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The 5 best fund managers in the business
Winners in good times and bad, they're not just lucky -- they're great. If youd bought their flagship funds (and you still can), you'd have one scorching portfolio.
By Timothy Middleton
The fund industry is taking a beating like Jerry Quarry, and for good reason. One fund after another is disclosing that it was engaged in funny-business trading.
But amid all this, its easy to forget that mutual funds often are the best way to invest and that many funds still can make good money for you.
So my colleagues at MSN Money gave me an immodest assignment: Name the five best managers in the business -- and back it up, of course.
Difficult it is, especially because some of the industrys legends are so wildly successful that their funds are closed. Thats the case, for instance, with William Ruane at Sequoia Fund (SEQUX), and virtually the entire small-cap lineup at Wasatch Funds.
Then there are some you wouldnt consider active managers, such as Rex Sinquefield, architect of the Dimensional Fund Advisors series of passive funds. Still others are anonymous, such as the brilliant staff of American Funds.
But enough equivocation. The industry has plenty of talent.
Good guys vs. good records
Chris and William Browne at Tweedy Browne; William Danoff at Fidelity Contrafund; John Brynjolfsson at Pimco, though hes not as well known yet; there are many great managers, says Harold Evensky, principal of an eponymous financial advisory firm in Coral Gables, Fla.
Here are my picks, which Ive vetted with a handful of leading investment advisers. One of them, Lewis J. Altfest of Manhattan, had this to say: The mark of a good guy, and the reason you should stress good guys as opposed to good records, is that a good guy knows when to get out, knows how to shift. Otherwise he becomes a creature of his own style.
Theyre a flexible bunch. Theyve prospered in good and bad markets. Unlike pension consultants and other academic purists, you dont want a fund manager whos content to lose money just because everybody else is losing it. You want a winner.
So these guys are winners and they have, Altfests observation notwithstanding, good records, indeed.
| Five best mutual fund managers | | Manager | Flagship fund | 3-yr. percentile rank | 5-yr. percentile rank | 10-yr. percentile rank | YTD perf. (%) | | Jean-Marie Eveillard | First Eagle Global (SGENX) | 3 | 4 | 1 | 20.08 | | James Gipson | Clipper (CFIMX) | 1 | 1 | 1 | 9.60 | | William Gross | Pimco Total Return (PTTRX) | 6 | 2 | 1 | 1.89 | | William Miller | Legg Mason Value Trust (LMVTX) | 9 | 4 | 1 | 27.99 | | William Nasgovitz | Heartland Value (HRTVX) | 6 | 10 | 7 | 42.05 |
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Data as of Aug. 31, 2003. Source: MSN Money, Morningstar.
Eveillard: Unanimous favorite
Jean-Marie Eveillard: Every adviser I polled agreed on this gaunt Gaul, who has run this fund since 1979, most of that time under the name SoGen International. Frances Socit Gnrale was foolish enough to cast him aside in the late 1990s, when he badly trailed the bubble market. I guess they dont like me anymore, he said impishly at the time.
But he took his operation intact to First Eagle. Over the last 10 years, his fund has surged 251% to the markets 183%, aided by large holdings of cash and gold in the bear market. Hes still only 68% in stocks, the large majority foreign, because his deep-value style cant find enough bargains to compensate for their risk.
Almost by definition, as markets went up in the last six months, the number of opportunities has shrunk, he says in an accent as buttery as brie. His 7% hoard of gold is not a trade, not even an investment, he says. Its insurance. Insurance against Mr. Greenspan falling flat on his face. He financed the bubble, became a cheerleader for the bubble, and the bubble burst and were still in a post-bubble environment.
Gipson: bear tamer
James Gipson: Like Eveillard, Gipson resisted the bear market in part by going to cash when he couldnt find cheap stocks; currently Clipper Fund (CFIMX) is about 14% cash. The stocks he does choose fall into two categories: abhorred and ignored, he wrote to his shareholders at the second quarters end.
Two of them badly hurt the funds performance last year and in this years first half: Tyco International (TYC, news, msgs) and Freddie Mac (FRE, news, msgs). Gipson and his partners staked out their position in Tyco after it crashed last year. While it struggled for a while, in recent months it has rebounded to a 52-week high. Freddie remains mired in controversy, and the stock is under pressure, but Gipson is a famously patient investor. Freddies accounting problems appear to be that it understated earnings that were already so high, Gipson wrote, that its a a notable contrast to the disappointing profits turned in by many companies.
In making my picks, I put heavy weight on a managers track record over a long period. Gipson has been running the Clipper Fund since 1984. Theres also a clone of it available, PBHG Clipper Focus (PBFOX). It's always fully invested and has lower initial minimums than the flagship fund but is otherwise virtually identical.
Gross: fixed-income champ
William Gross: This managers public record only goes back to 1987. But since 1973, the account that has evolved into Pimco Total Return Fund (PTTRX) has delivered annualized returns of more than 10%. That makes it and Pimco the undisputed heavyweight champions of fixed-income investing. Gross is the only fixed-income manager to be named Morningstars Manager of the Year twice.
Gross revolutionized the bond business in the 1970s by actively trading his portfolio, seeking incremental advantages to boost total returns. The fund consistently returns 0.5 to one percentage point more than the Lehman Brothers Aggregate Bond Index.
Bonds have taken a beating in recent months, and Gross doesnt think the damage is over. The 10-year Treasury is yielding 4.25%, and I think bondholders at this point should expect that type of yield, he says. Within two years, he sees that rising to 5%, meaning bond prices will fall. In combination, that means bondholders can probably expect 3% to 4% (annual) returns, he says.
Retail investors who buy the A shares of the Total Return (PTTAX) face a stiff 0.90% expense ratio. Fortunately, Gross manages two no-load funds, Fremont Bond (FBDFX) and Harbor Bond (HABDX), with more reasonable expenses of 0.59% and 0.58%, respectively.
Miller: willing to make bold bets
William Miller: Speaking of high expenses: Millers Legg Mason Value Trust (LMVTX) has an unconscionable expense ratio of 1.72%, although in fairness to him, the 12b-1 fee charged by the funds distributor is 0.95%, meaning Millers share is a reasonable 0.77%. That negative aside, Miller is probably the industrys most colorful and outspoken character, unafraid to make bold bets in unpopular markets.
He bought Amazon.com (AMZN, news, msgs) and Nextel Communications (NXTL, news, msgs) when they were dogs, and his fund is up sharply this year in part because theyve come in from the cold. Recently, he was adding Intuit (INTU, news, msgs) when everybody else was dumping it, arguing that the only thing better than its strong balance sheet and growing profits was its low share price.
In the last 10 years, the funds net asset value has surged nearly 400%, more than twice as much as the market, and Miller was just as successful in the 10 years before that. And thats after his punishing expense ratio. Without that burden, hed be a real performance star.
Nasgovitz: small-cap manager without peer
William Nasgovitz: Among small-cap managers still open to new investors, Bill Nasgovitz is without peer. Also a 20-year veteran at Heartland Value (HRTVX), he pulled off one of the industrys greatest feats in 1999, beating both an overheated market and his own depressed marketplace by significant margins, which he did again in 2001 and is doing yet again this year. In the last decade, hes beaten the market by more than four percentage points annually.
Despite his funds $1.8 billion of assets, Nasgovitz manages to hit home runs with micro-cap stocks by owning more than 200 names, half of them traditional small caps. Turnover is a low 50%. The fund buys at a discount of 30% to 40% of what its own research concludes is a companys intrinsic value.
By ignoring such traditional valuation metrics as price-to-earnings and price-to-book, Nasgovitz often buys stocks traditional value managers shun, which condemns him to style impurity in the eyes of academics. For shareholders, however, his style has meant hes gone where the money is more often than not.
Nasgovitz isnt always right: The stupidest thing he ever did was take over a pair of junk municipal bond funds that went belly-up and still embroil Heartland Advisors in costly lawsuits. But that comes out of his pocket, not shareholders. On their behalf, he has labored longer and with better and more consistent success than any other small-cap manager.
An investor who limited himself to the flagship funds of these five great managers would have a fully diversified portfolio that has stood the market on its ear for decades. No guarantee of future success, of course, but these guys arent lucky; theyre great.
At the time of publication, Timothy Middleton owned shares of the following securities mentioned in this article: PBHG Clipper Focus, Fremont Bond, Heartland Value. Also, he is writing a book on Gross for John Wiley & Sons due to be published early next year.
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