Our Nominees for Fund Managers of the Year

It's that time of year again: time to name our nominees for the Morningstar Fund Managers of the Year. Each year we honor managers who have gone above and beyond the call of duty to do what's right for shareholders, deliver superior long-term returns, and produce strong results for the year to boot. We look for good stewards who have developed sound strategies. We will announce the winners on Jan. 5.

Our goal is to recognize these managers' contributions. It's not a buy list--our Analyst Picks do that job. Nor is it an award to the fund or the fund company--hence the name Manager of the Year. Finally, because the time period is different from our Manager of the Decade award, it's possible that someone could win both. In fact, there are a few managers nominated for both.

So, let's see the nominees. I marked past winners with an asterisk.

Fixed-Income Manager of the Year
Phil Condon and Rebecca Flinn, DWS Strategic High Yield Tax Free (SHYTX)
In the muni world, the cream has risen to the top. Funds that were too aggressive got burned in 2008, but Condon and Flinn's relatively conservative approach helped their fund lose less than its peers in 2008. It lagged its peers in previous years because of its conservative streak, but, when lower-quality credits got cheap, Condon and Flinn loaded up. Thus, the fund was able to roar back with a 35% gain this year, and now it is in the top decile for the trailing three-, five-, and 10-year periods. Their conservatism and flexibility has been vindicated.

Farnham, Kane, Landmann, Nucci*,  Metropolitan West High Yield Bond (MWHYX)
Like DWS, this fund ran to the cautious side of the high-yield marker but then got aggressive when junk bonds were going for fire-sale prices. Management has earned a 52% return this year, and its three- and five-year numbers are in the top 5% of high yield. Today, the fund is once more positioned to the cautious side given the huge rally in junk.

Dan Fuss, Kathleen Gaffney, Matthew Eagan, Elaine Stokes*,  Loomis Sayles Bond (LSBRX)
Fuss and his team know how to sniff out values in the bond world. And about this time last year, there were bargains galore. Fuss said it was the best buying opportunity he'd seen in his long career, and the fund's 36% return this year is proof. Even more impressive is this fund's 15-year record of 10% annualized returns. The managers didn't do it without taking risks, as evidenced by their 2008 loss, but generally they take risks wisely. They typically invest a sizable chunk of the fund in junk bonds and emerging-markets debt. Really, they'll go just about anywhere to buy attractive bonds. Many funds that would like to compete with Fuss and Gaffney have blown up over the past 15 years because they didn't have the research chops or discipline to avoid all the traps.

Jeffrey Gundlach and Philip Barach*,  TCW Total Return Bond (TGLMX)
Yes, he was just fired and didn't quite put in all 12 months at this fund, but Gundlach and team still deserve recognition for what they have achieved at the fund. He turned the fund's mortgage focus from a huge potential liability to an asset by battening down the portfolio for the subprime hurricane in 2007 and 2008. He owned agency mortgages, which didn't have default risks, and then he made a bold move into nonagency mortgages when they got really cheap in early 2009. He also bought a slug of interest-only bonds that worked nicely, too. The grand sum of that effort is a remarkable 22% year-to-date return on the heels of a 1.1% return in 2008. His 15-year return is 8.27%--a figure that ties him for first place among intermediate-bond funds with Fuss and Gaffney's  Managers Bond (MGFIX) (a more conservative version of Loomis Sayles Bond.) In short, Gundlach has done a wonderful job for shareholders.

Mark Notkin,  Fidelity Capital & Income (FAGIX)
Unlike some of our nominees, Notkin got whacked in 2008, suffering a 32% loss. However, it wasn't a surprise for his very aggressive high-yield strategy. Moreover, he's up 67% this year--a return that indicates he wasn't delusional about what he owned in 2008. Although he started 2008 with a thud, Notkin saw the coming mess and moved into cash and climbed up the capital structure in the second half of 2008. That helped limit losses, and it gave him ample dry powder when high yield got cheap and the economy showed signs of a rebound.

Domestic-Stock Manager of the Year
Bruce Berkowitz,  Fairholme (FAIRX)
When the stock market is having its biggest sale in nearly a century, you want your stock manager to go shopping with a big cart for the very best values. That's what Berkowitz did in 2008. He sold his energy stocks and bought junk bonds with giant yields and pharmaceutical stocks like top holding  Pfizer (PFE). True, we won't be able to say for sure if those were great buys until years down the road, but, so far so good. Berkowitz has long held cash, and he certainly put it to good use in the sell-off. This year the fund is up 35%--that's particularly impressive considering the fund's 2008 loss was smaller than nearly everyone else's. Few funds had top-decile performance in both years. All told, the fund has more than tripled in value since its January 2000 launch, while the S&P 500 is slightly in the red.

Staley Cates and Mason Hawkins*,  Longleaf Partners (LLPFX)
What Cates and Hawkins lack in timing, they make up for with conviction and research. Their research-intensive process requires a huge 40% discount to their intrinsic value estimates. Such a big discount means that business can take some hits without hurting shareholders in this fund. However, it also means that they are often in a stock early and have to weather temporary setbacks. But this year, stocks like  Liberty Media ,  Pioneer Natural Resources , Level 3 , and  Chesapeake Energy  have produced huge gains for the fund. In the fund's annual and semiannual reports, you can see their 20-year returns versus the benchmark. For Partners fund, that amounted to a cumulative 521% versus 346% for the S&P 500.

Jeff Cardon,  Wasatch Small Cap Growth (WAAEX)
Cardon is a manager who has flown a little under the radar, but that could change given this fund's 43% year-to-date return. He looks for companies with clean balance sheets and high returns on equity--the sort of companies that produce steady earnings growth. As a result, he'll miss out on big runs in cyclical sectors like energy, but he does just fine in other years. Since the fund's late 1986 inception, it has posted an 11% average annual return.

Dennis Delafield and Vincent Sellecchia,  Delafield Fund 
Some of our nominees earned great returns by buying battered growth stocks at low multiples, but this pair instead made its money by finding battered value stocks at even cheaper multiples. Delafield and Sellecchia are choosy value investors who look for stocks hitting new lows that are ripe for a rebound. They do extensive meetings with company management to understand the turnaround plan so that they keep the number of value traps to a minimum. They'll also let cash build if they can't find enough attractive names, and, in fact, that's happening today as the market rallied. Despite being only 75% invested, the fund is up 50% for the year and an annualized 12% since 1994.

Bill Nygren*,  Oakmark Select (OAKLX)and  Oakmark (OAKMX)
If you've been following the investment world for a while, you know there's a recurring theme of investors who make a big comeback just as everyone was ready to write them off. The reason is that each strategy has times when it works well and times when it doesn't. Nygren is a great example. He had a rough stretch but has bounced back with an awesome 51% return this year at Select and a 43% return at Oakmark. The funds actually had solid relative performance in 2008, but some investors weren't feeling forgiving, as it came on the heels of a lousy 2007. Savvy contrarian plays on retailers and media companies have paid off big for the funds this year. For example, he stuck with Liberty Media despite its troubles and enjoyed a great rally. But he also bought healthier growth names like  Apple (AAPL) amid the panic. Since Select's launch in December 1996, Nygren has produced an impressive annualized return of about 12%.

International-Stock Manager of the Year
Hakan Castegren and Northern Cross Team*,  Harbor International (HAINX)
Castegren has already won this award twice--the second time came a few years after he was fired by Ivy Funds. Harbor recently added the team that supports him from Northern Cross to the managers listed. Although they are new to the comanager slot, Northern Cross' Jim LaTorre, Howard Appleby, Jean-Francois Ducrest, and Ted Wendell have contributed as analysts for many years. Castegren is a patient investor who looks for strong franchises trading at modest prices. Over the years, he's made a bundle by scooping up industrial giants near troughs in their cycles. The fund is up 37% for the year, 7.7% annualized for the trailing 10, and 10% for the trailing 15.

David Herro*,  Oakmark International (OAKIX)and  Oakmark International Small Cap (OAKEX)
Like Hawkins and Cates, Herro also demands a 40% discount to intrinsic value. Thus, while some of his holdings had a rough 2008, they survived to produce huge gains of 65% ( (OAKEX)) and 54% ( (OAKIX)) this year. Herro pays little attention to benchmarks and instead focuses on producing solid risk-adjusted returns over the long haul. Like many of our nominees, his strategy rewards investors patient enough to stick around. His 15-year return at International is a cumulative 278% versus 104% for MSCI EAFE. Since December 1995, Small Cap is up 321% versus 90% for MSCI EAFE.

Lee, Grace, Bepler, Denning, Lovelace, Kawaja*,  American Funds EuroPacific Growth (AEPGX)
We know from Morningstar Investor Return data that consistent performance leads to strong real world results for investors, whereas roller-coaster rides are too much for many investors. That's why the managers of this fund deserve recognition. They were top-quartile in 2008 and top-quartile this year. In fact, they've been in the top quartile in six of the past eight years. A sizable emerging-markets weighting has helped in some of those years, but it was a handicap in 2008, and they still had strong relative performance because of big weightings in health care and telecom. The managers have proved to be remarkably adept stock-pickers over the years, and the legions of shareholders are the better for it. And if someone tells you that foreign funds have to charge more, ask them why one of the best charges just 0.80%.

Brent Lynn,  Janus Overseas (JAOSX)
Lynn runs an aggressive strategy, and his risk taking has generated big returns. Lynn takes concentrated bets by stock, industry, and region. Asian real-estate stocks have helped this year, and he's made plenty for shareholders with big bets on India over the years. He places a greater emphasis on earnings growth than our other foreign-stock nominees, and his off years, such as a 53% loss in 2008, can smart as a result. But every other year since he became sole manager in 2003 has been outstanding. This year he is up an astounding 75%, and his five-year return is 17.1% annualized. Not too shabby.

Magiera, Tommasi, Coons, Andreach, Donlon, Gambill, Herrmann, Lester, Trotter,  Manning & Napier World Opportunities 
A few months ago I called Manning & Napier one of the best fund companies you've never heard of. Now some people have heard of it, thanks to its continuing success at funds like Manning & Napier World Opportunities. The Fairfield, N.Y., firm takes a team approach. A nine-member team supported by a bunch of analysts and economists runs all of its funds. The team's strategy isn't all that unusual, but its execution is. It looks for strong companies trading at reasonable prices, and it has produced excellent risk-adjusted returns with it. The fund is up 35% for the year to date and an annualized 8.7% for the trailing 10 years.

The 2009 Fund Manager of the Year winners will be announced on Morningstar.com and CNBC's Squawk on the Street at 9:50 a.m. EST/8:50 a.m. CST on Tuesday, Jan. 5, 2010.

		FundInvestor Newsletter
	Morningstar FundInvestor is a 48-page newsletter dedicated to helping investors pick great mutual funds, build winning portfolios, and monitor their funds for greater		gains. This one-year subscription consists of 12 monthly issues, a Reader's Guide, and four free investing reports. Learn more.
	$129.00 for 12 Print Issues		$119.00 for 12 PDF Issues