Five Money Managers Who Got It Right

BOSTON (TheStreet) -- Since the stock market bottomed out a year ago, many investors got it right as almost all industries rebounded. But some were more right than others.

The following five investment managers took different approaches. Some stayed the course. Others made the biggest bets of their lives on what seemed like down-and-out companies. Faltering real-estate firms, shaky airlines and U.S. blue-chip stocks -- their strategies were derided at the time but proved prescient.

Here's a rundown of Wall Street's savviest, how they outperformed in a time of chaos and what they foresee in 2010 and beyond.

Jay Leupp: Real-Estate Bubble to Rubble

When nearly everybody else was selling real-estate stocks at the beginning of last year, fund manager Jay Leupp was buying. In the end, his Grubb & Ellis AGA Realty Income Fund ( GBEIX) returned 72% in 2009, beating the S&P 500 and his rivals by 45 and 39 percentage points, respectively.

"It was an uncertain time, but we focused on real-estate fundamentals and the best management teams, and we found some fantastic values," Leupp says.

Leupp sees commercial real estate in the early stages of a three- to five-year recovery, with apartment and health-care real estate investment trusts, or REITs, reviving the fastest. Other areas like lodging and office properties will take longer to bounce back, but he still points to hotel REIT Ashford Hospitality Trust's ( AHT) preferred issue as his mutual fund's top pick.

"We view this as a way to collect a 10% plus dividend yield and also take advantage of a recovery in lodging fundamentals. Essentially you are getting paid to wait," Leupp says.

As for a "sleeper" pick, Leupp likes the series G preferred issue from Glimcher Realty ( GRT), a company that owns malls in the northeastern U.S.

"Retail fundamentals are already improving as evidenced by the pickup in same-store sales," Leupp says. "This is a company that's already been through this situation before and weathered the storm."

4. Bill Gross: Adjust, Don't Alter, Course

Bill Gross, who studies stamps, toiled as a blackjack player before helping to found Pacific Investment Management Co., or Pimco, in 1971. Located in Newport Beach, Calif., Pimco began by managing institutional accounts for Pacific Life Insurance. In 2000, it became a subsidiary of German insurer Allianz ( AZSEY). At the onset of 2010, assets under management surpassed $1 trillion, jumping 40% in a year on new client money and investment gains.

Gross and Co-Chief Investment Officer Mohamed El-Erian coined the term "new normal," a synonym for a slow-growth economy, that is now a staple of the Wall Street vernacular. In early 2009, Gross predicted an extended period of sluggish consumer spending, high unemployment and a string of sovereign debt crises. Gross' Total Return Fund ( PTTDX), the world's largest mutual fund with more than $200 billion in assets, returned 18% in the past year.

The fund rose 4.8% in 2008, bolstered by timely purchases of agency-backed mortgage securities, as its average competitor lost 4.7%. Over a five-year span, it has gained 7.1% annually, on average, outperforming 98% of its peers. Gross' strategy for the fund is to purchase intermediate-term bonds in any sector. In 2009, the fund benefitted from a rally in Treasury, corporate and high-yield debt. Gross has consistently outperformed other managers by making calculated and gradual bets.

Gross is bullish on the debt of emerging markets and resource-rich, fiscally prudent developed economies such as Canada. He recently wrote, "Ah, but Dubai, Iceland, Ireland and recently Greece pointed to a fatal flaw in the model. Shaking hands with the government was a brilliant strategy in 2009 when it was assumed that governments had an infinite capacity to leverage themselves. But what if they didn't? What if -- to put it simply -- you couldn't get out of a debt crisis by creating more debt?"

3. David Tepper: Swing for the Fences

Pittsburgh's golden boy has established himself as one of the world's premier money managers. Tepper earned his stripes on the Goldman Sachs ( GS) high-yield desk. But he left to set up his own shop in 1992, frustrated by an elusive partnership stake. Tepper's hedge-fund company, Appaloosa Management, employs deep-value and special-situation strategies, investing in companies that others won't touch. Appaloosa has returned 38% annually, on average and before fees, since its inception.

Last winter, as competitors scrambled to liquidate assets, Tepper scooped up financial-sector investments of every variety, including preferred securities and subordinated debt. When governments promoted mergers and backed securities, fire-sale prices transformed into windfall profits in typical Tepper alchemy. His four funds doubled in value in 2009. The masked thesis, government intervention, was a probable, if not certain, outcome. But few possessed the audacity to bet big.

Tepper's funds have delivered Street-trumping returns by investing in precarious companies. Unlike narrowly focused peers, Appaloosa will purchase any security that it deems undervalued. Often, the payoffs are delayed. Appaloosa suffered double-digit percentage losses in three years since its inception. It booked a more than $2 billion loss in 2008 when it backed out of a deal with auto-parts maker Delphi for bankruptcy financing.

In the fourth quarter, Appaloosa remained heavily invested in financial companies, with nearly 90% of its portfolio concentrated in that sector. It remains to be seen whether Tepper lessened or sold massive positions in Citigroup ( C) and Bank of America ( BAC), his two largest holdings, in response to Washington's new legislative threat, the so-called Volcker Rule, a proposal to limit banks' proprietary-trading operations. Other positions include Capital One ( COF), Delta Air Lines ( DAL) and Microsoft ( MSFT).

2. John Paulson: Think, and Act, Outside the Box

Among renowned colleagues, John Paulson stands apart. The soft-spoken investor is a former Harvard Business School Baker Scholar, a mark of preeminent distinction at that institution, who began his career at Boston Consulting Group, offering strategic advice to companies. Paulson & Co. has established itself as a forward-thinking hedge fund. Founded in 1994 with $2 million, assets now exceed $30 billion. The firm employs former Federal Reserve Chairman Alan Greenspan.

Paulson's bets, like those of David Tepper, have been in the financial industry. Cumulative funds gained $15 billion in 2007 and Paulson netted an estimated $3.7 billion by shorting subprime-mortgage securities. He anticipated the reverberations of the global housing crisis in 2008, booking sizable gains on short sales in British banks Barclays ( BCS) and RBS ( RBS). In 2009, he adeptly purchased financial stocks at the March low, including Bank of America, which he believes will double by 2011.

A background in consulting is unconventional for a fund manager, most of whom spend their careers in various investment roles. Paulson's knowledge of internal corporate functions clarifies his investing panache. He appears concerned with how and in what manner companies and markets should function, rather than how securities are priced and what sort of returns can be expected. This normative focus has aided Paulson in identifying and exploiting flaws of the global economy.

Paulson retained financial holdings and increased positions in Kinross Gold ( KGC) and pet-insurance project Conseco ( CNO) during the fourth quarter. More interesting is a recent expansion of offerings. Paulson established a fund in 2008 to assist banks suffering from mortgage-related write-downs. In February, he helped recapitalize Houghton Mifflin, a subsidiary of the Education Media and Publishing Group. Still, forays into precious metals and restructuring signal a scarcity of "fat pitches" in the stock market.

1. Jeremy Grantham: The Ultimate Contrarian

Jeremy Grantham began his career at Royal Dutch Shell ( RDS.A), where he was employed as an economist. He co-founded Batterymarch Financial in 1969 and GMO Capital in 1971, which now manages over $100 billion. As its chief investment strategist, he is charged with making asset-allocation recommendations to fund managers. Grantham achieved distinction by circumnavigating bubbles, including Japanese equities in the 1980s, technology stocks in the '90s and credit markets in 2006.

Grantham has inked a string of bafflingly insightful predictions. In times of perceived prosperity, such as the tech and telecom boom of the 1990s, Grantham's firm suffered an outflow of investors, who withdrew funds to seek higher returns. Yet he has consistently identified asset classes that achieve superior, risk-adjusted performance over extended periods. Grantham forecasted in 1999 that, over a 10-year span, "the egregiously overpriced S&P would underperform cash and everything else and emerging equities would do extremely well."

Interestingly, Grantham's style and outlook are similar to those of Pimco's Gross. His allocation system is resolute, allowing for gradual adjustments, and his expectation of the economy is "seven lean years" with "below-average GDP growth" and "below-average profit margins." He notes, "equity markets almost always peak when rates are low, so moving in desperation away from low rates into substantially overpriced equities always ends badly." The tax on cash, but lack of viable alternatives, is 2010's dilemma.

Despite a pessimistic view and a fair-value estimate of the S&P 500 of around 850, 26% lower than it is today, Grantham remains bullish on two asset classes: emerging-market and large-cap U.S. stocks. He believes, "for the longer term, the outperformance of high-quality U.S. blue chips compared with the rest of U.S. stocks is, in my opinion, 'nearly certain' (a phrase we at GMO traditionally define as greater than a 90% probability)." Grantham's Wager, the investment equivalent of the philosophical Pascal's Wager, is that in a rising market, blue-chips will outperform due to relative cheapness, and in a falling market, they will outperform due to relative safety.

-- Reported by Jake Lynch in Boston and Gregg Greenberg in New York.

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