Nominees for 2015 Domestic-Stock Fund Manager of the Year

Today, Morningstar reveals the nominees for its Domestic-Stock Fund Manager of the Year. Columns discussing the nominees for other asset classes will follow this week and next, and the winners will be announced on Jan. 26.

These are not one-hit wonders. The list of four includes some repeat nominees and winners, and all of the finalists have long-term records that are just as impressive as their 2015 results. Morningstar's Fund Manager of the Year awards have always tried to recognize managers who not only post strong trailing-year returns but also have recent achievements that point to enduring processes and strong prospects for sound long-term performance. It also helps if the managers have delivered outstanding results for a significant number of shareholders over time and exhibit histories of close alignment with shareholders. In evaluating the candidates, Morningstar analysts consider not just the managers' most prominent funds but also others they run (when applicable). Their funds need to have Morningstar Analyst Ratings of Gold, Silver, or Bronze.

The U.S. equity market entered a correction in 2015’s third quarter, which left it barely positive for the year. Concerns about a slowdown in the Chinese economy rippled through various domestic sectors, including materials and energy. Indeed, the price of oil ended the year even lower than where it began. That provided a tailwind to consumer stocks, which finished second only to health care. Tech names also fared relatively well. The market environment favored funds in the large-growth Morningstar Category, especially those with exposure to  Netflix (NFLX) and  Alphabet (GOOGL), which both posted tripled-digit calendar-year gains. While all four nominees are growth funds, there’s only one large-cap offering with exposure to these two names. That’s where we’ll begin, and from there we'll move down the market-cap spectrum.

Spiros "Sig" Segalas, Michael A. Del Balso, and Kathleen A. McCarragher 
 Harbor Capital Appreciation (HACAX) and
 Prudential Jennison Growth (PJFAX)
2015 Returns: 11%, 10.8%
Morningstar Category Rank (Percentile): 4, 5

Lead manager Spiros "Sig" Segalas has 40-plus years of experience. He cofounded Jennison Associates in 1969 and has managed the subadvised Harbor fund since 1990 and the Prudential clone since 1999. His comanagers are also seasoned. Michael Del Balso has been with Jennison since 1972, and Kathleen McCarragher joined in 1998. Segalas and his team have put together a fantastic long-term track record by looking for companies with sustainable above-average sales growth. He prefers firms with growth driven by unit sales rather than price increases, which is why the portfolio mostly avoids commodity-driven businesses. That helped in 2015, as did the funds' positions in  Amazon.com (AMZN) and Netflix. Amazon and other big contributors, like Alphabet, have been in the portfolios for many years, while Segalas added Netflix more recently in mid-2013. Several moves made in 2015 also helped, including buying China’s Tencent Holdings early in the year.

Among the nominees, only this team’s funds remain open to new investors. The rest are closed.

William O. Bell IV, W. Matthew Hereford, and Charles B. Reed
 Eaton Vance Atlanta Capital SMID-Cap (EAASX)
2015 Return: 9.5% 
Morningstar Category Rank (Percentile): 1

The fund now boasts four top-decile calendar-year finishes in the past decade, while avoiding the bottom quartile entirely. Its 9.5% gain in 2015 is all the more impressive given its sector positioning. The fund’s exposure to energy and materials was modest, but it had considerable overweightings in industrials and financials stocks. Indeed, the portfolio’s combined stake in these two lackluster sectors, as of late 2015, ranked in the mid-cap growth category’s top decile. Performance of the top 20 positions, as of October 2015, illustrates how strong a stock-picking year it was for the fund. Nearly four fifths of them, the vast majority multiyear holdings, posted double-digit gains in 2015, ranging from Acuity Brands’ (AYI) 67.29% to  AptarGroup’s (ATR) 10.4%. Only four of those stocks lost money, and two of those losses were negligible.

The fund previously targeted only small caps but in 2007 broadened its mandate to include stocks in the $500 million to $5 billion market-cap range. Throughout, the managers have sought to buy cash-generative and durable businesses, with modest valuations relative to their prospects. They are experienced at looking for such firms. Comanagers Charles Reed, William Bell, and Matthew Hereford joined subadvisor Atlanta Capital Management in 1998, 1999, and 2002, respectively. Reed and Bell also have a work history that predates their time here.

Brian W.H. Berghuis
 T. Rowe Price Mid-Cap Growth (RPMGX)
2015 Return: 6.6% 
Morningstar Category Rank (Percentile): 3

Manager Brian Berghuis is no stranger to these proceedings. He is a nominee for the second year in a row and won the Fund Manager of the Year award in 2004. He has led T. Rowe Price Mid-Cap Growth since mid-1992, and over the course of his tenure the fund has benefited from his focus on companies that can grow at least 12% per year (based on either earnings per share or cash flow growth) without undue reliance on debt. Indeed, the fund has finished in the category’s bottom half in only three calendar years, 1999, 2006, and 2012, and in each of those years it made money. The fund’s third-percentile finish in 2015, its best in a decade, was a tribute to strong stock-picking across multiple sectors. Longtime holdings such as  O'Reilly Automotive (ORLY) and  Fiserv (FISV) powered outperformance as did more-recent additions like  The WhiteWave Foods , first purchased in 2013. A flurry of merger-and-acquisition activity in the portfolio also helped, including takeouts Hospira, Altera, and Pall Corporation.

Keith A. Lee, Robert E. Hall, Kempton M. Ingersol, Damien Davis, and Andrew J. Fones
 Brown Capital Management Small Company (BCSIX)
2015 Return: 8.8% 
Morningstar Category Rank (Percentile): 1

This fund’s top-percentile finish in 2015 marks a rebound from its subpar showing the prior year. The fund has hardly been a laggard, though. It has placed in the small-growth category’s top-quartile or better in eight of the past 10 calendar years, including 2008’s bear market as well as the rallies of 2009, 2012, and 2013.

Lead manager Keith Lee and fellow-longest-tenured manager Robert Hall own the entirety of that record, as does Kempton Ingersol. Lee and Hall started here in July 1992 and Ingersol at year-end 2000. Damien Davis and Andrew Fones are newer additions, having joined in 2013 and 2014, respectively. Former manager Amy Zhang was a key contributor prior to her early 2015 departure.

The fund’s benchmark-agnostic, bottom-up stock-picking leads it to concentrate in certain sectors, and that worked to its benefit last year. As of late 2015, it had a whopping 86% combined stake in healthcare and tech versus 53% for the Russell 2000 Growth Index. Treading so heavily in these two sectors also reflects the managers’ preference for firms with the potential "to save lives, time, money, or headaches." To find them, the managers look for companies with good business models and annual operating revenue of $250 million dollars or less. Picks that work out can reward the fund’s shareholders for decades. For example, top-10 holding  Incyte (INCY) gained 48% in 2015 thanks largely to a promising rheumatoid arthritis drug currently in its drug pipeline. The managers, however, first bought the firm in 1997 for its revolutionary genomics work. At the time, it had less than $100 million in revenue and a market cap under $1 billion. Now, it has $500 million in revenue and market cap around $19 billion.

Morningstar director of manager research for multiasset strategies, North America, Janet Yang and senior analysts Katie Rushkewicz Reichart, David Kathman, and Greg Carlson contributed to this column.