Our Five Nominees for International-Stock Manager of the Year

2010 is drawing to a close, which means it's time for us to announce our three sets of finalists for Morningstar Managers of the Year. We named the nominees for domestic-stock manager of the year in this column yesterday, and we will list the contenders for fixed-income skipper of the year in this space tomorrow. Here, we will highlight the finalists for international-stock manager of the year.

International-stock managers have faced a challenging environment in 2010. Sure, many developed markets are on pace to post high-single-digit returns this year, and most emerging markets look set to earn low-double-digit gains. Such results may well seem rather staid after an awful 2008 (when nearly all of the world's exchanges suffered huge losses) and terrific 2009 (when the majority of markets around the globe posted enormous gains). But most developed and emerging markets have gyrated up and down this year, and there are notable outliers in most regions as well as major variations across the market-cap, sector, and style spectrums. The typical overseas small-growth fund has gained 18.8% for the year to date through Dec. 9, in fact, while the average foreign large-value fund has returned 5.4%.

But a good number of foreign-equity skippers have navigated 2010's rather demanding conditions quite well and delivered good returns. Many of those also have the various other qualities we demand from our fund Manager of the Year nominees, including long-term records of superior performance, commitments to sound and distinctive strategies, and other strengths. Therefore, the competition to be a finalist this year was fierce.

In the end, though, five contenders stood head and shoulders above the rest. They are a diverse quintet that includes past winners, former nominees that have yet to win, and first-time nominees. Here they are in alphabetical order.

William Browne, John Spears, Tom Shrager, Bob Wyckoff-- Tweedy Browne Global Value (TBGVX)
This management team has evolved since it was named International-Stock Manager of the Year in 2000: Tom Shrager and Bob Wyckoff joined the team in 2005, while Chris Browne stepped down from the team in mid-2009 (and tragically died later that year). But the team has stuck with the value discipline that has been in place since this fund opened in 1993. That discipline, which focuses on stocks from across the market-cap spectrum that are cheaper than their private market values, is distinctive as well as sound. The team pays lots of attention to lesser-known names, is willing to load up on individual markets and sectors, and is really patient. It's also unusual that the team normally hedges most of its foreign-currency exposure back into the dollar.

The team has implemented its value discipline deftly in 2010. Thanks to a diverse mix of picks that have prospered, including lesser-owned names like the German media company Axel Springer (SPR) and the Finnish elevator- and escalator-maker Kone Oyj  (KNEBV), this fund is up 12% and leads 95% of its foreign large-value peers for the year to date through Dec. 9. The team has also executed its style skillfully in a variety of other climates in the 2000s, including the 2008 meltdown and the 2009 rebound, so this fund boasts first-rate three-, five-, 10-, and 15-year returns. That all of the team members have significant to sizable investments in this fund is another factor in their favor. (Please note that this fund is expected to make a small distribution later this year.)

David Herro-- Oakmark International (OAKIX),  Oakmark International Small Cap (OAKEX)
David Herro's stock selection has been superb at his foreign large-value fund this year. His contrarian nature and commitment to stocks trading at big discounts to their intrinsic values have made it difficult for him to find opportunities among emerging-markets and small-cap names of late, which have continued to thrive in 2010. But a plethora of his large-cap and mid-cap European picks have flourished, including the French advertising leader Publicis (PUB) and the Swedish lock-maker Assa Abloy. Thus, this fund is up 14.6% and second in its category for the year to date through Dec. 9.

Herro's results have been more mixed this year at Oakmark International Small Cap, which is in the middle of the foreign small/mid-value category for the year to date (albeit with a 17.2% gain). But Herro, who won this award in 2006, has regularly delivered the goods in the past at his small-cap charge as well as at his large-cap offering, so both funds boast impressive long-term records. (Oakmark International's 10.4% annualized 15-year return ranks first among foreign large-value funds and fourth best among all foreign large-cap offerings).

Herro runs fairly compact portfolios, readily builds atypical country and sectors weights, and has more than $1 million invested in both funds, so he clearly has the courage of his convictions. And while the distinctive aspects of his discipline have caused rough spells in the past--and are likely to do so again in the future--the impressive results over time speak to the long-term merits of his approach. (Please note that Herro's two funds are expected to make small income distributions later this year.)

Brent Lynn-- Janus Overseas (JAOSX)
Brent Lynn, who joined the fund as a comanager in 2001 and took charge of the portfolio a couple of years later, takes a bolder approach than many foreign large-growth skippers. Lynn regularly loads up on opportunities in individual sectors and the developing world as he pursues rapid growers with savvy management and superior returns on capital. Such an approach comes with significant risks, of course, and this fund did lose approximately 6 percentage points more than the category norm of 47% in atrocious 2008.

However, Lynn has proved that he has what it takes to get the most out of his aggressive strategy. This fund has gained 17.3% and outpaced the vast majority of its foreign large-growth rivals for the year to date through Dec. 9, as many of his emerging-markets and other picks have soared. More importantly, Lynn's decision-making has been terrific over most of his watch. This fund has posted an 18.8% annualized gain and outpaced all other foreign large-cap offerings during his 7.5-year-tenure as lead manager. And the fact that he has more than $1 million invested in the fund is another plus. (Please note that this fund is expected to make a small income distribution later this year.)

Rohit Sah-- Oppenheimer International Small Company (OSMAX)
Rohit Sah's strategy is pretty bold even by the rather audacious standards of the foreign small/mid-growth group. For starters, Sah favors younger, entrepreneurial firms as he looks for companies with strong earnings growth, return on capital, and balance sheets, so this fund normally sports one of the smallest average market caps in the group. What's more, he often concentrates on individual sectors, countries, and regions as he constructs the portfolio. The fund has had three to four times the category average of 7% in energy stocks and double the group average of 15% to 20% in emerging-markets issues for years.

Sah's explosive strategy can cause the fund to blow up in adverse conditions. This fund plunged 17 percentage points more than the foreign small/mid-growth norm of 49% in awful 2008, as the smallest firms and emerging-markets names posted especially big losses. But Sah, who has managed this fund on his own since the start of 2004 and who ran a portion of its portfolio for two years before that, has consistently produced excellent returns in rallies. He delivered topnotch returns in each of his first four calendar years at the helm as his commodity and emerging-markets stocks paid off handsomely. In fact, he has led this fund to a 30.1% gain and past all but one of its foreign small/mid-growth rivals thus far in 2010 for similar reasons. Sah has between $500,000 and $1 million invested in this fund, which is pretty encouraging given that it is a specialty offering.

David Winters-- Wintergreen 
David Winters is a dedicated deep-value investor who has the freedom to go anywhere, the willingness to load up on areas when he finds lots of superior bargains, the courage to own lesser-followed securities, and the confidence to run a portfolio of 30-40 names. Indeed, the fund has long held a hefty position in tobacco stocks, because he is keen on their robust cash flows and pricing power. It also has 7.6% weighting in Malaysia--while most world-stock offerings have no exposure there and no other fund has more than 3% there--because he has found compelling opportunities in the gaming area in that country. The fact that he is comfortable holding cash adds to the fund's distinctive makeup. (And the fact that he, like all world-stock skippers, can and does invest significant amounts in the United States makes this fund stand out from all foreign-stock offerings.)

Thanks in large part to Winters' Malaysian and other Asian picks, this fund has returned 18.7% and outpaced more than 85% of its world-stock rivals for the year to date through Dec. 9. This is anything but a fluke. Winters' security selection was generally quite good as global markets were all over the map during his first four years at the helm, so this fund has handily outgained its typical peer and suffered rather moderate volatility since opening in late 2005. And he had lots of success with the same deep-value discipline at a prior firm before founding Wintergreen. This fund's high expense ratio is a minus, but the fact that Winters has more than $1 million invested in this fund is another plus.

We will debate and vote on the international-stock, domestic-stock, and fixed-income finalists over the next couple of weeks, and we will announce the winners in early January.