The Four Best Fund Managers
Suppose you had to pick a handful of people to manage your money for the next five years? Who would they be?
You'd want people who were talented, experienced and ethical -- and who boasted great records.
Following are my favorites. These aren't the managers I expect to do the best this year (for that, see Five Great Funds for 2007), but rather the ones I have the most confidence in over the coming years. Don't look for a diversified portfolio here: I've chosen the managers without regard to what parts of the market they focus on.
A few years ago, I attended a value investing conference in Manhattan. That Chris Davis was there wasn't surprising, but what shocked me was that he was in the audience taking notes -- rather than on the dais speaking. Davis is the co-manager of Selected American Shares (SLASX), one of the Kiplinger 25 funds, as well as Davis New York Venture, a load fund. He and co-manager Ken Feinberg, along with a growing team of analysts, are responsible for more than $60 billion. But Davis still views himself as a student of investing. He's one of the most unpretentious and intellectually curious managers I know.
That mindset can only serve to make him an even better investor over time. And Davis is just over 40. His record at Selected American is first rate. The fund has returned an annualized 11% over the past ten years, putting it in the top 7% among large-company-blend funds. Over those years, it has beaten Standard & Poor's 500-stock index by three percentage points per year.
The fund makes a powerful argument against indexing. Expenses are 0.90% (0.60% if you buy directly from the fund company), and turnover was a microscopic 4% last year. Davis and his family have tens of millions of dollars invested in his funds -- and thus a huge incentive to do right by shareholders. (The Davis team also manages the concentrated Clipper fund (CFIMX), which at last report held only 19 stocks.)
Bill Miller's streak of beating the S&P 500 for 15 straight calendar years ended in 2006. As I would have expected of Miller, he went down hard -- trailing the index by ten percentage points -- rather than just barely missing.
Miller and his analysts do some of the most rigorous stock analysis in the business. But once Miller decides he's right, he makes big bets and keeps raising them until the market comes around to his way of thinking. On some stocks, that can take years. Miller rarely changes his mind while he's waiting.
He's a value investor with a difference. Many of his stocks look like garden-variety value issues -- stocks that are cheap based on price-earnings ratios and the like. But Miller isn't using the same measuring sticks as other value investors. Otherwise, his funds wouldn't own such decidedly growthy fare as eBay, Google and Yahoo.
His thinking, in a nutshell: If a company continues growing rapidly, it will become a bargain -- even if it doesn't seem like one today. Even though his calls didn't deliver in 2006, I like the foresight he has historically demonstrated.
Legg Mason Value Trust (LMVTX) gets all the attention -- because of the streak. But Legg Mason Opportunity (LMOPX) is a much smaller and more flexible fund. Indeed, it has beaten Value every year since inception. Annual expenses are a steep 2.08% -- but this fund is worth it. It has returned an annualized 14% over the past five years, an average of eight percentage points per year more than the S&P.
When you phone David Herro, you're as likely to get a return call from China, Europe or his vacation home in Australia. Herro loves to analyze foreign companies, and he has a tremendous competitive spirit that hasn't dimmed during nearly 15 years at the helm of Oakmark International (OAKIX).
He's a deep value investor, unafraid to buy downtrodden companies or to concentrate his investments on a few sectors he believes are cheap. Currently, for instance, 25% of International is in consumer goods. He also has 12% in media stocks -- more than six times their representation in the MSCI Europe, Australasia and Far East index.
Herro also likes emerging markets, but he tends to trim positions after huge runups such as those that shares in developing nations have experienced in recent years. Even now, though, 12% of the fund is in Asia outside Japan.
Herro hunts for companies that are selling at low prices relative to their earnings and other measurements. But he places more emphasis than most value investors on his own subjective analysis of how a company is run and how talented and ethical its managers are.
Don't expect Herro to perform well in every environment. When value falls out of favor, his fund will go through a dry spell. But the fund has returned an annualized 12% over the past ten years, an average of five percentage points per year more than the EAFE index.
Don't expect low volatility in a Ken Heebner-run fund. Heebner is a brilliant fund manager, but he's different from the others on this list. Most important, Heebner has hot spells and cold spells -- and you shouldn't buy CGM Focus (CGMFX) unless you're willing to stay put during the hard freezes.
Colleagues say that Heebner is so wrapped up in his work that he'll often walk out of his Boston office in shirtsleeves in the dead of winter. Heebner says it's merely because cold weather doesn't bother him. The same colleagues call him "wild man," an affectionate term in this case, because of his willingness to focus on just a few sectors. He's a lone wolf: He gets his stock ideas from Wall Street analysts instead of employing his own analysts.
The secret of Heebner's successes (and failures) is his ability to rotate from sector to sector. Take a look at his current holdings: He only owns stocks in five of the ten major sectors. And he has more than half his assets in energy and industrial materials.
I wouldn't overdo Heebner. You can't expect consistency from CGM Focus, so you don't want to put too much into the fund. Otherwise, you may bail at the wrong time. But the bumpy ride has been worth it: Focus has returned an annualized 17% over the past five years, an average of ten percentage points per year ahead of the S&P.
Steven T. Goldberg is an investment adviser and freelance writer.