and if that state continues for a while, they'll close a fund. In fact, both Partners and Partners Small-Cap are closed.

This year has been vintage Longleaf. They bought controversial names several years ago, saw them go down some more, and then were patient enough to see the rebound. This year,  General Motors (GM),  DirecTV , and  Walt Disney (DIS) have been big winners after long periods of disappointing investors. Yet, you can still see how things work when they get in. Management has been buying  Dell , and so far it hasn't looked good, but I wouldn't bet against Longleaf. So far this year, the fund is up 22.5%, for the past 10 years it returned 12% annualized, and for the past 15 it's up 15% annualized. All of those figures have blown away just about any stock index you could mention. To put this into perspective let's look at the fund's cumulative returns since its 1987 inception: 1294% versus 657% for the S&P 500 and 625% for the Wilshire 5000.

Nicholas Kaiser
 Amana Trust Growth (AMAGX)andAmana Trust Income (AMANX)
Nicholas Kaiser has produced a 10-year return of 13.37% at Amana Growth Fund that whips the S&P 500 and tops 95% of all large-growth funds. It's a unique fund that is designed for Muslim investors. Kaiser chooses stocks from a list that is screened for Islamic investing principles. These require the fund to avoid alcohol, tobacco, pornography, pork, and money lending. Kaiser runs a superlow turnover growth-at-a-reasonable-price strategy.

Big winners this year include  Intuit (INTU), Manitowoc (MTW), and  American Eagle Outfitters . All told, the fund is up a nifty 14.75% this year.

Arnie Schneider
 Schneider Value  and  Schneider Small Cap Value 
Schneider fits nicely with a couple of themes running through this year's nominees. He doesn't care about marketing and is happy running a modest asset size so that he can focus on managing money, not people. He also shows tremendous respect for shareholders by keeping expenses a dirt cheap 0.85%, even though his funds are small, and by closing Small Cap Value at just $100 million in assets.

Schneider, a Wellington alumnus, is a deep-value investor who is particularly adept at buying cyclical stocks near the bottom when things look their darkest. In recent years he's made a great move into and out of energy, and this year he's had success with some beaten-down transportation stocks. Interestingly, he, too, bought Dell. Schneider Value is up 22% on the year and 19.7% annualized for the past three years.

Jay Sekelsky
 Madison Mosaic Investors (MINVX)
Sekelsky has put up good returns, but under the circumstances, those returns look even better. Sekelsky focuses on blue-chip stocks--a space that's been out of favor for six years. The fact that he's put up strong returns despite having a huge average market cap of $58 billion is quite impressive.

His strategy is to find consistent growers selling below their industry peers. He also wants solid management and strong cash flow. Favorite stocks include both  Sysco (SYY) and  Cisco Systems (CSCO),  Novartis (NVS),  Berkshire Hathaway (BRK.B), and  Microsoft (MSFT). The fund is up 14.41% for the year to date and 8.25% for the past 10 years.

Who Won in 2005?
Click here to see last year's winners.