Five Nominees for International-Stock Manager of the Year

A couple of weeks ago, we revealed our five nominees for Domestic-Stock Manager of the Year for 2006 and explained why each one made the list. Here we'll follow suit with the five nominees for International-Stock Manager of the Year.

The previous column outlined the criteria involved in the selection process, so we won't restate all of it here. However, it's worth repeating the most important fact: While we require the nominees to be enjoying strong performance this year, our Manager of the Year honors are not a reward for just one year. Equally critical are the managers' long-term records and other factors such as a sound strategy and manager commitment toward the funds' shareholders.

The international list features fairly well-known names, including two former winners of the award, along with managers who are probably less familiar to readers. Three of the nominees were featured in an August column that included a preliminary list of potential candidates as of that time. We should note that the managers who were cited in that column but who don't appear on this list didn't do anything wrong; we still consider them fine managers. For the record, a number of fine international managers didn't appear on either list this year. With so many worthy investors leading international funds these days, it's simply tough to make the final cut.

It's also worth noting that the combination of strong markets and strong currencies has propelled most international funds to high returns this year. Surprising as it might seem, a 20% gain wouldn't even have landed in the top half in any of the broad all-foreign categories.

With that background, here is the list of nominees for International-Stock Manager of the Year (in alphabetical order).

Hakan Castegren and Team
 Harbor International (HAINX)
Castegren won this award in 1996, and the fact that he appears on the list 10 years later means he obviously fulfills one key criterion for consideration: a lengthy record of success. Although the fund has had some periods in which it has lagged its peers--most recently in 2004--Castegren obviously hasn't lost his touch since winning the award a decade ago, for this fund has the fourth-best 10-year record of the 34 foreign large-value funds that have been around that long.

In recent years he has shared duties with a compact group of talented and very experienced analysts who know the portfolio inside and out and who are as strongly committed as Castegren to the fund's flexible-value style. Flexible in this sense doesn't mean the strategy changes with the winds; rather, it means that long before value managers started talking up  Microsoft (MSFT) as a value play, this fund was buying up technology-related shares rarely found in value-oriented portfolios. This year the fund is beating roughly 90% of its foreign large-value rivals with a 29.3% gain through Dec. 13 that also trounces the MSCI EAFE Index. Among other things, it was helped by a large stake in industrial-materials stocks. One other note: It's encouraging to see that this team has not been hampered by the rapid growth in the fund's asset base in recent years.

Hassan Elmasry and Team
 Van Kampen Global Franchise 
This is an unusual world-stock offering. It owns just a small number of companies that meet strict standards: They must provide a product or service that's hard to replicate and must have sustainable earnings and low capital outlays. That approach often results in a portfolio with high concentrations in just a few sectors and nothing invested in entire regions. Currently, for example, it has about 60% of its assets in a diverse array of consumer-goods companies, ranging from tobacco and alcohol giants to  Kimberly-Clark (KMB) and  Unilever (UL). It has no holdings in Japan--a substantial portion of most rival portfolios--or anywhere else in Asia. With no emerging-markets exposure, the fund has been at a disadvantage for years, as stocks in those regions have outperformed and rival funds show no hesitation in owning them. A complete lack of energy stocks also hurt until this year. Yet the fund's trailing five-year return lands in the world-stock category's top decile. This year it's beating about 70% of its peers in that group, despite losing ground in the past few months as energy stocks have rebounded.

David Herro
 Oakmark International (OAKIX)and  Oakmark International Small Cap (OAKEX)
Herro has been an excellent manager for a long time--his 14-year tenure at Oakmark International and 11-year reign at Oakmark International Small Cap are among the lengthiest in the foreign-fund arena--but he has never won this award. This year, Oakmark International Small Cap has the gaudier gain. With a 31.8% return through Dec. 13, the small-cap fund is beating 95% of its peers in the foreign small-/mid-value category, propelled by strong performance from picks in a variety of different areas. Herro has run that fund since its 1995 inception, sharing duties for many years with Michael Welsh, who left the fund's advisor, Harris Associates, in early 2006. (Chad Clark, who became a comanager in early 2005, remains in place; he and Herro work with a group of in-house analysts.) That fund has an excellent long-term record as well as a boffo 2006 showing.

Meanwhile, Oakmark International, the bigger of the two offerings, has also performed very well both this year and over its history. (Welsh was a comanager on this fund as well, for a decade in this case.) There is little if any overlap between the two funds, for the all-cap Oakmark International, which owned a substantial number of small and midsize companies in its early days, has been finding more opportunities in large-cap territory in recent years. Having such success with both funds is a testament to the effectiveness of Herro's--and Harris Associates'--value philosophy.

Bernard Horn
 Polaris Global Value (PGVFX)and  Quantitative Foreign Value (QFVOX)
The funds run by Bernard Horn are far smaller than those managed by the others on this list, and it's fair to assume that he is much less well-known as well. But there's no reason he shouldn't be more familiar to investors interested in top-quality international funds. He runs a small, independent advisory firm, Polaris Capital Management, with just a few associates. That could seem like a handicap, but it hasn't been. Polaris Global Value, created in 1998, has the top five-year return in the world-stock category, and Quantitative Foreign Value, a foreign-only offshoot that he subadvises, tops the foreign large-value category over that period. Both funds are beating 80%-85% of their respective rivals so far in 2006.

Horn uses quantitative screens to narrow down the immense number of global companies to a manageable amount, but then he uses plenty of bottom-up analysis combined with his insights about social and economic trends to choose the final candidates. He often buys unusual, smaller stocks rarely found in any significant amounts in other funds and tends to have very low turnover. The country and regional weightings of his portfolios tend to differ markedly from those of the indexes.

Rudolph-Riad Younes and Richard Pell
 Julius Baer International Equity (BJBIX)
This duo won our award for 2002, and typically we like to wait for a while longer before rewarding the same managers again. But their showing since their last award--and the way they've achieved it--made it impossible to keep them off the list of 2006 nominees. They've run this fund since 1995, and it has the best 10-year return of the roughly 90 funds in the foreign large-blend group with records going back that far. They use a very unusual strategy that relies much more on top-down outlooks and a variety of broad themes than most other managers do. Such predictions can easily backfire, but these managers show an uncanny ability to get it right an overwhelming percentage of the time. Since their 2002 award, this fund has continued performing superbly and has attracted a tremendous amount of attention; it now has more than $20 billion in its coffers.

Because much of the success enjoyed by Younes and Pell owed to the strong gains of smaller and midsize stocks, which tend to play lesser roles in big funds, partly because they're often not easy to buy and sell in large amounts, it was questionable if they could keep up the pace as the fund's asset base grew and grew. So far the answer is yes. The fund's trailing three-year return is of the category's best; this year the fund has the third-best gain in the entire group. One reason: The managers gathered great returns from a 6% position in Turkey--much more than competitors and indexes--early in the year yet cut that position drastically before Turkey crashed in the May-June emerging-markets swoon. (And unlike other emerging markets, Turkey's market has struggled since.) Other unusual plays, such as moves into Scandinavian banks and a relatively large Russian stake, have also paid off in spades.