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Nominees for 2014 Domestic-Stock Fund Manager of the Year

Five candidates who did more than ride the market's currents.

Today, we reveal the nominees for Morningstar's Domestic-Stock Fund Manager of the Year. Columns discussing the nominees for other asset classes will follow this week and next.

Morningstar will announce the winners on Jan. 21.

These are not one-hit wonders. The list of five includes some repeat nominees and winners, and all of the finalists have long-term records that are just as impressive as their 2014 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 those whose recent achievements 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, we consider not just the managers' most prominent funds but also others that they run (when applicable). Their funds need to have Morningstar Analyst Ratings of Gold, Silver, or Bronze.

The U.S. stock market was volatile in 2014 but ultimately rose to break through pre-financial crisis highs. Domestic share prices climbed a wall of worries that included high valuations, historically high profit margins, sluggish global economic growth, conflicts in Ukraine and Middle East, and plunging oil prices. At this stage in the now nearly six-year-old bull market, the challenge for naming the Domestic-Stock Fund Manager of the Year is finding managers who have not just benefited from tailwinds beyond their control. The nominees below did more than ride the prevailing market currents.

Phillip N. Davidson, Kevin Toney, Brian Woglom, and Michael Liss,  American Century Mid Cap Value (ACMVX),  American Century Value (TWVLX), and  American Century Equity Income (TWEIX)
2014 Returns: 16.3%, 12.9%, and 12.5%
Morningstar Category Rank (Percentile): 2, 15, 20

Davidson and his team run three mutual funds and a total of $20 billion across all accounts, but Silver-rated American Century Mid Cap Value was the team's standout in 2014. The fund beat 98% of its peers and was one of the few actively managed funds in the group to beat the Russell Midcap Value Index--and it did so by more than 150 basis points. The other funds, American Century Value and American Century Equity Income, also beat more than three fourths of their large-value peers, though they lagged the Russell 1000 Value Index. All three have beaten their average rivals and prospectus benchmarks since inception. Davidson, Toney, Woglom, and Liss have established themselves as disciplined stock-pickers who rely on screens and fundamental work to find higher-quality stocks that look cheap on at least two valuation metrics. They're equally methodical sellers who aren't afraid trim or unload a stock when it shows more downside risk. At American Century Mid Cap Value, which is closed to new investors, health-care stocks such as  Hospira (HSP) and LifePoint Hospitals (LPNT) have helped this past year, and so has some serendipitous merger and acquisition activity, such as  Tyson Foods' (TSN) takeover of Hillshire and  Becton Dickinson's (BDX) attempt to acquire  CareFusion (CFN).

Juliet Ellis, Juan Hartsfield, and Clay Manley, Invesco Small Cap Growth (GTSAX)
2014 Return: 7.7%
Morningstar Category Rank (Percentile): 10

This is the least obvious nominee. Though the Silver-rated fund ranked ahead of 90% of its small-growth peers, its absolute return was among the smallest of the funds we considered. However, it did very well in a rough year for small-cap growth funds, which were 2014's weakest diversified domestic-stock fund category. Lead manager Ellis and her team, including comanagers Hartsfield and Manley, have shown stock-picking acumen. Morningstar analyst Jeff Holt notes that stock selection across the diversified portfolio drove outperformance. Sector weightings remain within 3.5 percentage points of the fund's benchmark index, while stock-picking added to returns in most sectors for the year. The fund's steady focus on U.S. companies also helped in a year when domestic stocks outperformed international ones, so did having fewer micro-cap stocks than its benchmark and typical peer in a campaign when larger caps did better. Ellis and Hartsfield just hit their 10-year mark as comanagers on this closed fund in September, and since their start, the fund has beaten the Russell 2000 Growth Index and 91% of small-growth funds and has done so with below-average Morningstar Risk scores.

Todd Ahlsten and Ben Allen,  Parnassus Core Equity (PRBLX)
2014 Return: 14.5%
Morningstar Category Rank (Percentile): 11

What the managers of Silver-rated Parnassus Core Equity did right in 2014 was what they always do. Ahlsten and Allen seek undervalued companies that score well on environmental, social, and governance screens and also have wide or increasing economic moats, or competitive advantages. They limit the portfolio to about 40 holdings and let their stock-picking determine sector exposure. Ahlsten and Allen are patient and will hold on to good companies purchased at reasonable prices as long as their fundamentals justify their valuations. Several longtime holdings, including  Applied Materials (AMAT) and  Iron Mountain (IRM), fared well in 2014, but the fund's biggest winner was relatively recent purchase  Allergan (AGN). Ahlsten and Allen added the drug company in 2013 because they believed its price, which has lagged in recent years, didn't factor in the noncosmetic uses of the company's Botox franchise or the value of the company's pipeline. These were the same qualities that attracted bids from would-be acquisitor  Valeant Pharmaceuticals (VRX) and eventual merger partner  Actavis (ACT). The fund tends to cluster in some sectors and ignore others, so it can look out of step from time to time, but over long periods, it has been very strong on both an absolute and risk-adjusted basis.

Theo Kolokotrones, Joel Fried, Al Mordecai, Mohsin Ansari, and James Marchetti,  Primecap Odyssey Aggressive Growth (POAGX) ,  Primecap Odyssey Growth (POGRX),  Primecap Odyssey Stock (POSKX),  Vanguard Capital Opportunity (VHCOX),   Vanguard Primecap Core (VPCCX), and  Vanguard Primecap (VPMCX)
2014 Return: 16.6%, 13.9%, 15.0%, 18.9%, 19.3%, 18.7%
Morningstar Category Rank (Percentile): 1, 11, 8, 1, 1, 1

The Primecap team's patient strategy, based on finding stocks with great long-term growth prospects and hanging on to them until the market recognizes their worth, paid off in a big way in 2014. Notably, big biotech and pharmaceutical holdings--such as  Biogen Idec (BIIB),  Amgen (AMGN),  Eli Lilly (LLY), Roche, and  Novartis (NVS)--in all six funds posted strong returns for the second-straight year. Managers Fried, Kolokotrones, Mordecai, and Ansari have long said the market was underestimating these companies' pipelines and growth potential. The managers' long-standing bet on airline stocks also paid off in 2014, with  Southwest Airlines (LUV) more than doubling and  United Continental Holdings (UAL), Delta (DAL), and American Airlines (AAL) all posting strong gains, too. These successes are hallmarks of Primecap's patient, contrarian growth approach, which, despite periodic fallow seasons, has produced superior long-term results. Not only did all six Gold-rated funds beat the vast majority of their peers in 2014, but their 10-year returns (and 15-year results for the Vanguard funds) are topnotch as well. The Primecap team won the Domestic-Stock Fund Manager of the Year award in 2003 for its work at the Vanguard funds, which are currently closed to new investors along with Primecap Odyssey Aggressive Growth.

Brian Berghuis,  T. Rowe Price Mid-Cap Growth (RPMGX)
2014 Return: 13.2%
Morningstar Category Rank (Percentile): 6

The Gold-rated fund, run by 2004 Domestic-Stock Fund Manager of the Year award winner Berghuis, beat 94% of its peers in 2014. It also outperformed the Russell Midcap Growth Index by 100 basis points and the S&P MidCap 400 Index by more than 300 basis points--one of the few in the category to beat any index. It nearly doubled its average peer's return despite having an above-average stake in cash of about 6% versus 2% for its average peer. Despite those headwinds, picks within consumer discretionary and health care have helped, including CareFusion, Whitewave Foods (WWAV), and  Marriott (MAR). The fund is the largest in the category but is closed to new investors and still has a superior record over Berghuis' 22 years, particularly on a risk-adjusted basis. It has been consistently good, too, only landing in the category's bottom half in three calendar years during his tenure. As a result, the fund has been an easy one for investors to own, with good investor returns.

Morningstar analysts Gretchen Rupp, Jeff Holt, Laura Lallos, David Kathman, and Katie Reichart contributed to this column.

Dan Culloton has a position in the following securities mentioned above: POAGX. Find out about Morningstar’s editorial policies.