Five Nominees for Domestic-Stock Fund Manager of the Year
Who would you pick as your favorite for Manager of the Year?
Snow is on the ground and bowl games will soon be on the air. That can mean only one thing: It's time to nominate candidates for Morningstar Domestic-Stock Fund Manager of the Year.
But first, let's review our criteria. We look for managers who have made a lot of money for a lot of people over a long period of time. We also want managers who had a good calendar year. In addition, we look for managers who have blazed a trail with original research and who stick to their strategies through thick and thin. We also look for managers who are good stewards. That means they put shareholders' interests first rather than try to extract every last penny from shareholders.
So, let's take a look at our five finalists which I've listed in alphabetical order.
Brandywine Blue (BLUEX) and Brandywine Fund (BRWIX)
D'Alonzo and the analysts at Friess Associates practice a surprisingly effective brand of momentum investing that is based on human intelligence rather than speedy computer programs. They spend tons of time calling, e-mailing, and visiting stores, customers, and company management in order to get the very latest information on sales trends so that they can buy the companies most likely to produce upside earnings surprises. D'Alonzo tempers that with valuation discipline but the funds are still pretty aggressive. (Blue is a large-cap fund whereas Brandywine is all-cap.) This year Brandywine Blue is up 24% and Brandywine is up 23%, and they boast strong trailing returns as well.
D'Alonzo and team also score highly for stewardship. D'Alonzo invests heavily in the funds he runs, and he writes insightful shareholder letters.
Fidelity Contrafund (FCNTX) and Fidelity Advisor New Insights (FNIAX)
Talk about making a lot of money for a lot of people. Will Danoff is having a great year with more than $90 billion in assets combined in the two funds. In fact, he's had many great years with a lot of investors on board. Since Danoff took the lead at Contrafund in October 1990 through Dec. 10, 2007, he has produced annualized returns of 16.5% versus 12.4% for the Wilshire 5000. Ten years ago, the fund had $31 billion in assets, and it has returned an annualized 10.9% since compared with 6.2% for the S&P 500. Danoff seems to always be one step ahead of the market. He has made brilliant moves into and out of technology, energy, and precious-metals stocks. This year, Google (GOOG), Apple (AAPL), and Berkshire Hathaway (BRK.A) have been big winners. There are other funds that can make that claim but Danoff bought Google at the IPO, Berkshire in 1999, and Apple in 2003 when they were much cheaper than they are today.
It's not easy to define his growth leaning, sort of contrarian, kind of macro-economic influenced, rather fast trading style, but whatever he's doing has lead to consistent success.
James Drasdo, Dina Perry, Michael Kerr, Ronald Morrow, Brady Enright
American Funds Fundamental Investors (ANCFX)
Like most good American funds, this one has been quietly effective. This year's 16% year-to-date return is impressive considering that it's 600 basis points ahead of the average large-blend fund and 700 ahead of the S&P 500. But it's the fund's longer-term record that's really impressive. It has beaten the S&P 500 by more than 100 basis points in each calendar year since 1998. That means it beat the index through the dot-com boom and bust, when value crushed growth and vice versa, through recession and rapid economic growth. Going back 15 years, the fund's annualized returns are 13.15% compared with 10.64% for the S&P 500. As at other American funds, this is run by multiple managers who use varying investing styles to run their portion of the portfolio, but there is a strong underlying strategy of seeking undervalued companies through fundamental analysis. In their collective wisdom, the fund's managers made some savvy calls with a big weighting in energy and foreign stocks and a very light weighting in financials. On the stewardship front, they get big points for an expense ratio of 0.58% which is lower than any of the other nominees.
CGM Capital Development (LOMCX) and CGM Focus (CGMFX)
There has been lots of marketing about getting hedge-fund strategies in a mutual fund format. Most such funds are costly and have had disappointing performance. Yet here's Heebner who has been running mutual funds since 1976 using hedge-fund-like strategies with modest costs. This year has been the sort of which legends are made. At CGM Focus, Heebner has made a mint by buying metals producers and energy names. He saw trouble in mortgages and shorted Countrywide Financial (CFC), too. All told, CGM Focus is up an amazing 75% for the year to date and CGM Capital is up 34%. CGM Focus also boasts an outstanding 10-year record. CGM Capital has a weak 10-year record, however, but if you go all the way back to Heebner's start at the fund, it's 500 basis points per year ahead of the Wilshire 5000.
Heebner's superaggressive style means there are some blowups, however. And he's one of the few managers who doesn't give us regular interviews so it's been tough for us to warm up to his funds and grow comfortable enough with the risks. That said, we want to be sure to recognize the outstanding job he's done over the long haul for investors.
Excelsior Value & Restructuring (UMBIX)
This was a treacherous year to be a value investor. Anything financial or real estate related got clobbered. Despite having about the same financials weighting as the S&P 500, David Williams is having an outstanding year with a 13% gain so far in 2007. His financials actually did okay as names like Metropolitan Life (MET) avoided the subprime mess. Just as important, he owned a bunch of energy and copper names that earned big returns.
Williams takes a patient low-turnover approach to finding companies and industries that are restructuring and ready to earn healthy returns on equity. I mentioned Danoff's prescient buys and Williams has plenty to match. He bought Loews (LTR) in late 2001 when no one else would touch it because of its tobacco exposure but his sum of the parts analysis indicated it was worth much more; the stock is still a big holding in the fund. In 2003, he bought Consolidated Energy (CNX) in 2003 well before others had figured out the prospects for this producer of coal and coal methane.
Unlike some on this list, Williams has produced outstanding long-term results with a small staff--relying instead on Street research to help get what he needs. (No, he doesn't care what the actual recommendation is.) The fund is about to hit its 15-year mark and Williams has produced a remarkable 16.6% annualized return in that stretch. He's not well-known to the investing public, but a number of fund managers we speak to are big fans who avidly track his stock picks.
There were many more than five managers who enjoyed a great year, so I wanted to recognize a few:
Russel Kinnel has a position in the following securities mentioned above: RYSEX. Find out about Morningstar’s editorial policies.