Our 5 Nominees for Domestic-Stock Fund Manager of the Year

Sometimes, a rising tide that lifts all boats can make it difficult to stand out. It has been relatively easier to make money in U.S. stocks in 2012 than it was in 2011: Morningstar’s nine diversified domestic-equity categories have each rung up double-digit gains for the year to date through Dec. 10. And aside from a 6% dip in May, it has been fairly smooth sailing throughout the year.

This year's nominees for Morningstar Domestic-Stock Fund Manager of the Year have nevertheless made their mark in 2012 as well as over the long haul. As always, we looked for managers who have not just delivered great results but also have been strong stewards who put fundholders first. The nominees for International-Stock Fund Manager of the Year will be revealed on Friday, Dec. 14, and the Fixed-Income Fund Manager of the Year nominees will be posted on Monday, Dec. 17. We’re also introducing two new Manager of the Year awards for the growing Alternatives and Allocation categories; those nominees will be announced on Tuesday, Dec. 18 and Wednesday, Dec. 19, respectively. Finally, we'll announce all the winners in the first week of January. 

Here are the domestic-equity nominees:

Team From  American Funds New Economy (ANEFX)
Year-to-Date Return Through Dec. 10, 2012: 21.3% 
Category Rank (Percentile): 3
This large-growth fund has long boasted a strong manager lineup: Timothy Armour, Gordon Crawford, Mark Denning, Claudia Huntington, and Harold La have been among the managers who independently run separate pieces of this fund for an average of 14 years. Denning is also part of the  American Funds EuroPacific Growth (AEPGX) team that won the International-Stock Fund Manager of the Year award three years ago.

A late 2009 prospectus change gave the managers flexibility that contributed to a very impressive 2012. The fund previously had to invest 75% of its assets in services and information companies but now can invest in any company benefiting from or creating innovation. This broader mandate has allowed the managers to trim a once-outsized tech weighting and gave them room to build larger stakes in health-care and consumer cyclicals firms. All these moves boosted the fund’s returns in 2012, as did lighter-than-usual weightings in energy and materials--the fund typically has an underweighting in these sectors, but the managers were particularly wary of them coming into 2012.

But plain old broad-based stock-picking drove returns as well. The fund overcame headwinds. Large-cap stocks have generally beaten small caps in the United States, and this all-cap fund has a larger helping of mid- and small-cap stocks. Through Dec. 10, domestic stocks also had beaten international equities. This fund has nearly a third of its assets overseas and found winners across the globe such as Hong Kong-based casino conglomerate Galaxy Entertainment, Samsung of Korea, drugmaker Grifols of Spain, Hong Kong-based insurer AIA Holdings, and logistics firm PT AKR Coporindo of Indonesia.

The fund also has an excellent long-term record, besting 90% of its large-growth rivals as well as the all-cap Russell 3000 Growth Index over the past decade. Since Denning joined the fund in February 2002 (La is the only one of the five managers to join the fund after that date), a $10,000 investment in the fund has grown to $18,910 compared with $13,650 for its typical peer and $15,290 for the Russell 3000 Growth Index. Although veteran growth investor Crawford is retiring at the end of 2012, the fund should be in fine shape with the rest of its veteran team handling its $7.8 billion asset base. The firm also has a long history of handling manager transitions well and grooming in-house talent.

Timothy Hartch and Michael Keller,  BBH Core Select 
Year-to-Date Return Through Dec. 10, 2012: 18.9%
Category Rank (Percentile): 5
This large-blend fund is far from a household name, but it is distinctive. Managers Timothy Hartch and Michael Keller set this fund apart in several ways: They run a concentrated portfolio of roughly 30 stocks, ignore the sector and individual stock weightings of the fund’s S&P 500 benchmark, and focus heavily on downside protection.

In 2012, management’s typical emphasis on financially sturdy companies with modest valuations has paid off with winners such as medical-supplies firm  Baxter International (BAX),  Target (TGT), consumer products giant  Diageo (DEO), and telecommunications giant  Comcast (CMCSA). And since Hartch took the helm in October 2005 (along with Richard Witmer, who now provides oversight here; Keller was promoted from analyst in 2008), the fund has roughly doubled returns of the S&P 500 and the typical large-blend fund. A $10,000 investment in October 2005 would have grown to $17,500 compared with $12,640 for its typical peer and $13,450 for the S&P 500.

The icing on the cake here is that the fund closed to new investors on Nov. 30, 2012, at a modest level of $3.5 billion in assets, thus forgoing the opportunity to continue raking in more fee-generating assets (the fund took in $1.9 billion in the first 10 months of 2012) in favor of preserving the team’s flexibility.

Steve Wymer,  Fidelity Growth Company (FDGRX)
Year-to-Date Return Through Dec. 10, 2012: 17.7%
Category Rank (Percentile): 15
Steve Wymer is a rarity--an aggressive-growth manager who has survived and thrived through multiple bubbles and bear markets. Although he willingly pays up for rapid growers and will invest heavily at times in risky biotech firms, Wymer has lasted 16 years at this fund by exhibiting patience and conviction. Portfolio turnover is often under 50% (well below the category norm), and Wymer will often add to the fund’s positions when they stumble.

Indeed, the fund’s success in 2012 owes primarily to long-term holdings. Its biggest winners include  Apple (AAPL) (first purchased in 2004),  Salesforce.com (CRM) (2004),  Regeneron Pharmaceuticals (REGN) (2002), apparel maker  Lululemon Athletica (LULU) (2007),  Discover Financial (DFS) (2007), and  Alexion Pharmaceuticals  (2000). And most of those stocks, other than Apple, aren’t widely owned among the fund’s peers.

Wymer’s more-deliberate style is born, in part, of necessity: He runs an all-cap portfolio and manages a lot of money. The fund had $30 billion in assets in 2000 and has $45 billion today; it has also been closed to most new investors since 2006. But he has richly rewarded those many fundholders. The fund has beaten more than 90% of its rivals and handily outpaced the Russell 3000 Growth Index over five and 10 years and since he took the helm in January 1997. A $10,000 investment when Wymer took over would be $35,600 today, compared with $21,230 for its typical peer and $21,760 for the Russell 3000 Growth.

Bill Frels, Mark Henneman, and Team From  Mairs & Power Growth (MPGFX)
Year-to-Date Return Through Dec. 10, 2012: 20.7%
Category Rank (Percentile): 3
While Fidelity’s Steve Wymer is willing to stay put in stocks for a while, Bill Frels and Mark Henneman are positively tortoiselike. Of the fund’s top 25 holdings (which comprise most of its assets), 18 were bought in the 1990s and only one hasn’t been held for at least 10 years. The managers like to have a deep, fundamental understanding of the companies in the portfolio--so much so that they prefer to own the shares of businesses headquartered in Minnesota or the Upper Midwest near the Mairs & Power offices in St. Paul, Minn. Roughly half of the fund’s 45 holdings are based in the Twin Cities area.

The regional bias can be a stumbling block for some. The home-state bias, however, has helped the managers focus intently on a handful of higher-quality global firms whose fortunes aren’t necessarily tied to that of one state. The fund also has been less risky than expected, given its enormous sector biases. For example, it has a 13% stake (6 times the category norm) in basic materials, one of the worst-performing sectors in 2012. But many of the fund’s materials holdings beat the sector and boosted the fund’s returns this year, including paint and coatings firm
 Valspar , cleaning-products maker  Ecolab (ECL), and chemicals firm H.B. Fuller (FUL).

The fund won’t necessarily keep up when more-speculative firms rally--witness its fine absolute return, but weak relative showing, in 2009. But management’s patient approach has made for strong returns over the long haul: Since Frels took the helm in 1999, the fund has beaten all but one of its large-blend rivals and trounced the S&P 500. Indeed, a $10,000 investment at the time would be worth $27,770 now compared with $12,160 for its typical peer and $13,030 for the S&P 500. Modest fees and extremely low trading costs add to the fund’s appeal.

Bill Nygren,  Oakmark (OAKMX) and  Oakmark Select (OAKLX)
Respective Year-to-Date Returns Through Dec. 10, 2012: 19.1%, 19.2%
Respective Category Ranks (Percentile): 4, 4
Bill Nygren is an accomplished value investor, and in 2012 he’s demonstrated he has a broader definition of value than most of his peers. Both of his charges now sport healthy weightings in the growth side of the Morningstar Style Box and bigger stakes in tech firms than their typical large-blend peer.

Reflecting Nygren’s long-term approach, the funds’ 2012 winners are hardly new to the portfolios. They include  J.P. Morgan Chase (JPM) (held by both funds for more than seven years), credit card provider  Capital One Financial (COF) (owned by Oakmark since 2007 and Select since early 2008),  Comcast  (held by both funds since at least late 2009),  Discovery Communications  (a four-year holding for both), and--in Oakmark only-- Apple (AAPL) and  Oracle (ORCL) (both purchased in early 2009).

Nygren, who won this award in 2001, has overcome his big mistake of holding Washington Mutual at the top of Select in the mid-2000s to generate excellent near- and long-term returns at both charges. Since he took over Select at its 1996 inception, that fund has crushed its typical large-blend peer and the S&P 500--a $10,000 investment in the fund would be worth $63,500 while its typical peer turned that into $22,630 and the S&P 500 $26,930. Oakmark has also performed impressively since Nygren replaced Robert Sanborn in March 2000, turning a $10,000 investment into $27,870 versus $11,300 for its typical peer and $12,380 for the S&P 500.