Our Five Nominees for Morningstar Domestic-Stock Manager of the Year

It's that time of year again--time to choose our Morningstar Fund Managers of the Year. Each year we recognize a standout mutual fund manager of the year for domestic stocks, international stocks, and fixed income.

We're not simply looking for who had the highest returns in the calendar year. We're seeking to acknowledge managers who have produced great long-term results for investors and who have been great stewards of investors' capital, as well as those who have had an exceptional calendar year. "Manager of the Year" makes a catchier name than "Great Steward Who Produced Strong Long-Term Results and Excellent Single-Year Returns and Showed the Courage of His or Her Convictions to Stick with His or Her Approach Through Thick-and-Thin Award."

Over the years, many illustrious names in the fund world have won, including Bill Gross, Peter Lynch, Marty Whitman, the Primecap team, and Hakan Castegren. Last year's winners were Bruce Berkowitz of  Fairholme (FAIRX), the team from  American Funds EuroPacific Growth (AEPGX), and the team from  Loomis Sayles Bond (LSBRX). To see the complete list of past winners, click here.

The award is intended as recognition of great service for shareholders, not necessarily as a recommendation for the future. The award is really more like the Hall of Fame, whereas our  Analyst Picks would be more like the all-star team.

Today we're naming our five nominees for Domestic-Stock Manager of the Year. We'll name our international-stock nominees on Tuesday and our fixed-income nominees on Wednesday. We will announce the winners in the first week of January. To show you what we look at,  I've added performance attribution PDFs for all five funds. Normally, these reports are available only to subscribers of our Morningstar Direct institutional products, but I wanted to share them so that you can do your own deep dive. These reports show how each fund has done versus a benchmark over the past five years. Where did the managers add value, and where did they subtract it? Have a look and see for yourself.

We found a wealth of deserving candidates this year, but these are the five domestic-stock managers we found most deserving.

Bob Goldfarb and David Poppe-- Sequoia  (SEQUX)
Although many associate this fund most closely with founders Bill Ruane and Richard Cuniff, Bob Goldfarb has been onboard since 1971 and was named comanager in 1998. David Poppe joined the firm in 2000 and was named comanager in 2005. Go back through shareholder reports over the years, and you'll see frequent mention of both managers. The strategy here has evolved a bit over the years to placing greater emphasis on the quality of the business and its longevity, while slightly de-emphasizing the price being paid. In addition, Goldfarb and Poppe have reduced the fund's concentration as we illustrated in this recent FundInvestor article.

You can see just how well they've executed that strategy--note the fund's top-decile 10- and 15-year returns. You can also see their respect for shareholders in their forthright shareholder communications and in the fact that the fund was closed to new investors for a quarter of a century. The fund held up quite nicely in 2008, but this year shows it also can participate in rallies. Each of its top-10 holdings is up double digits this year, including Fastenal and O'Reilly Automotive.

Richard Aster Jr. and William Tao-- Meridian Growth (MERDX)
The past 10 years have been a very difficult time to scratch out returns using a growth strategy, but Richard Aster Jr and William Tao have thrived. They've produced outstanding returns in the long term and the short term. Like Goldfarb and Poppe, they had some of the smallest losses in 2008 and are enjoying a nice run this year. In fact, they have the highest return of our five finalists from the October 2007 peak through last week. It probably helps that they want companies with strong growth prospects, but they choose their entry point more like value managers. For instance, they snapped up  Adobe (ADBE) and  Expeditors International (EXPD) when they were trading at low multiples. Holding up in down years and performing respectably in up years isn't really the formula for gaining a lot of attention in the growth world, but it leads to great results for shareholders of this still modest $1.9 billion fund. Aster Jr. and Tao are patient investors who have been remarkably consistent performers.

Bruce Berkowitz and Charles Fernandez-- Fairholme (FAIRX)
Yes, the Morningstar Manager of the Decade and Manager of the Year for 2009 is back near the top again. We've never had a back-to-back winner because our emphasis on long-term results means that it would be rather redundant. However, we felt compelled to acknowledge that Berkowitz has knocked the ball out of the park again. Assets have swelled, making it tougher to repeat his success, but you wouldn't know that from returns. What's the secret of his success? To quote from Mike Breen's article on the subject, "Berkowitz's process is the inverse of most managers'. He focuses on what could go wrong, not right, with potential investments. Only after determining that going bust isn't possible does Berkowitz look for a firm's positives. Even then he anchors on the here and now, shunning the projections and big assumptions about the future that are needed for the discounted cash-flow analysis many rivals use. The phrase 'positive catalyst' is never uttered at Fairholme."

Andy Stephens and James Hamel-- Artisan Mid Cap (ARTMX)
Since this fund was launched, Stephens has produced great results with only one calendar year that was well below the mid-growth median. It helps that he closed the fund to new investors in 2002, but the fund still got rather bloated. However, redemptions have brought assets down, and the fund is thriving. Management blends aggressive fast-growing names with steadier lower- valuation stocks in a way that has made it a more consistent performer. Since its inception, the fund has produced a cumulative return (457%) that is more than double that of its benchmark (179%). Note: Matthew Kamm was named comanager Jan. 13, 2010. We left him off the nominees' list because he was not there for a full year.

Paul Magnuson and Ben Fischer-- Allianz NFJ Small Cap Value 
NFJ's strong emphasis on dividends has kept this closed fund grounded in small value. In years such as 2000-02, it was a tremendous boon as dividend stocks--especially in small value--had gotten neglected to the point that they were super cheap. But a dividend bias hurt many funds in 2008 because it led them right into financials and some other economically sensitive names. Not this fund, though. It held up quite well, thanks to the managers' skill and a price momentum model that they use to guide sales. Going back to the beginning of Magnuson's tenure in 1996, the fund boasts one of the best records in small value.

Conclusion
We'll be reviewing and debating each of these funds merits over the next couple of weeks. Then we'll vote on the winner later this month.

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