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Fund Spy

Announcing the Morningstar Fund Managers of the Decade

These three managers deftly steered investors through good times and bad.

For investors, the 1980s and 1990s were decades worth celebrating, but the 2000s? Not exactly. Stock market returns were meager, and though bonds performed better, it was anything but a smooth ride. In spite of the challenges, however, some managers not only topped their peers, but posted strong absolute gains as well.

The Manager of the Decade award is not just about returns, though. We consider the risks assumed to achieve those results and take into account the strength of the manager, strategy, and firm's stewardship. We also think it's a greater feat to make a lot of money for a lot of people than to earn sky-high returns on a tiny pool of assets, so asset size factors in. Our team of fund analysts spent much of November and December researching the nominees and debating the merits of each for this award. It was a tight race with strong nominees across the board, but the following managers took home the awards.

Fixed Income
Bill Gross
PIMCO Total Return: 7.7%*; Category Average: 5.5%* 

No other fund manager made more money for people than Bill Gross. Investors of his flagship,  PIMCO Total Return (PTTRX), are $47 billion wealthier for the decade. (Our wealth creation figure is the aggregate return made on dollars invested in the fund throughout the entire period.) The fund was already large in 2000, with approximately $32 billion in assets, which could have presented quite a handicap. It ended the decade much larger at more than $200 billion. But it succeeded in outsmarting the competition even with its behemoth size and continues to do so. Gross has managed the fund's and the firm's remarkable growth well.

Gross has stayed ahead of the competition throughout the decade by making the right calls at the right times. His successes have come in a variety of forms. For example, despite the mess that mortgages created in the market, bonds backed by mortgages have been one of the fund's largest sources of excess return. Other good calls have come in the form of yield-curve bets and plays on emerging markets and corporate and foreign bonds. Gross was betting against the dollar in 2006 and was vindicated when the dollar declined versus other currencies. Gross is often accused of relying heavily on duration plays, but in reality, they haven't once been the top earner.

It is clear from his investment calls and topnotch performance that Gross is one of the best investors of our era. Many investors eagerly await the insights in his monthly investment outlook. And in 2009, investors poured more than $50 billion into PIMCO Total Return. But he hasn't done it alone; he's surrounded himself with a lot of smart people at PIMCO, including Mohamed El-Erian, Paul McCulley, Michael Gomez, and others who have made him even better and who give us confidence in PIMCO's ability to remain a good steward of the hundreds of billions of dollars entrusted to them.

Domestic Equity
Bruce Berkowitz
Fairholme: 13.2%*; Category Average: 0.01%*

By the end of the decade, Bruce Berkowitz had made his name as a top investor, but he laid the foundation when he first launched  Fairholme (FAIRX) in December 1999 and was known to few. Think back to what was transpiring at the time. Growth stocks, especially tech and telecom companies, were topping the performance charts with eye-popping gains. Sticking with a value discipline, let alone launching a value fund, was considered lunacy by much of the fund industry, which was busy riding the wave and serving up new growth and technology funds. Funds left and right espousing value disciplines were abandoning their mandates to partake in the party. Yet this fund's earliest portfolios held boring old-economy stocks such as  Berkshire Hathaway (BRK.B),  Leucadia (LUK),  White Mountains Insurance (WTM),  Mercury General (MCY), and  Jefferies Group . Berkowitz's holdings went on to post spectacular gains just as the air was coming right out of the growth bubble.

The fund carries much the same profile today; Berkowitz looks for good businesses with solid cash flows, has a contrarian bent, and has timed his bets well. For example, he rode the energy wave: At one point in 2007, he had nearly 35% of the portfolio in the sector. The fund profited handsomely, and when too many people jumped on the bandwagon, he was happy to sell to them just before energy stocks crashed in 2008. He deployed that cash into health-care and defense stocks--both areas were highly controversial, especially given the looming legislative uncertainty in an election year. Those moves paid off in 2008 and in 2009, helping him end the decade with a bang and also making him the winner of Morningstar's Fund Manager of the Year Award for 2009.

Foreign Equity
David Herro
Oakmark International: 8.2%*; Category Average: 3.2%*
Oakmark International Small Cap: 10.1%*; Category Average: 6.1%*

Eclectic. Contrarian. Right. That pretty much sums up David Herro's investment strategy and execution. Herro is a deep-value investor at heart, who focuses on 50 to 60 stocks and readily loads up on individual sectors and markets when he thinks they're packed with compelling bargains. Both of his funds, therefore, are relatively compact and normally look quite unlike their relevant benchmarks and peers. In fact,  Oakmark International (OAKIX) currently has a huge media weight, a hefty business-services position, and a Switzerland stake that is nearly 4 times the foreign large-value average of 6%. Herro showed his contrarian stripes in late 2008 by scooping up luxury goods companies in both funds when investors were fleeing consumer discretionary stocks in droves, especially those focused on the high end. And though both funds have modest weightings in emerging markets right now, they have had substantial stakes in the developing world at various times in the past when Herro has spied opportunities.

Herro's distinctive and rather bold value strategy comes with significant risks, and both of his funds have endured poor years only to bounce back smartly. The two funds finished in the cellars of their categories in 2007, for example, partly because his strict valuation discipline led him to almost completely ignore the red-hot energy and commodity-related industries. But those same standards helped both funds hold up reasonably well relative to peers in 2008's terrible meltdown and helped them shine in 2009's sharp rebound. Indeed, Oakmark International gained 56% and outpaced nearly all its foreign large-value peers last year, while  Oakmark International Small Cap (OAKEX) returned 68% and finished near the top of the foreign small/mid-value group in 2009.

More importantly, Herro and his comanagers have delivered impressive results over time at both funds with this hard-core value style. The funds' results over the past 10 years are anything but flukes. The two funds have posted superior results in all of the rolling 10-year periods since their inceptions in the mid-1990s.

*10-Year Annualized Returns through 12/31/09


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