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Fund Spy

Announcing the Morningstar Fund Managers of the Year for 2011

These winners stayed on track in a year of head fakes.

What a year to be a fund manager. U.S. stocks were up early, plunged in late summer, then rose again, ending 2011 barely above water. Foreign equities, plagued by debt troubles in Europe and concerns over slowing growth in emerging markets (primarily China and India), finished the year deep in the red. The U.S. bond market enjoyed its status as a safe haven with the strength of U.S. government bonds surprising many astute investors who had been concerned about Treasuries' ultralow yields against a backdrop of slow growth and high government debt. Overall, the most successful managers were able to keep perspective by staying focused on deep research within their circles of competency.

As always, some fund managers' styles were in favor, helping elevate them to the top of the performance charts. Yet, our winners' returns cannot solely be explained by a stylistic tailwind. We look for managers who nailed the past year on the heels of much lengthier success, and we measure achievement not only by observing trailing performance but also by reviewing managers' strategies in action over time.

Morningstar presents three awards each year: Domestic-Stock Fund Manager of the Year, International-Stock Fund Manager of the Year, and Fixed-Income Fund Manager of the Year. In early December, fund analysts specializing in those fields narrow the universe for each award to five nominees, and the winner is then selected by Morningstar's entire team of mutual fund analysts. To make the most informed decision, we comb through portfolios, returns, stewardship, and our own institutional memory of these managers as we debate and vote. While the awards have always distinguished the past calendar year, we've never simply chosen the highest-returning funds. We favor managers who have achieved strong risk-adjusted performance through the careful execution of a solid investment strategy and who act as responsible stewards of investors' capital.

This is not an attempt to pick the best manager for the upcoming quarter or year; rather, it recognizes managers' past achievements. Still, we're confident this year's winners--and past ones—can enjoy continued success in the future because our selection process focuses not only on performance but also on how those returns were achieved.

Domestic-Stock Fund Manager of the Year for 2011
Scott Satterwhite, James Kieffer, and George Sertl
 Artisan Mid Cap Value (ARTQX): 2011 Return/Category Rank: 6.42%/2
 Artisan Value (ARTLX): 2011 Return/Category Rank: 5.49%/15
 Artisan Small Cap Value : 2011 Return/Category Rank: negative 3.17%/49

Scott Satterwhite, James Kieffer, and George Sertl shone in 2011 but didn't get off to a running start. Although each of the three funds they manage gained more than 10% in 2010 and continued on an upward trek in early 2011, the market favored companies that were more highly leveraged than what this team prefers and the funds lagged their peers moving into the year. Yet, when the tide turned and risky fare was punished, this team's approach proved resilient. The managers achieved their success in 2011 and have amassed an impressive longer-term record by applying a patient, contrarian approach to companies of all sizes.

The managers prize healthy balance sheets and strong business models, and they look for stocks trading at steep discounts to their estimate of private-market values. That focus was more than a hypothetical exercise in the case of National Semiconductor, held in Artisan Mid Cap Value, which was purchased by  Texas Instruments (TXN) in 2011 at a 78% premium. Many of the team's recent successes, in fact, have come from technology, a sector traditionally more attractive to growth managers. But tech stocks today sport the kind of balance-sheet strength and cash flow characteristics this team likes. While the tech sector in aggregate has been a poor performer, this team has managed to park some real gems in the portfolios-- Apple (AAPL) in Artisan Value, National Semiconductor in Artisan Mid Cap Value, and Manhattan Associates (MANH) in Artisan Small Cap Value. Success has come from more-traditional value areas, too. Utilities have been a boon for the funds, while keeping a light stake in financials and avoiding banks definitely helped as well.

The managers spread their conviction broadly (although the larger-cap funds sport rather concentrated portfolios); they limit top positions to no more than 5% of assets, relying on most of their picks to do well rather than counting on a few outsized successes. This steady profile has worked in a variety of markets. Artisan Small Cap Value hasn't had a banner year in 2011, but it is in the top quartile for the trailing 10 years, as is Artisan Mid Cap Value (Artisan Value doesn't have a 10-year record), and all three funds have shone over the past five years, which encompasses several sharp market reversals. They've also beaten their respective benchmarks and the majority of their peers with remarkable consistency over rolling three- and five-year periods. That makes good fundholder experiences highly likely.

The management team has also been careful to preserve their ability to outperform by limiting capacity; Artisan Small Cap Value and Artisan Mid Cap Value are both closed to new investors.

International-Stock Fund Manager of the Year for 2011
William Browne, John Spears, Tom Shrager, and Bob Wyckoff
 Tweedy, Browne Global Value (TBGVX): 2011 Return/Category Rank: negative 4.13%/5

This fund and its management team stood out for limiting losses in a brutal year for international-stock investing. Tweedy, Browne Global Value lost 4.13% in 2011, which is roughly 800 basis points better than rival funds and the MSCI EAFE Index.

The fund's biggest help came from heavy positions in tobacco and alcohol stocks, which had a standout year. The portfolio held sizable positions in  Philip Morris (PM) and  British American Tobacco (BATS) plus spirits-maker  Diageo (DGE), all of which were up double digits in 2011. But the real key to the fund's resilience in 2011 was the portfolio's distance from banks, the epicenter of Europe's problems. The fund has one of the smallest bank weightings in its category, with a few non-European banks holding measured spots in its portfolio. Thick controversy is not a magnet drawing these managers in; rather, they prefer financially strong companies with good franchises trading at reasonable valuations--an approach that's worked well over time.

This team does not only shine in down markets. While the fund was in its category's top quartile in 2008's treacherous environment, it also locked in top-quartile finishes in 2009's and 2010's rallies. The fund's toughest times came in 2002 when its consumer-oriented bent hurt returns and later in the decade when the U.S. dollar weakened. In that period, the fund's fully hedged policy damaged its relative standing versus funds that don't hedge.

This is a second win for members of this team. William Browne and John Spears won the award in 2000 along with a former comanager, the late Chris Browne. Tom Shrager and Bob Wyckoff are 20-year veterans of the advisor and were quite involved with this foreign large-value fund long before they joined the helm in the mid-2000s. The managers have also earned good year-to-date and long-term risk-adjusted results at  Tweedy, Browne Value (TWEBX) and  Tweedy, Browne Worldwide High Dividend Yield Value (TBHDX) using similar approaches.

Fixed-Income Fund Manager of the Year for 2011
John Carlson
 Fidelity New Markets Income (FNMIX): 2011 Return/Category Rank: 7.93%/1

This fund focuses on buying emerging-markets bonds denominated in U.S. dollars, and 2011 was a good year for that mandate. But its stellar results owe much to manager John Carlson's experience and deft management in what was a rocky environment for emerging markets.

Plenty of managers paid for being on the wrong side of interest rates in 2011, but Carlson got it right. He doesn't typically make big interest-rate bets, but he was concerned about deflation and lengthened the fund's duration, a measure of its interest-rate risk, in response. The fund's duration peaked near 7.5 years in October, well above the index's level of 6.75 years, just in time to benefit from the rally for long-dated, dollar-denominated debt. He has since brought the fund's duration closer to that of its index.

What Carlson didn't own also benefited the fund. He entered 2011 with roughly 17% in emerging-markets corporate bonds, a position that had paid off nicely in recent years. But he grew wary of valuations and lightened up on those positions in the spring and summer, leaving the portfolio with just 5% in emerging-markets corporate bonds by September, which paid off when prices were hit in the latter half of the year. And although local-currency debt isn't this fund's focus, it has held up to 10% in such fare as recently as late 2009. But Carlson virtually eliminated it from the portfolio in early 2011--a timely move as local-currency bonds have lagged dollar-denominated ones by a wide margin in 2011.

Carlson's deft handling of 2011 fits the pattern of strong management established over his 16-year tenure. The fund's returns are compelling in an absolute sense and are in the top quartile of emerging-markets peers for the trailing one-, three-, five-, 10-, and 15-year periods. He has navigated several emerging-markets crises well. He also deserves kudos for staying true to this fund's strategy and posting competitive long-term, risk-adjusted returns despite the growing popularity and competing performance of local-currency alternatives.


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Karen Dolan has a position in the following securities mentioned above: TBGVX. Find out about Morningstar’s editorial policies.