Market volatility has shaped the performance of many top managers this year.

By Jim Ryan | Senior Stock Analyst

With 2010 drawing to a close, we thought it would be interesting to take a deeper look at the holdings, purchases and sales of some of our best-performing managers over the last year. As we noted in our last article, the end of the third quarter and start of the fourth quarter of 2010 were exemplified by strong equity market performance, with the S&P 500 Index  posting one of its best returns for the month of September in the last 85 years. This compares to the seesaw of returns that were posted by equities during the five months prior to September, with the market dropping more than 8% in May, and another 6% in June of this year. The recent rebound in the markets was driven by solid second-quarter earnings results in the face of the European credit crisis, and its potential impact on the global economic recovery.

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In a period marked by this kind of volatility, it was not too surprising to see only a handful of our Ultimate Stock-Pickers actually beating the market this year. Of the 22 fund managers we track, just four of them-- Wintergreen ,  Fairholme , Columbia Value & Restructuring , and Amana Trust Growth  --are currently beating the S&P 500 Index. This compares to 15 out of 22 managers that outperformed the market in 2009. Of the four managers beating the market this year, three of them were on the list of top performers in 2009, with Columbia Value & Restructuring not making the list by virtue of it not being added to our Ultimate Stock-Pickers until the first quarter of 2010. For the record, Columbia Value & Restructuring did beat the market in 2009 with a 47% total return.

What is interesting to note, though, is that our best-performing manager last year,  Yacktman , which posted a 59% return in 2009, is trailing the market by more than 100 basis points this year. Most of this underperformance happened late in the third quarter, and continued through October and November, as the fund was beating the market by more than 200 basis points through the first two quarters of 2010. Yacktman remains one of the top three best-performing funds on our list over the last 3-, 5-, and 10-year timeframes, a testament to the success Donald and Stephen Yacktman have had picking winning stocks over the years.

Barring a strong run of performance this month (relative to the market that is), Yacktman will most likely close out 2010 trailing the total return of the S&P 500 Index. This is not unusual for the fund, which trailed the market by more than 200 basis points in 2007, and more than 600 basis points in 2005. The key to their success has been steering clear of investing methods aimed at mimicking benchmark returns, preferring to rely on bottom-up individual security analysis to purchase stocks, and hold them until better opportunities become available, or until they determine they've made a mistake.

Wintergreen Outperforming with Eclectic Mix of Stocks
With a total return of 19% year to date, Wintergreen is our best-performing fund manager this year. Portfolio manager David Winters has put together one of the more eclectic portfolios in our list of 26 top managers, with top five holdings Jardine Matheson Holdings , The Swatch Group , Schindler Holding ,  Anglo American , and  British American Tobacco  accounting for more than one third of his portfolio. Winters has also made large sector bets in consumer goods (36% of total stock holdings) and financial services (34%). Within consumer goods, he has around half of his holdings in tobacco stocks, including British American Tobacco,  Imperial Tobacco Group , Japan Tobacco, and  Philip Morris International . His financial services holdings, meanwhile, include a mix of the less well-known--like Jardine Matheson, Genting Malaysia, and  Fairfax Financial --and more commonly known firms--like  Berkshire Hathaway ,  Franklin Resources , and  Goldman Sachs .

Wintergreen is also one of the few truly global funds on our list of top managers, with nearly three quarters of the fund's equity holdings in non-U.S. stocks. David Winters believes that the best opportunities in years ahead will be outside the U.S. and has more than doubled his fund's international exposure over the last five years. He feels that companies able to tap into growing affluence in developing and emerging markets will have a big advantage over those that are focused on mature economies like the U.S. and Europe, where he believes the deleveraging process we are currently undergoing will take a long time to work out. Winters has been a big proponent of  Nestle  of late, making a meaningful addition to an existing position he has held in the stock. He also established a new stake in Heineken  during the third quarter.

Columbia and Amana Run More Diverse Portfolios
Producing total returns of more than 14% this year, both Columbia Value & Restructuring and Amana Trust Growth have generated market-beating returns with far less concentrated portfolios. Columbia's top ten holdings accounted for 36% of the firm's total equity portfolio at the end of the most recent period, while Amana's top ten holdings made up just 25% of its stock portfolio. Whereas Columbia is a bit more concentrated in a few sectors, like industrial materials, energy, and financial services, Amana has been a bit more diversified, with seven sectors accounting for more than three quarters of the portfolio. Amana has, however, been more heavily invested in hardware, software and telecommunications than Columbia, which is understandable given its penchant for growth investing.

That said, Amana's most recent purchases-- Coach ,  Hewlett-Packard ,  Fastenal ,  Harris Corporation ,  Adobe Systems , and  Intel --include a mixture of both cyclical firms and growth stories. What continues to amaze us about Amana, though, is that fund manager Nick Kaiser can generate market-beating returns by investing in accordance with Islamic law. This means that the fund cannot hold the stock of any firm that generates more than 5% of its revenue from alcohol, tobacco, pork processing, gambling, or from the borrowing or lending of money.

Columbia has no such constraints, but does target firms that manager David Williams believes are set to boost profits through restructurings, reorganizations, and/or mergers and acquisitions. Williams tends to stick with his winners long after they've overcome the challenges they faced when he purchased their shares, but only for as long as the underlying business generates solid returns on capital. The fund's largest purchase of late have included  Xerox , AIA Group, and  Methanex .

Securities mentioned in this article



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The Morningstar Ultimate Stock-Pickers Team does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.
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