Early Favorites for Morningstar Manager of the Year--Domestic Stock

It's September, and the end of the year is in sight. With that in mind, I took a look around to find out which managers appear to be in the running for our Domestic-Stock Manager of the Year award. I looked for managers having a great year, but I also wanted a great long-term track record (at least 10 years). For the sake of variety here, I skipped over those who have already won the award--but they are eligible to win.

Our award recognizes managers who have contributed to shareholder well being over both the short and long haul. We also look for good stewards. The award is intended as recognition of past contributions rather than a prediction of future success. (Our Analyst Picks do the latter.)

So, what follows is a list of front-runners. It's not a short list that we will choose from. In fact, the way the markets are whipping around these days, you can be sure that year-to-date performance rankings will shift quite a bit from now until the end of the year.

Phil Davidson/Michael Liss/Kevin Toney-- American Century Equity Income (TWEIX) and  American Century Value (TWVLX)
It's the tough years when American Century Equity Income stands out. In 2008, lead manager Phil Davidson helped the fund to lose just 20%--tops in the large-value category. It also held up quite nicely in the 2000-02 bear market. Today, the fund is up about 3% for the year to date while its typical peer has lost around 2%. But it's not all defense--its 10-year return is an annualized 6.8%, and its 15-year return is an annualized 9.5%. Both are in the top 2% of the large-value category.

Davidson takes a conservative tack in selecting low-valuation but solid-yielding stocks. He also buys convertible bonds to boost the fund's yield and temper the downside.

Richie Freeman-- Legg Mason ClearBridge Aggressive Growth (SHRAX)
Richie Freeman is an extremely patient growth manager. His years of outperformance are just as likely to come in a rally as a bear market, but the important thing is that the good years have outweighed the bad. This year, the fund's 2.5% gain is near the top of large growth, but it's the 15-year 8% annualized return that's really impressive. With a concentrated eclectic portfolio, it's always a stock-specific story here.

This year, strong performance at  Genzyme ,  UnitedHealth Group (UNH), and  Cablevision  have the fund outperforming. Each stock is up for a different reason, and each has been in the portfolio for a long time. When a manager has single-digit turnover as Freeman does, he or she is forced to focus intently on both the quality and sustainability of the company's competitive edge and its valuation. Skimp on either and you have to sell or suffer. Freeman has executed that strategy beautifully.

Bob Goldfarb and David Poppe-- Sequoia (SEQUX)
Like Phil Davidson, Bob Goldfarb and David Poppe have been at their best in tough markets. The fund's 10-year return of about 6% tops all but 2% of the large-blend category. This year, it's up about 8%, or 900 basis points ahead of the S&P 500, thanks to top holding  Berkshire Hathaway (BRK.A), a hefty stake in cash (which offered downside protection), and a number of other strong top holdings. The fund's next largest three,  TJX (TJX),  Idexx Laboratories (IDXX), and  Fastenal (FAST), are also enjoying strong years. Like Warren Buffett, they look for great companies trading for fair prices. They want strong management and competitive advantages. While they are the second generation of managers at the fund, they certainly had a big hand in its long-term success. Goldfarb is coming up on his 40th anniversary at the firm, and Poppe has been there for 10 years.

Andy Stephens-- Artisan Mid Cap (ARTMX)
Wow. Go back to the start of this closed fund in 1997--Andy Stephens has produced a cumulative return of 391% compared with 154% for the fund's benchmark. I'm not sure anything else needs to be said, but I'll venture a few more words. Stephens looks for industry leaders that are about to hit a sweet spot in earnings. That sounds like a lot of growth funds that have crashed and burned in recent years, but Stephens and company have done a great job of applying that flexibly across industries. As a result, the fund held up brilliantly in value-dominated years when those same growth funds were getting hammered. This year, performance has been led by an unusual mix of cyclical industrial names and tech stocks. James Hamel was named comanager in July 2006 and Matthew Kamm in January 2010.

Wally Weitz-- Weitz Partners Value (WPVLX)
Wally Weitz is another Buffettologist on my list. Interestingly, though, he hasn't been as much of a bear-market champion as Goldfarb and Poppe. But with a 7% gain this year and a 9% annualized 15-year return, he clearly has done well over the long haul. A look at the calendar-year returns shows that the fund is pretty up and down. You've got to be around for years like this one and last year (up 31%) because there are sure to be some clunkers (down 38% in 2008) along the way.

Compared with Goldfarb and Poppe, Weitz places greater emphasis on the price. He tends to buy deeper-value names that throw off strong cash flows even in rough stretches. Thus, there's media and cable plays like  Liberty Media (LINTA) and  Comcast (CMCSA) alongside financials like  Willis (WSH) and  Berkshire Hathaway (BRK.B). This year, both of those groups have fared well in the portfolio and that's when you see spurts of outperformance. Going back to 1983, the fund is up a cumulative 2,185%--nearly 1,000 basis points ahead of its benchmark.

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