We obviously think highly of all the managers who run the funds in the Kiplinger 25 -- otherwise the funds wouldn't be on our list. Among these managers, we've singled out five for special attention. It should come as no surprise that all five have posted outstanding results over extended periods that span several market cycles. In fact, four of the five have been at the helm of their funds for at least 20 years.
Education: BA, Northwestern University
Investment Style: Value
Shareholders of Steve Romick's FPA Crescent (symbol FPACX) really should sleep well at night. Romick is proof that playing a strong game of defense in managing a mutual fund can also be a sound offense. The reason for this is the humble math of compounding: If you limit downside losses, the upside seems to take care of itself.
Romick's chief objective is to match or beat the return of Standard & Poor's 500-stock index while taking less risk than the index. In this endeavor he has succeeded brilliantly. From Crescent's inception in June 1993 through April 8, the fund returned 11.3% annualized, compared with 8.3% for the S&P 500, and did so with nearly one-third less volatility than the index. Two numbers explain why Romick's numbers have compounded so nicely with limited commotion: Crescent has enjoyed nearly 80% of the S&P's gains in up months while suffering just over half of the losses in the index's down months.
To be sure, Romick's portfolio doesn't resemble the S&P. He has the freedom to roam the spectrum of stocks, bonds, convertible securities, bank loans, and so forth -- wherever he perceives the most attractive return potential relative to risk. For instance, in 2009 he loaded up on bonds when, he says, "debt markets had priced in a depression." From a 31% weighting in bonds in 2009, Crescent is now down to 9% in bonds, he says. He's been raising his fund's allocation to stocks, particularly to companies tied to commodities. "We're worried about inflation," Romick says. A born worrier and risk manager, Romick is always fretting about something -- to the benefit of Crescent shareholders.
Education: BS, MBA Marquette University
Investment Style: Go anywhere
You can't accuse us of age discrimination. Dan Fuss, co-manager of Loomis Sayles Bond (LSBRX), is 77. But his mind is still young. The worldly Fuss, who buys bonds issued all over the globe, is as likely to discuss the investment implications of demography in Japan and drug wars in Mexico as he is the U.S.'s budget woes.
Moreover, his rich experience in the bond markets is a big advantage. Fuss has been involved with bonds since 1958 (he started managing Loomis Sayles Bond in 1991). He notes that the first 23 years of his career (1958-1981) were essentially a cycle of rising interest rates. This was followed by nearly 30 years of declining rates, which Fuss thinks came to an end in 2010. He now expects another long period of rising rates. "I've seen this movie before," he says. Fuss expects the yield on ten-year Treasury bonds to climb to 6.25% over the next several years, from the current 3.5%. So to cut risk, he has shortened the average maturity of the holdings in Loomis Sayles Bond from the typical 14 to 15 years to less than 11 years.
After more than half a century as a professional bond investor, Fuss still gets charged up every day. "I don't need video games for excitement," he says. "I've never had a day that's exactly like the previous day in this business. That's the attraction."
Education: BA, MA, UC Santa Barbara
Investment Style: Growth at a reasonable price
Speaking of septuagenarians, Rick Aster has quietly posted dazzling numbers (13% annualized) in the mid-cap growth category since launching Meridian Growth (MERDX) in 1984. In the Kiplinger 25, we use a number of funds from industry giants such as Fidelity and Vanguard. But we always have room for outstanding independent houses such as Meridian, based in Larkspur, Cal.
Meridian Growth's assets are a substantial $2.5 billion, but there are no analysts on the fund, only Aster and co-manager William Tao. "I don't want a big bureaucracy making investment decisions," says Aster, who notes that he's the biggest shareholder of the fund, which does not engage in any marketing.
Fortunately, Aster himself is a fine analyst of businesses ranging in market value from $1 billion to $7 billion. He looks for growing companies with high profitability and low debt, but refuses to overpay for the stocks. Buying financially solid businesses at a discount is one reason Meridian tends to hold up well in bear markets. Over the past ten years, the fund returned an annualized 10.8%, an average of nearly five percentage points better than a basket of mid-cap growth funds -- and with much less volatility than the typical fund.
Education: BA, Yale University; MBA, Stanford University
Investment Style: Value
Preston Athey, manager of T. Rowe Price Small Cap Value (PRSVX), embodies what we look for in a Kiplinger 25 fund. Athey has a stellar long-term track record: Since he took the reins of Small Cap Value in August 1991, it has returned an annualized 13.0%, more than three points per year better, on average, than the Russell 2000 index, a benchmark of small-company stocks.
Moreover, Athey has achieved that feat while taking less risk than the index. He holds his stocks for nine to ten years on average, which is an eternity by fund-industry standards. As Athey puts it: "The average institutional investor is a frenetic day-trader who jumps at every little piece of information coming across his screen. I think of myself as a frog on a lily pad waiting patiently for a dragonfly to go by."
Early in his long career at Price, Athey focused, as both a stock analyst and fund manager, on growth companies. Today he's very much a value manager, but one who understands the characteristics of growth companies and growth-stock investors. An ideal stock, he says, is an out-of-favor growth stock with a blemish that has led to a decline in its share price. Athey will buy it and hold on as it enters the “process of moving from an ugly duckling to a beautiful swan." When it's pretty again, it's time to sell the stock to a growth investor, he says.
Education: BA, Harvard; MA, MBA University of Pennsylvania
Investment Style: Growth
Last but far from least is Will Danoff, the peerless manager of Fidelity Contrafund (FCNTX), a large-cap growth fund with $80 billion in assets. Danoff is about as common as a black swan in the fund industry. Over the past 20 years, Contrafund has returned an annualized 12.0%, an average of 3.2 percentage points ahead of the S&P 500 index -- a remarkable feat.
Danoff makes the most of Fidelity's enormous resources and access to corporate chiefs. He pays tribute to the "small army of analysts who cast a wide net" that he can tap. Gregarious by nature, Danoff himself chats up hundreds of chief executives and other top corporate brass every year. The goal, he says, is to identify companies that are multiyear growth stories. These firms are often run by exceptional businesspeople.
Nor is Danoff shy about promoting Contrafund. "Over time," he says, "I've beaten the S&P. I think of my fund as a building block for everyone’s portfolio."
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