Lessons from Morningstar's Fund Managers of the Year

Morningstar's 2009 Fund Managers of the Year list is a bit misleading. And that's a good thing.

What Morningstar really chose were three terrific funds over the long-term that did very well in 2009. (Not as catchy a headline, eh?)

None of the selected funds was actually anywhere near the "best" in its category for just the past 12 months.

• Fairholme Fund: Domestic Equity Fund Manager of the Year, ranked in the 9th percentile of large-cap blend funds. 2009 Gain: 39 percent

• American Funds/EuroPacific Growth: International Equity Fund of the Year, ranked in the 15th percentile of Foreign Large Cap Blend funds. 2009 Gain: 39 percent.

• Loomis Sayles Bond: Fixed Income Fund Manager of the Year, ranked in the 14th percentile of multi-sector bond funds. 2009 Gain: 36.8 percent.

Those are all great one-year showings; each fund left most of its peers and benchmark index far in the rear view mirror. But what makes the picks compelling is that each fund is anything but a one-year wonder. There is nothing "lost" about the annualized returns they delivered over the past decade:

Ten-year annualized gains Fairholme: 13.6 percent
EuroPacific Growth: 4.6 percent
Loomis Sayles: 9 percent.

And that's what makes them standout funds. They deliver over the long-term. Morningstar's shout-out to them for a stellar 2009 is really just a marketing hook to laud them for delivering over many years.

Each fund is also a nice counterweight to the notion that active management can't add value. Granted, that's the embedded bias of Morningstar's annual bake-off: you'll never see an index fund on this list. I am not advocating that anyone with an index-heavy portfolio dump 'em and pick these. Indexing works. Always has and always will. But for many investors there's the undeniable urge to shoot for more than index returns. That's why the vast majority of fund assets are invested in actively managed funds, not index portfolios.

If you're inclined to keep a portion of your money riding on human beings not benchmarks, Morningstar's 2009 picks exhibit a lot of the traits you want to look for: Proven investment strategies over the long-term, the patience and conviction to not get sucked into short investment trends, and consistent management (Fairholme's Bruce Berkowitz is the newbie of the three and he has been at the helm since the fund's inception a decade ago.)

The one area where all three aren't exactly standouts is fees; none can compete with the rock-bottom expense ratios of Fidelity, Vanguard or Schwab index fund or ETFs. That's no small issue, but none of the picks are egregiously expensive either. Fairholme and Loomis Sayles are both no-loads; Fairholme's expense ratio is 1.01 percent; Loomis Sayles Bond is 0.94 percent. The American Funds group (EuroPacific) works with advisers and brokers; so there is a commission involved. There's no getting around the fact that this a costly route to go (5.75 percent load on A shares.) But for investors who work with someone other than a fee-based advisor, the American group is known for having some of the lowest annual expense ratios. The 0.83 percent for EuroPacific Growth A shares is well below the 1.4 percent average for similar foreign funds.

I always cringe at "Top" lists based on short-term performance; it enduces investors to performance chase hot funds. Morningstar's Best of 2009 is one "annual" list that works; if only because it's really a stealth list of some of the best long-term funds/fund managers in the business.

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