The Morningstar Managers of the Decade

Jason Stipp: I'm Jason Stipp for Morningstar. On the heels of our announcement last week of the Fund Manager of the Year for 2009, Morningstar's also announcing Fund Manager of the Decade for 2000 through 2009--a very prestigious honor. Here with me to talk about the winners is Morningstar's Karen Dolan. She's director of fund analysis. Thanks for joining me, Karen.

Karen Dolan: Hi Jason. Thank you.

Stipp: So I'm going to hold everyone in suspense for just a little bit, I just want to get a sense of this last decade--it had two down markets; it was very tumultuous. How would you characterize what we saw in the last decade, and what made a fund be able to succeed in something that was so up and down and up and down?

Dolan: Well, this last decade gave investors a lot of opportunities to lose money, but not a lot of opportunities to make money. I think what these managers did, across the board, was they really were able to protect their funds on the downside well, while also participating in the up markets. It was the only way to get through this decade with positive returns, really.

Bond markets weren't as bad as equity markets--there were some more opportunities to make money there. However, just across the board there were a lot of sinkholes, a lot of ways to get a fund into trouble. And these managers steered away from all of that.

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Stipp: So certainly when you see something like the broad S&P 500 Index very lackluster over a 10-year period, a longer-term period, the value that these managers were able to place with their bets certainly paid off for the investors that were in those funds.

Dolan: Absolutely, yet a lot of opportunities to mess up or to make a good call, and these managers made more than one, and so the full decade record reflects that.

Stipp: So for the first award, let's start with Fixed Income. An area of the market where it was easier to make money over the last 10 years, but this fund, even despite its size, was able to make better than its competitors, and also do it for a lot of investors who went on the bond front.

Dolan: The Fixed Income Award goes to Bill Gross. All of our fixed-income candidates did a wonderful job over the decade, but this was the Bill Gross decade for bonds. He came into the period with a very large fund to begin with. It was about $30-$32 billion at the time, beginning in 2000. It's now the largest mutual fund out there at $202 billion.

So, he has made a lot of money for a lot of people, and he's done it with excellent investment calls. Bill Gross is very well-known for melding the top-down macroeconomic views with the bottom-up work that PIMCO's analysts do. But without those top-down considerations, this fund would not have had the success it had. They really nailed a lot of the calls along the way.

Stipp: With a fund that big, I mean, certainly it's more difficult to do better than the market. So if he's making those big calls, what did he get right on the macro sense in the last 10 years that really stood out?

Dolan: You're right, you know with a fund as large as that one, you're not going to make it by picking bond, by bond, by bond. Yes, there is some of that credit work going on. Yes, there is some of that research going on at PIMCO, for sure, I don't want to underestimate that.

However, that fund moves a lot of money around. It's very big, and in order to make a bet it has to be a big bet, and so a lot of where it's added value are in picking bond sectors. Picking its spot for interest rates, doing yield curve positioning, currencies, predicting the housing bubble.

So a lot of those were big top-down calls, that were then implemented in the portfolio with the bottom-up research that the analysts at PIMCO were doing, and that proved to be a really good combination.

Stipp: Well, certainly very good news for all of the many, many shareholders in that fund over the last decade.

Dolan: Yes.

Stipp: So moving on to Domestic Equity, who do you have for the winner on the Domestic Equity side.

Dolan: Well, I'm going to sound a little bit like a broken record from last week, but it's Bruce Berkowitz. He came out and part of the reason why he won in '09 for the Fund Manager of the Year was the fact that '09 was not a one-trick kind of year for him. He has really put up just great numbers, year-in year-out, and has put up a very, very strong decade of performance.

Stipp: So you were mentioning to me before where he started out, in 1999, was a little bit against the grain and probably gave investors a good sense of what would be to come for this sort of investor. Tell me a little bit about if you looked back at his portfolio, 10 years ago, what would you see there?

Dolan: Well, he launched this portfolio in 1999, late in the year, and if you remember what was going on, it was a period of lots of growth--it was growth investing, it was tech, it was telecom, mega-cap stocks, it was just very much in this bubble building mentality.

Bruce came out and he started buying--his first portfolios had the likes of Berkshire Hathaway, Leucadia, White Mountains Insurance, Jefferies Group. Those were old economy stocks; those were not the kind of quick-hit type Internet wonders that were really the name of the day.

So I think he really established himself as a good investor very early on with what was a very contrarian portfolio, and we've seen that contrarian portfolio come through all throughout the decade.

Stipp: The timing on that back in 1999 probably had a few rough months at the very beginning, but then his insight really showed to pay off for him.

Dolan: Yeah, I don't think it was more than three or four rough months. That fund has just really done great. Even 2000, right when everything started to crash, he was a top performer and actually had really nice gains in that year.

Stipp: OK. For the International Manager of the Decade, who came out on top on that front?

Dolan: This is David Herro at Oakmark. He manages Oakmark International and Oakmark International Small Cap. A lot of the same trends, as I was discussing with Bruce Berkowitz, he is a value investor, he very much is a contrarian at heart.

He looks for the kinds of stocks that everybody else wants to dismiss. The portfolios do not look anything like peers. They don't look like the benchmark; he really does carve his own path with the holdings, and I think that that's paid off for him. He has had a few rough patches along the way, but over time it's really proved to be very rewarding for shareholders.

Stipp: For a go-anywhere, more of a go-anywhere fund, where was he able to root out some of that value across a 10-year span in all we've seen in the international markets?

Dolan: Well, he's been really good about going into emerging markets, getting out of them when they are hot--actually, he got out too early so he had to pay for it a little bit in '07. He also did the same with energy and cyclicals, so he's been very good about--it's not like he'll completely dismiss emerging markets, or completely dismiss energy. He's willing to play in those areas when he does think they're out of favor. When other people start coming in, he's out, and he's out early.

More recently, in 2008 and early 2009, he has been buying more luxury goods. You know, if you think back to '08--even now, even today, I don't think you're going to find a lot of managers or investors who are piling into luxury--the makers of luxury goods, given all the stress that consumers are under, and given especially the higher-end luxury goods--where it really is a luxury to have those. So he continues to make those kinds of bets. Over time he has to be patient, but they do usually pay off for him.

Stipp: Well certainly it seems like some of the roughest times can really be the times that really great managers can shine, and it seems like that's certainly the case for these three winners.

Dolan: Absolutely. They've been tested, and they have come out ahead.

Stipp: Well, thanks for announcing the winners with us today, Karen.

Dolan: Thank you, Jason.

Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.