Thursday was Oscar day for the mutual fund industry as
handed out its manager-of-the-year awards.
The envelope, please. For equity funds, Jim Callinan of the $2.5 billion
RS Emerging Growth fund; for international funds, the seven-member management team of
EuroPacific Growth; and for fixed-income, Jerry Paul of the $749 million
Invesco High Yield fund.
Picking winners wasn't easy with stocks posting such boffo returns last year, with so many funds returning more than 100%, says Don Phillips, Morningstar's chief executive. (See our
Century Club list.)
"This is a year where the triple-digit return was a cutoff" for domestic funds, he adds. This lofty cutoff left impressive managers like
Magellan's Robert Stansky out in the cold.
Morningstar staffers' picks, which date back to 1987, add up to a who's who of stock and bond managers. Past winners include former Magellan mangers Peter Lynch (1988) and Jeff Vinik (1993), value maven Martin Whitman (1990) and bond gurus William Gross (1998) and Dan Fuss (1995). (In 1995, the firm divided its single manager-of-the-year award into separate trophies for domestic, international and fixed-income managers.)
But just as not all Oscar-winners go on to make great movies (see Louis Gossett Jr.'s
Iron Eagle IV
), funds run by past Morningstar winners haven't all been great investments.
"The awards show managers did a good job over the past year -- that they had the luck and skill to do well. But be cautious about using the list to pick your next investment," says Jim Folwell of Boston fund-researcher
For some managers the award is bad luck, akin to the
Don Yachtman took top honors in 1991. But life hasn't been so good since then. In the past five years his
Yacktman flagship has beaten the
index once and failed to beat its category average three times -- in 1999, it trailed by more than 34 percentage points.
Bill Dutton won in 1992 when the small-cap value specialist's
Skyline Special Equities returned 42.4%, doubling his average peer's return and trouncing the S&P 500. Since then, small-cap value stocks have fallen from favor and investors have been fickle. The fund has opened and closed several times; it's currently
merging with Skyline's two other funds. Dutton has held his own over the past five years, but deep redemptions in 1999 and losing stock picks have hit the fund hard. He lost more than 13% last year, lagging his average peer by more than 18 percentage points.
Other winners have fared better.
Legg Mason Value's Bill Miller won last year and beat the S&P 500 this year for the ninth year in a row. Former
Janus Twenty manager Tom Marsico won in 1989 and kept posting solid returns at Janus and has continued to do so in managing his own
family of funds since 1997.
One last caveat with Morningstar's awards is manager turnover. Four of the 20 winners from 1987 through last year have either changed firms or left the management business altogether.
This Year's Winners
Each of this year's winning funds have outperformed peers over the past five years, according to Morningstar.
Callinan took no-load Emerging Growth's reins in 1996. Since then he's shown up his peers in good times and bad, and this year's jaw-dropping 182.5% return beat his average competitor by more than 116 percentage points. Morningstar's Phillips believes that Callinan's prescient moves, like last year's shift into business-to-business Internet stocks -- made him a winner.
That said, his fund's $2.5 billion in assets could become a problem. Many small-cap managers say small-cap funds are less nimble when assets top $1 billion. Callinan may still have more room to grow since he holds more than 200 stocks, but this year's performance and Thursday's award could bloat the fund, causing performance to sag. Investors should also keep in mind that the fund is betting heavily on technology. Callinan had more than half the fund's assets in tech stocks on Sept. 30.
The mysterious and massive $275 billion American fund group keeps a lower profile than Garbo. But looking at its EuroPacific Growth fund, it's tough to find a weak spot. The fund's management team has beaten its peers every year since 1994. The turnover rate is just 32%, and its 57% return last year beat its average competitor by nearly 13 percentage points. The fund carries a 5.75% front-end load, but its 0.84% annual expense ratio makes it quite cheap for long-term shareholders. The fund recently announced plans to waive its 26 funds' loads for investors buying shares through some wirehouse brokerages' fee-based wrap accounts.
Jerry Paul started running no-load Invesco High Yield fund in 1994 and has beaten his peers ever since. His 9.4% 1999 return outpaced his peers by more than 5 percentage points. Most impressive about Paul's record is that he's done it with lower volatility than his group.
New CEO Award
In a new twist, Phillips also named Charles Schwab and David Pottruck co-CEOs of the year. Although
own funds topped $100 billion last year (most of those assets were in money-market funds), Phillips said the pair got the nod for the way their
fund supermarket has given investors greater investment choices, forcing traditional brokers like
to follow suit.
The CEO award could raise some eyebrows. Pottruck spoke at Morningstar's annual conference last year, and last September, Morningstar fund and stock analysts started discussing investments on Schwab's "Mutual Fund Monday" and "Tech Stock Tuesday" online chats.
But Phillips says Morningstar analysts offer commentary on many financial sites and that Morningstar's deals with Schwab involve no cash compensation. Also, Morningstar stock analysts chose Schwab and Pottruck without any input from the firm's business side, he says, which didn't know whom the analysts chose until the winners were announced.