The securities markets have not been very friendly to mutual fund managers lately. In fact, J.P. Morgan says more than 25% of them performed worse than the indexes to which they’re measured against by five percentage points or more in the first nine months of 2010.
That, says the investment bank, is the worst performance for mutual fund managers since 1998. Still, there were a few managers who somehow manage to do well no matter how bad the markets are doing.
SmartMoney magazine has sifted through some 6,800 mutual funds available in the U.S. to find a few super-star fund managers who consistently outperformed their peers, and they do it without charging sky-high fees. Here, according to SmartMoney are the top fund managers in four major categories:
Foreign-Stock Funds
The managers of the Thornburg International Value fund have beaten their benchmark every year since the fund was created in 1998. Fund founder William Fries used to manage the fund alone but today, he shares duties with co-managers Wendy Trevisani and Lei Wang. The team is flexible about their investing style; although the fund emphasizes lower-priced "value" stocks, they're willing to pay more for companies with high earnings.
Nor are the managers afraid to kick the tires. Before adding Volkswagen to their portfolio last year, they talked to a Volkswagen dealer on Long Island, New York, about the dealer's perspective on the business. Emerging markets typically make up about 20% of Thornburg International, which is nearly twice the average for broad-based foreign-stock funds, according to William Samuel Rocco, a fund analyst at Morningstar.
U.S. Large-Cap Funds
Unlike many managers of traditional mutual funds, Bruce Berkowitz uses his Fairholme fund to buy the debt of ailing companies or to participate in initial public stock offerings. He limits the fund to around two-dozen holdings. Berkowitz says he tries to treat the companies he invests in as if they were silent partners in their business. In the wake of the financial crisis, Mr. Berkowitz scooped up heavily discounted financial stocks.
Some have paid off big: Fairholme was recently the largest investor (after the U.S. government) in American International Group, whose stock soared after it was bailed out during the financial crisis. The goal, Mr. Berkowitz says, is to buy companies that seem tarnished, but are in better shape than investors think. He says that "at the end of the day, a dollar doesn't know how it's made." Double-digit average annual returns over the past decade sent Fairholme's assets soaring to their current $17 billion.
Global Real-Estate Funds
Marc Halle has spent less time running the Prudential Global Real Estate fund than the other winners in the SmartMoney survey, but he has 25 years of experience investing in real estate. And since he took the helm at the beginning of 2007, his experience has paid off: The fund has beaten its peers by an average of nearly two percentage points a year. Mr. Halle says he prefers the developed world to emerging markets because of the greater transparency in accounting and corporate governance and the liquidity of the markets.
He hasn't invested in Russia and prefers to get his exposure to Chinese real estate through companies based in Hong Kong or Singapore. Sun Hung Kai Properties, based in Hong Kong, was recently the fund's second-largest holding, after Simon Property Group in the U.S. The recession has been brutal to real estate in almost every nation. In 2008, Prudential Global Real Estate tumbled only slightly less than the 47% decline of its peer group. But Lipper senior analyst Jeff Tjornehoj says that if the dollar continues its recent decline, funds like Mr. Halle's could take off.
U.S. Small-Cap Funds
Whitney George calls his investment team at Royce & Associates "scavengers" who are focused on small-value stocks that other investors avoid. Still, the trash-bin approach has been profitable. The average annual returns of Mr. George's Royce Low-Priced Stock fund exceeded 10% over the past decade -- a time when the broader market posted returns closer to zero. Mr. George believes inflation might pick up soon because of stimulus spending in developed nations and rising labor costs in countries like China and Mexico.
That's led him to scoop up mining and energy stocks, which tend to do well during inflationary times. Mr. George likes silver -- and silver miners -- because it's used in jewelry and electronics. His emphasis on so-called hard assets like metals and industrial materials has given his portfolio more global exposure than most U.S. small-cap funds: More than 20% of its assets are invested in companies based outside the country.
