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Our Take on the Fund Manager of the Year Winners

Morningstar analysts explain what makes the award winners stand out.

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This week, Morningstar named the 2016 Fund Managers of the Year. The following are excerpts from the four winners. Morningstar Premium Members have access to full analyst reports such as this for more than 1,000 of the largest and best mutual funds. Not a Premium Member? Gain full access to our analyst reports and advanced tools immediately when you try Morningstar Premium free for 14 days.

Domestic-Stock Fund Manager of the Year
David Wallack
T. Rowe Price Mid-Cap Value (TRMCX)

By Katie Rushkewicz Reichart, CFA | 01/10/2017

T. Rowe Price Mid-Cap Value remains a pre-eminent fund. Manager David Wallack's contrarian style and thorough research have led to superb long-term results. Reasonable fees and a willingness to close the fund to investors further make the case for a Morningstar Analyst Rating of Gold.

Wallack, who has run the fund for 16 years, has the backing of T. Rowe Price's well-regarded analyst team, but he's also an analyst at heart. That works to this fund's advantage, as he's skillfully sought out new ideas and applied his own analytical insights to find firms that are trading cheaply but have various levers to unlock value. He favors firms that have the financial wherewithal to survive a downturn and is willing to patiently wait for a turnaround. While many T. Rowe equity managers were underweight energy in 2016, Wallack went against the grain and increased the fund's energy stake in early 2016, as he found compelling valuation opportunities. He added to existing positions, including Murphy Oil (MUR) and Hess (HES), which he says have stood the test of time and have been through various energy cycles. He also bought Devon Energy (DVN), as it had to offer new equity at a price that Wallack considered attractive. While the purchases were driven by company-specific factors and not a bet on oil prices, his good calls within energy and strong stock-picking across the portfolio led to a top-decile 24.3% gain for the year, well above the Russell Midcap Value's 20.0%.

Wallack showed his contrarian leanings elsewhere, scooping up Alkermes (ALKS) as biotech broadly sold off in early 2016. While biotech is not commonplace in value-oriented portfolios, Wallack has had success in a few names through the years. In this case, the name sold off significantly on some bad drug-trial data, but he's encouraged by its royalty stream and pipeline. While the fund often owns positions that the market is skeptical of and may take time to play out, its diversified nature spreads out the risk. Over time, the fund has produced enviable risk-adjusted results that prove it's worth sticking with.

International-Stock Fund Manager of the Year
David Herro
Oakmark International (OAKIX)

By Greg Carlson | 01/12/2017

Oakmark International lost a veteran comanager, but its prospects remain strong. It continues to earn a Morningstar Analyst Rating of Gold.

At the end of September 2016, Rob Taylor, comanager of this fund since the end of 2008, retired. Taylor's departure certainly represented a loss. A 22-year veteran of the firm, he had served as director of international research from 2004-15 and comanaged Gold-rated Oakmark Global (OAKGX) since 2005.

But this fund will remain in highly proven hands. Lead manager David Herro has amassed a superb record in his 24-year tenure. He has twice previously run the fund on his own for periods of roughly three years (1992-95 and 2005-08) with no drop-off in performance. He also named a new comanager here in November--Mike Manelli, his comanager on Bronze-rated Oakmark International Small Cap (OAKEX) since 2011. The two are backed by six other analysts and portfolio managers with an average of 8.3 years' tenure at the firm. Three of them were recently named comanagers on Herro's other charges: Justin Hance on Oakmark International Small Cap, Jason Long on Oakmark Global, and Eric Liu on Oakmark Global Select (OAKWX) (which Herro has managed with Bill Nygren).

Although Herro runs more than $30 billion in this strategy, the reopening of the fund to all new investors in July 2016 isn't a concern. Investment losses and redemptions due to poor recent performance pulled that number down from a peak of over $40 billion. Herro says he hoped to match recent outflows with inflows, which makes it easier to buy and sell stocks at desired times. The strategy remains focused on large caps.

The fund's financials holdings, which make up a sizable chunk of assets, have largely underperformed (even in 2016, when the fund did well overall). But Herro argues that the fund's European bank stocks in particular are too cheap given their improved balance sheets and potential for earnings growth. The fund remains a solid holding.

Fixed-Income Fund Manager of the Year
Ford O’Neil and Team
Fidelity Total Bond (FTBFX)

By Emory Zink | 01/23/2017

Fidelity Total Bond earns a Morningstar Analyst Rating of Gold by thoughtfully exercising flexibility across a broad fixed-income opportunity set and generating compelling longer-term performance at a reasonable price.

In the competitive intermediate-term bond Morningstar Category, this fund stands out for making the most of its wide mandate. In addition to investing in investment-grade U.S. bonds like its bogy, the Bloomberg Barclays U.S. Aggregate Bond Index, manager Ford O'Neil has the flexibility to venture into high-yield, emerging-markets, and international bonds. He uses Fidelity's 100-plus-person fixed-income department and looks for undervalued securities and sectors that will provide strong risk-adjusted returns.

Since its 2002 inception through December 2016, the fund gained 5.0% annualized, outpacing its average intermediate-term bond peer, its benchmark, and the Bloomberg Barclays U.S. Universal Index--which includes a menu of "plus" sectors similar to those in this fund. Still, the fund carries risk. Its weightings in lower-quality bonds and emerging markets make it more susceptible to losses and have burned it before, such as during the 2008 financial crisis.

Management is typically duration-neutral relative to its bogy but makes active bets on sector, yield-curve, and individual security selection. As of December 2016, it was overweight corporate, emerging-markets, and high-yield debt and underweight in Treasuries and mortgage-backed securities. O'Neil and his team often take a contrarian approach and aim for longer-term risk-conscious results above all else. Following the 2008 crisis, the fund had a nearly 20% stake in emerging-markets and high-yield bonds because the managers thought they were oversold.

With around 80% of assets currently dedicated to investment-grade bonds, the fund maintains a high-quality core that emboldens management to seek opportunities across high-yield, emerging-markets, and international bonds--exercising the "plus" portion of its mandate with discipline and experience.

Allocation and Alternatives Fund Manager of the Year
The Equity and Fixed-Income Investment Policy Committees
Dodge & Cox Balanced (DODBX)

By Andrew Daniels | 01/13/2017

Dodge & Cox Balanced earns a Morningstar Analyst Rating of Gold for its strong long-term record, sound process, rock-bottom expenses, and experienced management team backed by an exemplary firm. It also isn't for everyone.

Those seeking broad stock-market exposure with a predictable bond ballast may be disappointed. Asset-allocation here will fluctuate given market valuations. The fund can hold up to 75% in equities and was near that upper limit for several years because management found stocks more attractive than low-yielding bonds. During 2013's strong stock rally, they trimmed the stake below 70%, but it has remained relatively high since then, even within the allocation--50% to 70% equity category. That equity overweighting helped drive top-decile results during the trailing three-year period ended December 2016.

It's not just asset allocation that sets the fund apart. A patient value approach to stocks that sometimes includes a contrarian bent can pay off nicely, but it creates bumps along the way. The bottom-up process can also result in pronounced sector biases; the stock portfolio has near 20% or more in healthcare, tech, and financials, but it is light on consumer names and has no utilities. The fixed-income portfolio is distinctive, with an emphasis on primarily investment-grade corporate bonds that leverages the firm's industry research resources. The fund has had minimal exposure to Treasuries in recent years but an often-sizable stake in government-backed agency mortgages. The managers have kept duration low in recent years, so the fund will likely benefit from a rising interest-rate environment.

Steep losses from late 2007 through early 2009, and poor results in 2011, spurred outflows that persist. The fund's Morningstar Risk ratings, which emphasize downside variations in returns, have been High within the category over the past decade. However, its five-year returns through December 2016 were in the top decile of its category, and its 10-year returns were in the top quintile. Patient value-minded investors will appreciate the advantages of the fund's approach.

Morningstar.com does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.