Announcing Morningstar’s 2015 Fund Managers of the Year

Our manager research team at Morningstar analyzes and rates more than a thousand fund managers every year and speaks to hundreds more whose funds we don’t cover. Over the years, we’ve come to appreciate how difficult it is for most active managers to perform consistently well using a repeatable, well-executed process. That’s why we begin each year by recognizing some of those who do as Morningstar Fund Managers of the Year.

Our selections come from the universe of funds that have current Morningstar Analyst Ratings of Gold, Silver, or Bronze, an indication 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. To get such a rating, analysts use our five-pillar framework to go in-depth on Process, People, Performance, Parent, and Price, and then must take their recommended rating through our Ratings Committee for approval.

Nominees are generated within our analyst asset-class teams. We have four: Equity, Fixed Income, Multiasset, and Alternatives. Then, the entire analyst team gets together to discuss the nominees and vote on the winners.

While our Manager of the Year award winners have distinguished themselves in the past calendar year, we’ve never simply chosen the best-performing funds. The award recognizes managers who have not only just completed outstanding years but also have added on to already-stellar records.

Here are this year’s winners, followed by our analysts’ take on what makes them tick:

Domestic-Stock Fund Manager of the Year 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 Morningstar 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.

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 an 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 or less. Picks that work out can reward the fund’s shareholders for decades. For example, top-10 holding

– Alec Lucas

International-Stock Fund Manager of the Year Robert Lovelace and Team American Funds New Perspective

ANWPX

2015 Return: 5.3% Morningstar Category Rank (Percentile): 7

This world-stock fund is run by seven named managers located in the United States, the United Kingdom, and Asia, each running a sleeve of the portfolio independently. Two come from Capital Group subsidiary Capital International Investors, while the others work for another subsidiary, Capital World Investors. The CII and CWI managers communicate within their respective teams and with their respective analyst groups, but they don't share investment ideas across subsidiaries. That makes for a more diverse fund, as does the firm's practice of having each manager run a separate sleeve of the portfolio. Robert Lovelace, the longest-tenured manager, oversees CII's side and the fund as a whole, while Joanna Jonsson oversees CWI's side. Although Lovelace and Jonsson don't share investment ideas, they talk regularly to ensure that balance and diversification characterize each side's respective subportfolios and the entire fund.

Over the years, the fund has amassed an impressive record. Through the end of 2015, its three- and five-year rankings were in the 12th percentile of the world-stock Morningstar Category, and its 10-year return landed in the fourth percentile. The fund also comfortably topped the returns of the relevant indexes in those stretches. What's more, its Morningstar Risk rating was below average (indicating that it had milder-than-average volatility) for all three periods. That's a powerful combination.

In 2015, the fund demonstrated its relative resilience once again. In the third quarter, when the MSCI All Country World Index dropped 9.5%, this fund held its loss to 6.5%, which was an important factor in why it landed in the category's top decile for the year. Other reasons included very strong performance by the fund's two top holdings, Novo Nordisk and

– Gregg Wolper

Fixed-Income Fund Manager of the Year Jerome Schneider PIMCO Short-Term

PTSHX

2015 Return: 1.37%

Morningstar Category Rank (Percentile): Top 1%

It is unusual to see a manager nominated for the performance of a fund in the ultrashort-bond Morningstar Category, a relatively conservative group typically run with durations of less than a year. However, in a year when short-term rates rose sharply and many bond funds failed to earn a positive return, Jerome Schneider's performance at PIMCO Short-Term stands out. This fund earned a 1.37% return in 2015, placing it in the top 1% of the ultrashort-term bond category. The fund's returns also compare strongly with the short-term bond category norm, where portfolio durations range between roughly 1.0 and 3.5 years. Schneider actively adjusted the fund's curve positioning and rate sensitivity over the course of the year, which contributed a healthy portion of its returns. Schneider maintained a very short duration for the first half of the year, even briefly taking duration into slightly negative territory in January and February. He then lengthened duration modestly later in the year, generally avoiding issues in the ultrashort reaches of the curve, sensitive to changing expectations surrounding Federal Reserve policy. The stability and success of Schneider's team is important given that it helps in the running of short-term money for funds across the firm, including

– Sumit Desai

Allocation Fund Manager of the Year

Michael Reckmeyer and John Keogh

Vanguard Wellesley Income

VWINX

2015 Return: 1.3%

Morningstar Category Rank: Top 1%

Stability has been the key to this fund's success. Unlike many conservative-allocation peers, it doesn't make tactical shifts between stocks and bonds. Michael Reckmeyer invests between 35% and 40% of the fund's assets in equities that pay above-average dividends, which he tries to buy when they are out of favor. Meanwhile, John Keogh tilts the remaining 60%-65% bond portion toward corporates rated in the A range, and he eschews big interest-rate bets. The duo uses the market's fluctuations to rebalance the fund's mix of stocks and bonds and relies primarily on security selection to come out ahead.

In 2015's rough market, the fund's 1.3% gain doubled the return of its customized benchmark (weighted 65% in the Barclays U.S. Credit A or Better Index and 35% in the FTSE High Dividend Yield Index) and placed in the conservative-allocation category's top 1%. The fund's equity portfolio had a strong year, owing to stock selection within the consumer staples and energy sectors. Former top-10 holding

The fund also boasts a superior longer-term record. Since the shared tenure of fixed-income manager Keogh and equity manager Reckmeyer began in July 2008, the fund's 7% annualized gain through December 2015 places second out of about 140 peers, while its Morningstar Risk-Adjusted Return places first. – Leo Acheson

Alternatives Fund Manager of the Year

James Troyer, Michael Roach, and James Stetler

Vanguard Market Neutral

VMNIX

2015 Return: 5.52%

Morningstar Category Rank (Percentile): 12

This team was also nominated in 2014. Simply put, Vanguard Market Neutral has produced what investors want from alternative strategies: very low correlation, solid returns when equity markets go south, and, on top of that, the lowest fees of any alternatives fund. The three managers are all long-tenured members of Vanguard's quantitative-equity group; James Troyer has been a named manager on the fund since 2007, while Michael Roach and James Stetler were added in 2012. Vanguard has been the sole manager of the fund since October 2010, when it dropped AXA Rosenberg as a subadvisor. From that point, the fund's 4.2% annualized return and 0.95 Sharpe ratio are the best in the market-neutral category through December 2015.

The team has developed a five-factor quantitative model intended to identify stocks likely to grow their earnings faster than industry peers but also trading at inexpensive valuations (and, in the case of this fund, to short those demonstrating opposite characteristics). The managers construct the portfolio to be market-neutral by industry and size, while individual positions are capped at 0.5%, so performance is ultimately driven by the aggregate ability of its model's highly ranked stocks to outperform the low-ranked stocks within an industry. In 2015, the fund came through when it mattered most for investors. During the volatile third quarter, when the S&P 500 lost 6.4%, this fund gained 7% as its short positions fell far more than its longs. Vanguard's low-fee cost structure gives this fund an ongoing advantage (the retail shares charge only 0.25% annually), with the caveat that the lowest minimum investment is a steep $250,000, as Vanguard hopes to prevent investors from misusing the fund. – Josh Charlson