Fund Managers of the Year
02/03/2006 12:00 am EST
Each year, in a highly awaited report, Morningstar unveils its "Manager of the Year" awards. Here, editor Russel Kinnel takes a look at those managers that it considers the very best in the fund management field, among domestic, fixed-income, and international funds.
"In choosing the winners of the 2005 Morningstar Managers of the Year awards, we were fortunate to have so many good fund managers who did all the right things for shareholders in a wide variety of markets. In 2005, the markets certainly made a case for diversification. Soaring energy and precious metal prices burned bonds, which hate inflation. As a result, the bond market had a cold year in which funds were lucky to earn 2%. Foreign stocks, fueled by those same commodities and reforms in key markets, produced hot returns averaging 17%. Finally, the typical domestic stock fund returned a lukewarm 7%.
"You might expect that this environment would cause us to diversify with our three Manager of the Year selections, possibly choosing a bear for fixed-income, a bull for foreign stocks, and someone in between for domestic equity. But while we certainly look for managers who had great one-year showings, they also must have produced superior results over a long period of time--a single great year won't cut it. The surest way to making a lot of money for shareholders is to string together a bunch of modest victories in order to produce strong results over the long haul.
"We also look closely at how seriously a manager takes his or her fiduciary duty to shareholders. In the long run, shareholder orientation is closely linked to shareholder returns. We look for managers who put shareholders first when it comes to fees, communication, their own investments in their funds, closing their offerings in a timely fashion, and other important issues. A strong Stewardship Grade is therefore a prerequisite for any Manager of the Year contender.
"We're encouraged that so many great managers passed all those tests. It made for very difficult decisions this year. You could make a strong case for a number of managers, but we only chose one for each of the three broad asset classes: domestic stocks, foreign stocks, and fixed-income. It's also worth noting we've been fans of these funds for a long time.
"In 2005, Chris Davis and Ken Feinberg's abilities really came to the fore. Although it was a treacherous year for financials, this financials-heavy fund was able to thump the S&P 500 and most of its peers. The fund's 10.19% return was far ahead of the 4.91% gain of the S&P 500 because the managers found high-quality financials and some energy stocks that produced remarkable returns. Because turnover at Selected American and Davis NY Venture is in the single digits in most years, successful stock picks in any single year are actually attributable to work the firm has done over many previous years.
"Just as important as these managers' stock investments have been their investments in people. Although their firm is still small, Davis and Feinberg rounded out their analyst staff over recent years with some outstanding hires. For example, Kent Whitaker, who joined Davis Selected Advisers after working for Amoco, has played an important role in finding the energy names that have paid off recently. We're also impressed by Davis and Feinberg's focus on doing the right thing for fund owners. There are hundreds of funds where portfolio managers show a half-hearted commitment to shareholders with a lack of investment in their funds or needlessly high fees. Davis and Feinberg show that is not how responsible fiduciaries behave.
Fixed-Income Managers of the
Tad Rivelle, David Lippman, Laird Landmann, and Stephen Kane
Metropolitan West Total Return Bond (MWTRX)
"MetWest takes a creative approach to managing fixed-income assets, and it has produced great results. The firm will adjust its funds' interest-rate sensitivity, shift into different sectors of the bond market, or bulk up on individual bond issues when opportunities present themselves. The team used corporate bonds to push this fund past its average peer in 2004, and in 2005 it made profitable forays into high-yield bonds, bank loans, and other specialty areas of the market, helping the fund nearly double the return of its average peer.
"In 2005, the fund's 3.11% return topped 95% of its peer group. The fund's bold approach burned it in 2002, as a big bet on WorldCom bonds turned sour, but it has since recouped that lost ground and then some as the market has corrected its overreaction to credit risk. Despite a 1% loss in 2002, the fund has delivered an annualized return of 7.22% since its 1997 inception, which easily beats the average intermediate-term bond fund's 5.84% return. That's a huge margin in the high-quality bond world, where a few basis points worth of outperformance is a big deal. MetWest also gets an A for stewardship because management invests in the funds and the firm keeps expenses low.
International Stock Managers of
Rob Lyon, Matt Pickering, and Jerry Senser
ICAP International (ICEUX)
"Funny how great stewards can produce great returns. Lead manager Rob Lyon's fund gets an A for overall stewardship. Although small, the fund has always charged just 0.80% to retail investors even though many fund companies mark up their foreign-fund management fees simply because they can get away with it. Likewise, the fund's board is paid in fund shares. Just as important, ICAP has a healthy corporate culture that has kept turnover among its investment professional staff quite low.
"In May 2005, the fund converted from a Europe fund to a broad foreign-stock mandate because management was finding a lot of attractive names in Japan. The move was fortuitous, as Japan enjoyed a strong rally in 2005. Lyon and his ICAP colleagues blend top-down analysis with stringent valuation work to find attractive companies with potential. They run a concentrated portfolio of about 35 names, most of them large-cap. Lyon brings an unusual wrinkle to that concentrated portfolio of value stocks, though. He trades around positions pretty rapidly based on changes in valuation. Although the companies in the portfolio don't change all that much, their position sizes are always in flux."