Announcing the Morningstar Fund Managers of the Year for 2013

Morningstar

Last year was a great year to be a stock fund manager but a challenging one for fixed-income fund managers. For our 2013 Morningstar Fund Managers of the Year, greater exposure to equity-sensitive markets, deft security selection, and diversification paid off. Some winners benefited by adding to bets that had been unpopular in preceding years. Others benefited by placing enough different bets that the ones they got right offset those they didn't.

A quick markets recap puts our winners' performances into context. Domestic equities led the way, with the S&P 500 Index returning a remarkable 32.4%. Small- and mid-cap stocks did even better, and health care and tech were the places to be. International equities as measured by the MSCI EAFE Index rose 22.8%, as the eurozone's continuing woes weighed on improving sentiment. Emerging markets struggled, with the MSCI Emerging Markets Index losing 2.3%.

Equity- and credit-sensitive fixed-income fare shone. The average convertibles, high-yield, and bank-loan funds gained 21.7%, 6.9%, and 5.7%, respectively. Rising yields took a toll, with the Barclays U.S. Aggregate Bond Index ending the year with a 2.0% loss. Funds taking on greater duration, significant government exposure, or non-U.S. dollar exposure posted mid-single-digit to low-double-digit losses. Commodities and precious metals brought up the rear with steeper losses.

Beyond a great year in 2013, our winners must be Morningstar Medalists, must have generated strong long-term risk-adjusted returns, and must be strong stewards of investor capital. While our Fund Manager of the Year awards are recognition of past contributions rather than predictions of future results, we're confident in each one's long-term prospects because of their deep research resources and willingness to stick with their discipline in good times and bad. We wouldn't expect repeat performances in 2014, as our winners and their rivals will wrestle with lofty equity valuations, policy-related volatility, a still-recovering economy, and the specter of rising rates.



Domestic-Stock Fund Manager of the Year 2013
Dennis Lynch and Team From Morgan Stanley Institutional Growth
(MSEQX)
Morningstar Category: Large Growth
2013 Return/Category Return Rank: 48.6%/1
Morningstar Analyst Rating: Gold
The Morgan Stanley Growth team, led by Dennis Lynch and comanagers David Cohen, Sam Chainani, Armistead Nash, Alexander Norton, and Jason Yeung, are being recognized for their stellar efforts on their quartet of Gold-rated funds, the $2.0 billion Morgan Stanley Focus Growth (AMOAX), $1.2 billion Morgan Stanley Institutional Growth (MSEQX), $7.8 billion Morgan Stanley Institutional Mid Cap Growth (MPEGX), and $2.5 billion Morgan Stanley Institutional Small Company Growth (MSSGX).

While the team invests in a number of areas that shone the brightest in 2013--such as technology and biotech--Morningstar's attribution data suggests the team's individual stock picks fueled the funds' performance. The team's decisions to scoop up or add to a number of controversial, beaten-down holdings during the second half of 2012, including Facebook (FB) and Groupon (GRPN), paid off as those holdings rallied to beat the band in 2013. Early 2013 purchases including Tesla Motors (TSLA) and Medidata Solutions (MDSO) gave the funds an additional boost.

Over time, the team's flexible research approach, including astute pre-IPO investments, has generated superior results on an absolute and Morningstar Risk-adjusted basis. Flexibility can be a two-edged sword, but Lynch has done a remarkable job forging a cohesive culture and sheltering his team from the ups and downs of its parent, Morgan Stanley (MS). Lynch takes a rather high-risk approach, but he's executed it brilliantly.

International-Stock Fund Manager of the Year 2013
David Samra and Daniel O'Keefe From Artisan International Value
(ARTKX)
Morningstar Category: Foreign Large Blend
2013 Return/Category Return Rank: 30.5%/1

Morningstar Analyst Rating: Gold

Artisan Global Value (ARTGX)
Morningstar Category: World Stock
2013 Return/Category Return Rank: 31.1%/16

Morningstar Analyst Rating: Silver
David Samra and Daniel O'Keefe won Fund Manager of the Year in 2008 when their tendency to outperform in tough markets prevailed, so it's remarkable that they did so too in 2013 amid a vigorous stock market rally. At both the $11.0 billion Artisan International Value (ARTKX) and $1.4 billion Artisan Global Value (ARTGX), the duo favors sturdier firms with high returns on capital that are trading at substantial discounts to their estimate of private-market value. In 2013 they notched wins across multiple sectors with late 2012 and early 2013 picks such as Baidu (BIDU), Vodafone (VOD), and Microsoft (MSFT), as well as longer-standing financials holdings such as Arch Capital (ACGL), Marsh & McLennan (MMC), and Lloyds (LLOY). Both funds' recent low double-digit cash stakes give them the wherewithal to go bargain-hunting should the markets swoon.

Both funds' stellar long-term returns and top-decile finishes in 2008 show they didn't just get lucky in 2013. Despite running fairly compact portfolios of 40-50 stocks with top position sizes approaching 5% of assets, both funds have been less volatile than their benchmarks and average category rivals, leading to chart-topping Morningstar Risk-adjusted performance over longer trailing periods. The fact that International Value has remained closed to new investors since mid-2011 and that Global Value is closed to new institutional separate accounts highlights Artisan's willingness to close strategies to protect current shareholders.

Fixed-Income Fund Manager of the Year 2013
Daniel Ivascyn and Alfred Murata
From PIMCO Income (PIMIX)
Morningstar Category: Multisector Bond
2013 Return/Category Return Rank: 4.8%/18
Morningstar Analyst Rating: Silver

PIMCO's decision to take on greater interest-rate risk and maintain emerging-markets exposure backfired during the 2013's second quarter, when yields rose and emerging markets sold off. Yet Daniel Ivascyn and Alfred Murata also got a lot of things right in 2013. Security selection in agency and nonagency mortgages, corporate credit, and currencies all worked to the fund's advantage. So did the duo's relatively cautious use of leverage, in which they gain additional market exposure through the use of short-duration mortgages, swaps, and other tools (they ply a more leveraged approach at PIMCO Dynamic Income (PDI)).

Making the most of a tough market is where funds can really help shareholders. While PIMCO won't get all of its calls right--no one does--its concerted efforts to prevent any single bet from overwhelming performance played out for this fund in 2013. Ivascyn and Murata have also delivered on the fund's income-oriented goals without returning capital to shareholders since its 2007 inception. That's a tall order in today's relatively low-yielding environment, but PIMCO's vast tool chest and diversified approach instill confidence.

Allocation Fund Manager of the Year 2013
Steven Romick, Mark Landecker, and Brian Selmo From FPA Crescent (FPACX)
Morningstar Category: Moderate Allocation
2013 Return/Category Return Rank: 21.9%/6
Morningstar Analyst Rating: Gold
Romick and crew let security selection and a strict valuation discipline drive this $15.9 billion fund's asset allocation rather than maintaining a strategic or balanced allocation. Leaning heavily on equities paid off for many allocation funds in 2013, but this team's success was not a case of being in the right place at the right time: The fund's net equity allocation clocked in just under 60% of assets to start the year--well under its typical category rival's--and ended closer to 50% as the team took gains throughout the year and found fewer opportunities. Instead, Morningstar's performance attribution suggests management's stock selection added value in eight out of 10 sectors, with big gains in top holdings Thermo Fisher Scientific (TMO), Aon (AON), CVS Caremark (CVS), and Microsoft.

The fund's top-decile finish is particularly notable given its heavy cash stake, which ranged between 30% and 40% of assets throughout the year. That slug reflects the team's reluctance to go near anything that doesn't offer a big margin of safety, and it gives the fund a big war chest for when valuations look more reasonable. That eye on capital preservation and FPA's strong stewardship have helped the fund achieve its goal of delivering equitylike returns with less equity risk over the long haul. To see what the team has achieved, step back and look at the big picture: The fund's 15-year return is 9.7% annualized, topping its peer group and doubling the S&P 500 Index with less risk.

Alternatives Fund Manager of the Year 2013
Brian Hurst and Yao Hua Ooi From AQR Managed Futures
(AQMIX)
Morningstar Category: Managed Futures
2013 Return/Category Return Rank: 9.4%/6
Morningstar Analyst Rating: Silver
Managed-futures funds have had a tough couple of years, as policy-related market disruptions, mercurial investor sentiment, and touchy fixed-income and commodities markets have thrown wrenches into their trend-following approach. This $5.8 billion fund's 9.4% gain in 2013 stands out on an absolute and risk-adjusted basis (as measured by Sharpe ratio) versus the category's average 0.9% loss, and its 2.3% annualized gain since its January 2010 inception through Jan. 11, 2014, outpaces all but one of its rivals.

Hurst and Ooi run a more diversified strategy than most of the competition. The duo takes long and short positions across the equity, fixed-income, commodity, and currency markets, while many managed-futures products focus primarily on the fixed-income or commodities markets. Rather than relying solely on short-term trends, they also factor in longer-term trends and will pull back their investments if markets become overextended. That last component serves as a governor and serves to protect investors. AQR's diversified approach propelled the fund's performance in 2013 and has helped it weather what's been a long, tough stretch.

(Disclosure: Daniel O'Keefe was a fund analyst at Morningstar for several years in the 1990s.)

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