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Fund Spy: Morningstar Medalist Edition

Announcing the Morningstar Fund Managers of the Year for 2014

Success starts with teamwork for this year's winners.

Mentioned: , , , , , , , , ,

Our manager research team at Morningstar is in the business of analyzing fund managers day in, day out, year after year. We analyze and rate more than 1,100 funds every year, speaking to the managers and doing deep dives using our five-pillar framework (Process, Performance, People, Parent, and Price). We also speak to the managers of hundreds of funds that we don't cover. Over time, we've certainly come across our share of mediocrities and flashes in the pan, and we've come to especially appreciate how difficult it is for active managers to outperform consistently and over long time periods. So it is a pleasure to start off the new year--as we have for the past 27 years--by naming Morningstar's Fund Managers of the Year.

While the Manager of the Year award winners have distinguished themselves in the past calendar year, we've never simply chosen the highest-returning funds. The awards recognize managers who have not only just completed outstanding years but have tacked on a winning year to their already stellar long-term track records. Our winners have generated strong long-term risk-adjusted returns and have been strong stewards of their investors' capital. Beyond having had a great year and possessing an excellent long-term record, our winners must have current Morningstar Analyst Ratings of Gold, Silver, or Bronze, indicating that our analysts have conviction in the managers' ability to outperform their categories and/or benchmarks on a risk-adjusted basis over the long haul.

Morningstar gives awards in five categories: domestic-stock funds, international-stock funds, fixed-income funds, allocation funds, and alternatives funds. Every December, analysts specializing in those areas narrow the universe to a group of three to five finalists for each award. The winner is then selected by Morningstar's entire analyst team. To make the most informed decision, we comb through portfolios, returns, stewardship grades, and our own long institutional memory of these funds as we debate, deliberate, and vote.

Beyond their 2014 outperformance and topnotch long-term records, this year's winners share several important traits. Two are repeat winners from a decade or more ago, truly an indication of the long-term excellence we like to reward. Several are closed to new investors, which we routinely view as a positive move to ensure the best outcomes for existing shareholders. Given their excellent records, all of these closed strategies could easily garner more assets by remaining open, but at the risk of lowering investor returns. Our winning managers also tend to invest alongside shareholders, another element that we see as helping ensure successful outcomes for investors. Finally, not a single winner this year is a solo manager, and several winners are rather large teams of managers, reflecting the fact that more and more funds today are team-managed. In reality, even single-manager funds are generally the work of many.

Domestic-Stock Fund Manager of the Year
Theo Kolokotrones, Joel Fried, Al Mordecai, Mohsin Ansari, and James Marchetti
Primecap Odyssey Aggressive Growth (POAGX) , Primecap Odyssey Growth (POGRX), Primecap Odyssey Stock (POSKX), Vanguard Capital Opportunity (VHCOX), Vanguard Primecap Core (VPCCX), and Vanguard Primecap (VPMCX)

The team from Primecap has gained fame and fortune for itself and shareholders by subadvising Vanguard Primecap for the past 30 years and Vanguard Capital Opportunity for the past 20, and advising three direct-sold Primecap funds for the past decade. The funds are all variants of the same patient contrarian growth strategy, which is based on finding stocks with great long-term growth prospects at discount prices and being willing to hang on to them until the market recognizes their worth. This publicity-shy team quietly goes about its business, with each manager handling his own sleeve of the portfolio, and some senior analysts also getting smaller sleeves to run. Because they all hew to the same investment philosophy, the overall portfolio often has significant sector or industry overweightings, but those result from independent decisions made by different managers rather than a single decision to place a big bet in one area of the market.

The Primecap team's strategy paid off in a big way in 2014. Notably, big biotech and pharma holdings in all six funds--such as  Biogen Idec (BIIB),  Amgen (AMGN),  Eli Lilly (LLY),  Roche (RHHBY), and  Novartis (NVS)--posted strong returns for the second-straight year. The team has long argued that the market was underestimating the pipelines and growth potential of these firms. The managers' long-standing bet on airline stocks also paid off in 2014, with  Southwest Airlines (LUV) more than doubling and  United Continental Holdings (UAL), Delta (DAL), and American Airlines (AAL) all posting strong gains.

To be sure, the Primecap approach can experience periodic slumps, but it has produced superior long-term results. Not only did all six Gold-rated funds beat the overwhelming majority of their peers in 2014, but their 10-year returns (and 15-year results for the Vanguard funds) are topnotch as well. The Primecap team won the Domestic-Stock Fund Manager of the Year award in 2003 for its work at the Vanguard funds, which are currently closed to new investors along with the mid-cap oriented Primecap Odyssey Aggressive Growth. New investors can easily access Primecap Odyssey Growth, a large-cap growth fund, and the less aggressive Primecap Odyssey Stock, which is in the large-blend Morningstar Category. We think it's good to see a boutique firm willing to close its doors to slow down asset growth and protect its existing shareholders. The team here also has a lot of its own money invested in the funds.

International-Stock Fund Manager of the Year
Dodge & Cox International Investment Policy Committee
 Dodge & Cox International Stock (DODFX)

This is an exemplary team from an exemplary firm. Dodge & Cox has rolled out only six strategies since it opened its doors during the Great Depression. Each fund is run collaboratively by an investment-policy committee, including this one, and some members of this nine-person team also serve on the committees that direct other Dodge & Cox funds. Those funds, like this one, have put together impressive long-term records. The managers on the International Investment Policy Committee are highly experienced, to say the least. Every member of the team has been at the firm for more than a decade, and the average tenure is 24 years. Most have also spent their entire careers at the firm. The team won this award back in 2004 with five of the current nine members.

Dodge & Cox is, in essence, a value shop, and this team carries the firm's patient value approach to international markets. Its managers look for companies they consider to be undervalued, often leading them to unpopular stocks, and then they'll hold on as they wait for troubled companies to turn things around. The fund's portfolio exhibits turnover rates typically below 20%. The managers benefited last year from pharma holdings Novartis and Roche that had been cheap because of concerns about lackluster pipelines. They'll also wait patiently to buy companies they like until the stocks reach an appealing valuation. For example, they already owned a small stake in India's ICICI Bank entering 2013, but they added to that position repeatedly in the first three quarters of that year when the Indian market and that stock were falling precipitously. That boldness paid off when ICICI Bank soared more than 60% in 2014. As the ICICI Bank play shows, the managers have not let the fund's large asset base lead to caution and blandness. Another top holding is a far less-known company, Naspers, a South Africa-based Internet firm that has posted stellar gains for the fund. The fund has around 20% of assets in emerging markets, making it a great way for investors to gain exposure to developed and emerging international markets in one vehicle.

Dodge & Cox International Stock has a top-quartile ranking in the foreign large-blend category for the trailing 10-year period. It's in the top decile for the three- and five-year stretches. On Jan. 6, Dodge & Cox announced that the International Stock Fund would close to new investors on Jan. 16 while remaining open for investments by existing shareholders. All five of the other Dodge & Cox funds are open to new investors as well as existing shareholders.

Fixed-Income Fund Manager of the Year
Ken Leech, Carl Eichstaedt, and Mark Lindbloom
 Western Asset Core Bond (WACSX) and  Western Asset Core Plus Bond (WAPSX)

This year's fixed-income award winner is a comeback story. The team underperformed during the financial crisis, revealing some flaws in its credit research, ineffective risk oversight, and poor communication between the firm's macro and fundamental research teams. Since then, a number of improvements have been made to the investment process and risk management, and resources have been strengthened across the board. From 2009 through 2014, the team has guided both funds to topnotch records. Western Asset Core Bond and Western Asset Core Plus Bond land in the top quartile of the intermediate-term bond category for the trailing five- and 10-year periods ended Dec. 31. This is a great example of managers who learned something from a crisis, addressed the problems, and moved forward successfully. 

Top-down positioning decisions are made by a larger committee, as is typical in many bond shops today. Western Asset Management's committee consists of Ken Leech, who is also the firm's CIO, the senior portfolio managers, and members of Western's risk-management group. This group determines portfolio duration, yield-curve exposure, and sector weightings. Sector teams are then responsible for individual bond selection. The firm boasts 40 analysts across investment-grade, high-yield, emerging-markets, and structured products, averaging 18 years of investment experience. Leech and team favor credit-sensitive sectors and generally eschew U.S. Treasuries, which distinguishes the funds from their benchmark, the Barclays U.S. Aggregate Bond Index. Both funds are on the more credit-sensitive side of the intermediate-bond category, with Western Asset Core Plus Bond, true to its name, generally having larger weightings of high-yield bonds, emerging-markets bonds, and foreign-currency exposure. While the funds' willingness to hold positions in those types of credits as well as nonagency mortgages can court plenty of risk, the team deserves credit for carefully negotiating a variety of markets since 2008 and notably sidestepping trouble in 2011's rocky bond markets.

At the core of the team's 2014 success was a contrarian duration call at the beginning of the year. While interest rates were widely expected to rise, the team positioned the funds with longer durations than those of the Aggregate Index and many of their peers. As long-term rates declined through the year, the funds' 7% returns for 2014 bested more than 95% of peers and topped the index by more than 100 basis points. The funds also got good mileage out of stakes in agency and nonagency mortgages and a short position in the euro.

Allocation Fund Manager of the Year
Anne Lester and Team
JPMorgan SmartRetirement Target-Date Series (JSIIX)
This is the first time we've recognized a manager of a target-date series. It's about time. As the investment vehicle of choice (or by default) for retirement-plan savers, target dates are now the largest type of allocation funds, with more than $700 billion in assets and around $50 billion of inflows last year.

Anne Lester has led the JPMorgan SmartRetirement team since the series inception in 2006, and most of the fund's managers have spent their investment careers at J.P. Morgan. That stability has helped the series successfully blend all the key elements of target-date management: the glide path, strategic allocation, manager selection, and tactical positioning. The series' glide path is more conservative (lighter in equities) than its peers', but that decision is based on extensive research on J.P. Morgan's plan-participant base. Lester and team also emphasize greater diversification than many of their peers, with the allocation including stakes in REITs, high-yield bonds, and commodities. For manager selection, Lester and team screen potential underlying funds for factors such as expected alpha, correlation between strategies, and fees. J.P. Morgan's fund universe is of varying quality, but the team has done a commendable job selecting consistent performers from that lineup, mixing fundamental and quantitative strategies and otherwise seeking to combine funds that don't correlate strongly. The team makes tactical moves at the margins that have, in general, added value.

In 2014, the series' funds, on average, ranked in the best decile of their respective peer groups, with each fund in the series returning more than 5%. The team fired on all cylinders, with strategic asset allocation, tactical positioning, and selection of underlying managers all contributing to outperformance. A highly diversified approach paid dividends, as a dedicated allocation to REITs and a modest bias toward emerging-markets stocks in the international sleeve contributed to results. A tactical overweighting to U.S. large caps and an underweighting to core bonds boosted performance. Strong showings from most of the underlying domestic-equity managers also propelled the series ahead of the competition. With a Silver Morningstar Analyst Rating, the series now also has Positive ratings for all five pillars after Morningstar upgraded the Parent pillar in December 2014. Since the series' inception, the average rank of its funds has never fallen into the bottom third on a calendar-year basis.

Alternatives Fund Manager of the Year
Robert Jones and Ali Motamed
 Boston Partners Long/Short Equity (BPLSX)

It probably comes as no surprise that we don't have a very big universe of alternatives managers that have Morningstar Analyst Ratings of Gold, Silver, or Bronze. That's because most mutual funds that pursue alternative strategies have relatively short records. This year's winner, however, is one of the longest-tenured managers in the alternative mutual funds space. Robert Jones took over Boston Partners Long/Short Equity fund in 2004, when the strategy was overhauled to its current approach. Ali Motamed, a longtime analyst on the fund who has worked with Jones for more than a decade, was promoted to the named management team in 2013.

Jones has earned outstanding long-term results for the fund by actively investing in stocks long and short. He selects stocks based on three primary factors: valuation, business fundamentals, and catalyst for change. This three-factor framework keeps the team focused. Analysts cannot pitch ideas outside the scope of the process. The long book usually stays around 95% invested, while short exposure can range between 10% and 80%, depending on the opportunities management finds.

In 2014, the fund's category-beating 4.7% return was particularly notable given the fund's low average net exposure of 34% and a weekly beta for the year of only 0.12. Jones managed to produce alpha from the short portfolio--no easy task in a strong year for the stock market--with gains in stocks such as  Netflix (NFLX) and  Twitter (TWTR). Although high fees are a glaring weakness, the fund has been closed for several years to allow management to maintain its flexibility, and its Analyst Rating was recently upgraded to Silver from Bronze, in conjunction with an upgrade to the Parent rating of Boston Partners. Both managers also show commitment to the strategy with each investing more than $1 million in it. With the managers' commitment, tested process, and track record, we're confident in their ability to execute the higher degree of difficulty associated with running a complex long-short strategy.


For a list of the open-end funds we cover, click here.
For a list of the closed-end funds we cover, click here.
For a list of the exchange-traded funds we cover, click here.
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Jon Hale does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.