Legg Mason's Bill Miller

For a top-notch stock fund manager, there’s nothing worse than poor returns. But one thing comes close: great performance that everyone ignores.  As The Wall Street Journal reported recently, many ace stock-pickers are having trouble attracting investors, even as they rack up double-digit return.

Consider Harry Lange of Fidelity Magellan (FMAGX), who has guided his fund to a 31% gain so far in 2009—some 15 percentage points ahead of the Standard & Poor’s 500. But during the first nine months of this year, shareholders have yanked $1.8 billion from the fund. More

The Vanguard Wellington fund (VWELX) turns 80 today. No worries, this is not going to be some trip down nostalgia lane — who cares about old for old’s sake? Rather, what’s compelling about the $40-billion geezer is that it encapsulates the key factors that are the foundation of successful fund investing.

Before I run through those fine points, let me cough up a big, impressive stat: If you had invested $10,000 in Vanguard Wellington at its launch on July 1, 1929, you (or perhaps your heirs) would have more than $4.7 million saved up today — an annualized gain of 8% over the 80 years. (Precisely speaking, it was the Industrial and Power Securities Company that launched back then; the name was changed to Wellington Fund in 1935, and the Vanguard Group, of which it was a cornerstone, was formed in 1974.)

Wellington's performance, though, isn’t a matter of great returns decades ago obscuring a poor recent record; Wellington has managed a 4.4% annualized gain over the past 10 years. Now, before you scoff that 4.4% isn’t exactly the stuff retirement dreams are made of — you're right — it is in fact a heck of a lot better than if you had parked all your money in the Vanguard 500 index fund (-1.8% annualized over the 10-year stretch).

There’s no secret to Wellington’s success. And that’s its charm. It just plugs along, putting some very old investing principles to work:

•    Start with stocks, season with bonds. Let marinate. When I started covering mutual funds more than 20 years ago, Wellington was a balanced fund; now Morningstar has it categorized as Moderate Allocation. Whatever you want to call it, the important takeaway is that a stock-heavy portfolio with a complement of bonds works. Wellington keeps about 60%-70% in stocks and 30%-40% in bonds. Even with the risk-dampening slug of bonds, the fund's 8% annualized gain over the 80-year stretch captured about 90% of the return of an all-stock index over the same stretch, with less risk. And in periods of great volatility, such as the past 10 years, those bonds provide a great cushion to soften the pain of stock-market losses.
•    Dividends are your friend. During the 1990s, dividends accounted for just 16% of the S&P 500’s total return; blame the Internet bubble for that. But what happened in the 90s was both unsustainable and an aberration. The long term trend is that dividends have delivered more than 40% of the S&P 500’s total return; going forward it's likely that dividends will once again matter, a lot.  It’s not just Wellington’s bonds that provide steady income; the fund’s 4% yield is in part powered by dividend-paying stocks.
•    Don’t Chase. In the late 1960s Wellington’s management decided to “modernize” the fund’s investment approach; it let the stock portion rise form 62% in 1966 to 77% in 1971, and at the same time shifted a chunk of money from staid blue chips to smaller stocks that carried the luster of greater growth potential. It was a disaster; the fund fell way behind its peers. So much so, that the guy who greenlighted that push — none other than John Bogle — was booted. Yep, even legends have lessons to learn. By the early 1980s Wellington righted the ship and returned to its roots.
•   Cheap is Good. I know you’ve heard this one before, but Wellington sure tells it in a powerful way: The no-load fund’s annual expense ratio today is a miserly 0.35%. For a managed fund, that's a pittance — about one full percentage point less than the average expense ratio. In an environment where the bulls expect 8% a year to be a great return, you better believe 1 percentage point is a very big deal.

None of that is meant as an ad for Wellington. A  low-cost target retirement fund is actually a better next-generation riff on balanced funds like Wellington. With a target you get a mix of stocks and bonds with the added benefit of the allocation mix shifting as you age. And, hey, if you’re into building your own multi-fund, or multi-ETF portfolio, that works too. Just keep in mind the key pieces of what has made Wellington work: Include a mix of stocks and bonds, give props to the power of dividends, avoid performance chasing and keep your costs low. That’ll work this year and most probably for the next 80 as well.

Sometimes a great notion just doesn’t live up to its promise.

That’s certainly true for target-date retirement funds, which are all-in-one portfolios that automatically shift to grow more conservative by your retirement date. A staple of 401(k) plans—and the default option for most new  investors—many target funds underperformed badly in the market meltdown. The typical 2020 portfolio dropped 30% last year. Worse, many shareholders in 2010 funds, who were poised to retire, got hit with similar losses.

Question is, who’s going to fix target-date retirement funds, and how?

Cue the federal government. On June 18 a hearing on target-date funds will be jointly held by the Labor Department and the Securities and Exchange Commission, which may eventually lead to new rules for these investments.

According to SEC chairman Mary Schapiro, who laid out the agenda for the hearing before a House financial services subcommittee earlier this week, regulators will examine the different asset mixes held by target date funds, which led to widely varying results. Among  2010 funds, Schapiro noted, returns last year ranged from -3.6% to -41%. The SEC and Labor Dept. will consider "whether additional measures are needed to better align target-date funds' asset allocations with investor expectations,"  Schapiro said.

Regulators will  also look closely at whether a target-date fund’s name might be "misleading or confusing to investors," Schapiro said. Not that there’s much question about investor confusion. One recent survey (pdf) found that 62% of investors polled thought “investing in a target-date fund means you will be able to retire on the target date.”

That would seem an obvious conclusion. But instead fund companies assume you will keep your money in your target fund for another two or three decades after retirement, instead of cashing out immediately. So the funds often hold a large stake in stocks, anywhere from 40% to 70% of the portfolio, until the retirement date, only then downshifting to bonds and cash.

Why assume such a long investing timeline? For one thing, higher stock allocations enable  fund groups to tout better performance records, since historically (if not lately) stocks have  delivered higher returns than bonds. The strategy is also a way to make up for the poor savings habits of 401(k) participants, since many fail to contribute enough to build adequate nest eggs.

Of course, taking greater risks to chase higher returns can easily backfire—just look at last year. As one would-be hearing witness, Joseph Nagengast of Target Analytics, wrote in his comments to the SEC (pdf), “If a fund labeled 2010 is really targeted to ‘land’ at 2040, it should be re-labeled as a 2040 fund.” (You can read comments from other experts seeking to testify at the SEC's website.)

If any reforms do result from these hearings, they would likely focus on improved disclosure of target-date risks. But regulating asset allocation is more difficult. Even financial experts disagree about the proper portfolio mix of stocks, bonds and other investments. Will a government agency be a better judge?

Still, it's clear by now that these investing choices should not be left up to the fund companies that market target funds, or employers, who aren't financial experts. The best solution, as some 401(k) critics have pointed out,  would involve guidance from independent fiduciaries, whose only concern is the interests of the fund shareholders—perhaps a federal retirement board should take on the task, as Vanguard founder John Bogle has suggested (pdf).

Meantime, a few fund groups are seeking to get ahead of any federal regulations by making their own changes. Schwab announced last month that it was reducing the amount of stock held by its target-date funds. Its 2010 portfolio, for example, shifted from a 50% stake in stocks to 43%.  Other firms that have made similar fixes include Aim and OppenheimerFunds, according to Financial Research Corp.

It's a start.

If you don't look too closely, you might think it's 2007 all over  again.

Thanks to the recent bull rally, foreign stock markets are racking up double-digit returns. The MSCI EAFE  index, a benchmark of developed nations, soared 32% in the three months ending May 29. Third-world nations, meanwhile, have trounced those gains, with the MSCI Emerging Markets index surging 56%. Those numbers make our home-grown returns looks comparatively anemic—the S&P 500 is ahead by just 25.8%.

The overseas performance edge should be no surprise, given the troubled U.S. economic forecasts. Ultrabearish economist Nouriel Roubini expects the U.S. to remain in recession this year; and for the next two years, he sees only a weak recovery. Meanwhile emerging markets economies, such as China and Brazil, are expected to grow by as much as 10% this year. The MSCI BRIC index, which tracks the booming economies of Brazil, Russia, India and China, soared 60% during the rally.

Even faster growth is expected in so-called frontier markets, which are smaller, less developed nations that don't qualify even for emerging markets status. (For more on frontier markets, see this story).  The MSCI Sri Lanka index is up 80% over the past three months, while Romania has skyrocketed 110%. Franklin Templeton's Mark Mobius, considered the dean of emerging markets investors, has said he is putting more of his personal money into frontier markets (subscription req.).

Many retail investors are way ahead of him. In the first four months of this year, nearly $8 billion in new cash flooded into emerging markets funds, according to Financial Research Corp., even as investors pulled money out of U.S. and other foreign stock funds.

If you think you've seen this movie before, you have. Big surges in emerging markets have invariably led to big busts, which are usually far worse than domestic losses. The MSCI emerging markets index plunged 55% in 2008 vs. 37% for the S&P 500. This year's blistering run-up, though it does not erase those losses, is  reason for caution. As noted bear Jeremy Grantham announced at a Morningstar conference last week,  "you can bet on" a bubble forming in emerging markets stocks.

One reason for the big swings is that investing in emerging markets is, to a large extent, a bet on commodities. After all, production of raw materials, such as oil, precious metals, and the like, is the main engine for many of these growing economies. The typical Latin American fund holds more than 40% of its portfolio in energy and industrial material stocks, according to Morningstar.com. The top holding, at 26% of assets, is oil giant Brazilian Petroleum Corp. Volatility, anyone?

None of which means you should avoid emerging markets altogether. But if you don't want a repeat of last year's losses, invest carefully.  Most advisers recommend keeping  only  5% to 10% your portfolio in these markets. If you haven't jumped in already, consider dollar cost averaging, so you can take advantage of any downturns by buying more shares. And if you've already invested, now may be the time to take some profits.

After losing nearly half its value in 2008, Fidelity Magellan (FMAGX) is finally regaining its stride.  Since the start of the year through May 21, Manager Harry Lange has steered the $21 billion fund to a 13% gain. That return beats the Standard & Poor's 500 index by a whopping 13.5 percentage points, according to Morningstar, which places Magellan in the 10% of its peers.

These are short-term numbers, of course, but the comeback says a lot about Lange's dedication to his strategy. A growth- style investor, he seeks out stocks that are likely to deliver rapidly increasing earnings, but he prefer to buy them at bargain prices. So last year, when the market slammed many of his favorite technology stocks, such as Corning (GLW) and Cisco (CSCO), he saw an opportunity.

"I felt the market had overreacted," said Lange in a recent interview. "These were industry leaders that were selling products that people wanted, so I doubled up as the market went down." So far this year, Cisco has gained 11% and Corning has soared 44%.

Lange still likes tech—the industry recently accounted for a hefty 24% of the fund's portfolio. In addition to Corning and Cisco, the fund's other top tech holdings include Apple (AAPL) and Nokia (NOK). Says Lange. "People around the globe are still buying the latest smartphones and gadgets."

A go-anywhere investor, Lange recently began venturing into an asset you might not expect to find in a growth fund: gold, which recently made up 7% of the portfolio. Among the larger stakes: Newmont Mining (NEM) and Goldcorp (GG). "The money being pumped into the economy as a result of the economic stimulus is likely to lead to inflation," says Lange, "or certainly a lot of inflation fears."

Over the past year Lange has cut back on some former favorites, such as alternative energy—"it's hard to see strength in this sector near term, given the deficit and the lower cost of conventional energy"—and financials. Last year his bets on AIG and Wachovia helped drag down the fund to a 49% loss.

But Lange isn't cutting out financials completely—the fund still holds a 10% stake, with J.P. Morgan (JPM) among the top picks. In 2009 these stocks have helped returns,  Lange says, adding, "The surviving investment banks will gain market share, and they will earn better spreads than when there was lots of competition."

Will Lange's strategy continue to work? That's impossible to say. But it's clear that Lange is doing what he was assigned to do—restore Magellan to the adventurous growth fund it was under Peter Lynch. Previous manager Roger Stansky had turned the fund into an index-hugger, which led to mediocre returns.

Magellan shareholders aren't the only ones with a lot riding on the Lange's success. Fidelity Investments does too. Magellan, after all, was once Fidelity's flagship fund, with more than $100 billion in assets. That was back in 2000. The current flagship fund, Fidelity Contrafund (FCNTX), run by Will Danoff, is up less than 2% this year; and its assets have fallen from more than $80 billion in 2007 to just $48 billion.

All of which has led to a big loss of market share for Fidelity. And it casts doubt on the future of its gun-slinging stock-picking style, which worked so well in the '80s and '90s. Meanwhile, investors have been pouring money into rivals Vanguard, the champion of indexing, and American Funds, with its anonymous team mangement—not to mention today's hottest-selling investment, exchange-traded funds.

Back in 2004, Fidelity ranked second in long-term assets, just behind Vanguard, according to Financial Research Corp. Now it ranks third. In response, Fidelity has launched a series of changes to its investment process, as well as an overhaul among its top executives.

These moves may help—but a long-term market rally that gives its managers a chance to shine would help even more.

Some food for thought from President Obama's current investment portfolio, which was revealed last Friday as part of his government-mandated annual financial disclosure report:

1. There's an old bit of investment advice: If you don't have a lot of money, you invest to build your assets. If you already have a lot of money, you invest to protect them. Well, it's the second part of that statement that applies to our president. Judging from the report, he and his immediate family had investments and savings, as of year-end 2008, of at least $1.4 million and as much as $5.9 million. (Sorry about the imprecision there; blame the report's format for the wide range of valuations.) And, boy, is his portfolio safe and liquid. His biggest holding, by far, is his stake in U.S. Treasury bills–somewhere between $1.05 million and $5.1 million. The next biggest chunk is the $100,000 to $250,000 that Barack and Michelle have in their joint checking account. Face it: When either of them uses a debit card to gas up the limo at the 7-11, they don't have to worry about those pesky overdraft fees.

2. The president isn't really into stock-picking. He and the First Lady used to own a few different equity mutual funds; now he owns only one, and it's an index fund: the Vanguard FTSE Social Index fund (VFTSX). President & Mrs. Obama have somewhere between $115,00 and $250,000 in the fund, spread out among three different retirement accounts. And they've suffered like everyone else: The fund has a total return of negative 39% over the past year, slightly worse than that of the S&P 500. Michelle used to have big holdings in the actively-managed Vanguard Wellesley Income (VWINX) and Vanguard Wellington (VWELX) funds, but she apparently got rid of them last year.

3. Face it, when you're President of the United States, your investment objectives and criteria are not like your next-door neighbor's (if indeed you have any neighbors). As much as Obama might be concerned about protecting his wealth–and maybe he isn't, since he'll have a nice pension and plenty of opportunities to make money in retirement–he's got to worry more about how his investments look to other people, and what those investments say about him. That's what they euphemize in financial circles as the "optics" of the situation.

4. On that basis, the optics of Obama's investments look pretty good. By investing in an index fund, he's not making an active bet on a particular company (though he does end up making big bets, for better or worse, on particular industries: The Social Index fund has about 26% of its investments in financial stocks, 27% in information technology, and another 30% in either health care or consumer discretionary). That lone mutual fund invests nearly all its money in U.S. stocks, and it screens companies on the basis of their policies and performance relative to the environment, human rights, sweatshops, bribery and other social issues. Who's going to argue with that? And think about it: With so much of Obama's money in Treasury bills and cash, he's making a big bet on the performance of the U.S. economy and the U.S. dollar. It's like with any money manager: When he's playing with your money, you want him to have a lot of his own assets at risk, too.

Addendum:

The Obamas have socked away somewhere between $100,000 and $200,000 in 529 plans for Sasha and Malia's college education. That's great, but it appears they have put their money in broker-sold plans that charge a 3.5% upfront sales load and have annual expense ratios of around 1.3%. Ouch! Financial planner (and MONEY contributor) Allan Roth suggests they move to lower-expense direct-sold plans, a move that would mean lower fees and more money for the girls' schooling.

Anyone invested in a value mutual fund last year knows it was the horribilis of all annuses; according to Morningstar the average large-cap value fund lost 38% in 2008. And the pain was even more severe for investors in some of value’s marquee mutual funds. Longleaf Partners lost 51% last year and Bill Miller’s Legg Mason Value Trust shed 55%.

As my colleague Penny Wang pointed out, the big losses from the supposedly lower-risk value style of investing caught plenty of investors by surprise.

Yet since the market hit its recent market low on March 6th, value funds have been showing signs of life once again, posting gains that sharply outpace the 33% rise in the S&P 500. Longleaf Partners is up 51% from early March through the end of last week, Legg Mason Value is up 50%, and Dodge & Cox Stock and Davis New York Venture, are up more than 40% from the market low after getting seriously whacked in 2008. To be sure, that still leaves the battered bunch of 2008 with plenty to make up. After losing 50% it takes a 100% gain to get back to where you once were.

But you have to start somewhere.

As Legg Mason’s Bill Miller put it in his first quarter commentary (dated April 27th”): “After three years where the market was dominated first by price momentum, and then by panic, we have found value has once again begun to matter, as it has done 70 to 80 percent of the time. Consistent with that, our portfolio has once again begun to outperform. As the U.S. and global economy stabilize, risk aversion should attenuate, and capital should begin to return to credit and equity markets. That should be good for valuation-based strategies, and I am confident our results will reflect the value inherent in our portfolio.”

Are you as confident that the value style is going to regain its long-term footing?

– Carla Fried

Well, Schwab can't do anything about the stock market, but the the financial services company can make it cheaper for people to invest. This morning, the mutual fund operation of Charles Schwab made deep cuts in the expense ratios of its equity index funds and lowered costs throughout its fund family for individual investors.

The news comes only one month after Morningstar forecast that mutual fund expense ratios will rise in 2009.

Under its new pricing, Schwab is giving all investors in a given fund the same expense ratio, whether they're making the minimum initial investment of $100 or investing a larger amount. For example, expenses for a small investment in Schwab's popular Dividend Equity fund will drop from 1.04% to 0.89%, a ratio previously available only to people with a minimum investment of $50,000. Ratios on other funds will have higher drops: For small investments in the Schwab Fundamental U.S. Large Company Index fund, expenses will go from 0.59% to 0.35%.

Playing a game of expense-ratio limbo with other brand-name mutual fund giants–and with ETFs, such as the SPDR S&P 500, that are stealing dollars from index mutual funds–Schwab is claiming the industry's lowest expenses in three categories of index mutual funds: the S&P 500, the total US stock market, and small-cap stocks. For example, Schwab's S&P 500 Index fund, which used to have an expense ratio of 0.36% for small accounts, now has an expense ratio of 0.09%. The expense ratio for the Vanguard 500 Index fund, which has a minimum initial investment of $3,000, is 0.15% for most individuals, while the Fidelity Spartan 500 Index–a $10,000-minimum fund–has an expense ratio of 0.10%.

"This is not a promotional offer or anything like that," said Schwab's Peter Crawford, senior v.p. of investment management services, at a press conference Tuesday morning. "These are permanent reductions."

Granted, Schwab's index fund expenses may not have the absolutely lowest expense ratios out there. If you're lucky enough to have at least $100,000 to invest, your Vanguard 500 Index Admiral Shares will have a ratio of 0.07%. The SPDR S&P 500, by the way, has an expense ratio of 0.0945%, but you'll have to pay brokerage commissions on any transactions.

Keep in mind, also, that some of these numbers won't exactly right all the wrongs the stock market has recently inflicted on your portfolio. On an investment of $10,000, a 0.09% ratio on Schwab's 500 index amounts to expenses of  $9 a year, compared to the $15 you'd be paying if you were holding Vanguard's index shares. In other words, you'd be saving yourself $6 a year. That's not quite enough to turn your retirement picture around, but maybe it would make an appreciable difference in your investments given enough time and money in the market.

And who knows? Maybe this will be the first round in a mutual-fund price war. That's a battle all investors would be happy to see.

David Dreman

Could it be the beginning of the end of the market meltdown? If history is any guide, just possibly. One of the few remaining star fund managers, famed value investor David Dreman, 72, was recently fired from $2.4 billion DWS High Return Equity. Dreman had guided High Return for more than two decades, a period that encompassed numerous market cycles and as well as a series of corporate owners, most recently Deutsche Bank. His tenure came to an end last week, when the fund’s board announced that as of June 1 he would be replaced by a Frankfurt-based team of quantitative managers.

As financial historians are quick to point out, dismissing a manager after a spate of poor returns often backfires, since that particular investing style is probably due for a comeback. During the dotcom era, many well-known value managers lagged badly when they avoided tech stocks, and by 2000 a number had lost their jobs or retired. Among them: Robert Sanborn of Oakmark Select, Gary Brinson of Brinson Global, and George Vanderheiden of Fidelity Destiny. Dreman himself was down 13% in 1999, vs. a 21% gain for the S&P 500. When value investing rebounded the next year, Dreman High Return rocketed 41%, trouncing the index by 50 percentage points.

This time around Dreman’s underperformance was the result of stocks he bought, not those he avoided. A contrarian investor, he held a big stake in ill-fated financials last year, including Fannie Mae, Freddie Mac, Wachovia, and Washington Mutual. No surprise, High Return ended 2008 with 46% loss, placing it near the bottom of its peer group. Says Dreman, “In retrospect, our financial holdings cost us a lot.” It didn’t help that 2008’s disaster followed two previous years of subpar returns, which meant the fund’s three-year and five-year numbers looked grim.

But that kind of underperformance is exactly what you have to expect with value managers. Successful investing requires plenty of patience, since studies show that even the best stock-pickers often lag the market for several years in a row. And if you give up too soon, you can miss out on the good years. Despite its recent stumbles, Dreman’s High Return fund ranks in the top half of its category over the past 10 years, according to Morningstar, and since inception the fund’s 9.2% average annual return beats the S&P 500 by more than a full percentage point.

Of course, there’s no guarantee that any fallen manager will soar again. But Dreman, who has no immediate plans to retire, is clearly gunning for a comeback. Along with his heir apparent Clifton Hoover, he still manages three other DWS funds (including a top-performing small cap value portfolio), as well as the no-load Dreman Contrarian funds. “Low P/E investing is a proven strategy,” he says. “And this is exactly the kind of market we do well in—many great stocks got knocked down to levels we have not seen since the 1950s.”

And those stocks are likely to rebound in the next few years, Dreman says. He is looking for the economy to begin recovering in 2010, although the government’s efforts to pump liquidity into credit markets may cause double-digit inflation. Still, stocks tend to do well during inflationary periods, since companies have pricing power to maintain earnings. “Over the next five years,” Dreman says, “the stock market could possibly double.” A 100% stock market gain? Right now that’s something only a contrarian would predict.

Get ready for higher mutual fund fees.

Morningstar reports that expense ratios will likely climb in 2009. As investors yanked money out of the market in the last year, fund asset levels declined. At the end of February, for example, mutual funds held $5.9 trillion, down from $8 trillion at the start of 2008, according to Morningstar. Since a fund's expense ratio reflects total fees divided by assets, it's not surprising that fees are on the rise.

It's just painful — and a dubious approach for winning back investors hit by losses of 50% or more.

Granted, expense ratios may climb by only a few basis points. But in a market where positive returns are scarce, slight increments are felt. If you own a fund where the expense ratio already was high, you may want to reconsider your position. In 2008, the average fee for a U.S. stock fund was 1.6%. For an international stock fund the average was 1.8%, and for a taxable bond fund, 1.3%, according to Morningstar.

Getting below the average can minimize the pain. Vanguard–yes, even this fee-conscious shop–is raising the expense ratio on some of its funds, including Intermediate-Term Tax-Exempt (ticker: VWITX), a MONEY 70 pick. The new fee is 0.20%, up from 0.15%. At that level, however, you're not giving up too much money. Let's say the fund manages a 5% return this year (hey, it's a hypothetical). On $10,000, the higher fees cost you only an additional $5.

–Carolyn Bigda

So much for letting a little matter such as the largest erosion of investor equity in more than 70 years get in the way of some fund-industry back-slapping. Last week the 2009 Lipper Fund Awards were doled out, recognizing more than 200 “funds that have excelled in delivering consistently strong risk-adjusted performance, relative to peers.”

Maybe I am a tad overly sensitive given the serious depletion of my retirement savings, but isn’t cheering on mutual funds just because they managed to suck less than their peers a bit much? Do we really need to high-five Pyrrhic victors right now? For example, what exactly is award-worthy about the fact that the Dreyfus S&P STARS Opportunities fund has a five-year annualized return of -4.5%? I don’t care if that was a heck of a lot better than its peers; a loss is a loss and doesn’t seem worth celebrating, yet it was anointed the winner among mid cap growth funds for the past five years. You can check out other “winners” here.

It’s not lost on me that a fund that held on better than its peers in a down market will require less digging out when the market rebounds. And I fully get that weathering down markets is a necessary part of a long-term investing strategy. But awards? Come on.

Yet Lipper seems a bit oblivious to the carnage done to 401(k) balances. “Welcome to the Virtuosos” is the greeting on the awards home page (the link above) accompanied by a ridiculously bullish fever-line market graph that looks like the S&P 500 circa 1999, not 2009. Not having attended the ceremony I am unaware if rose-tinted glasses were handed out as party favors. But here’s the absolute cherry on the top of this sundae: Lipper is hawking trophies to the award winners at the bargain basement price of $165 for a large trophy, $119 for medium and $95 for small. Let’s just hope no fund orders up a bunch and sends the bill to its shareholders.

And let us know if you in fact think any funds you own are award-worthy.

– Carla Fried

So you’ve just nailed the Morningstar Fixed-Income Manager of the Year award for the third time. You’ve led both a stock fund and a bond fund to great long-term returns, which prompted Money to name you Best Fund Manager of Our Time in 2008. And you’ve been proven correct in your forecasts about the dire impact of subprime mortgage debt. With economy collapsing just as you predicted, what do you do now?
For Robert Rodriguez of First Pacific Advisors the answer is a bit counterintuitive: you announce that you are leaving for a one-year sabbatical starting next January.

A star fund manager taking a sabbatical in the midst of the worst financial crisis since the Great Depression? It’s all part of a long-term plan, according to Rodriguez. “When is a good time to pass the baton?” he says. “I’ve seen a lot of fund managers overstay. And that can be bad for the firm and its clients.” With a successful transition, he says, FPA’s future can be secured for another 10 to 20 years.

And there’s good reason to be optimistic. Rodriguez has recruited a deep bench of portfolio managers, who share his value investing philosophy, and they have established their own impressive records. Tom Atteberry, co-manager of FPA New Income (FPINX)—who shares a Morningstar Manager of Year award for fixed-income investing—will continue to head that fund. And at stock fund FPA Capital (FPPTX), co-managers Dennis Bryan and Rikard Ekstrand will take full charge.

“Who in their right mind would consider a major transition at this time unless they had high confidence in their associates?” Rodriguez says. “I’m leaving all my money in the firm.” When he returns to FPA in 2011, it will be as an advisor and analyst, as well as managing partner—but he will not be a lead portfolio manager.

Rodriguez acknowledges that FPA’s managers are likely to face a tough investing climate in 2010. “I think the worst of the financial collapse is behind us,” he says. “But we have a long, drawn-out fight ahead of us. I think people will be disappointed by the magnitude of the financial recovery—the stimulus will have virtually no traction.” That’s because the impact of the stimulus money will be offset by Americans’ increased saving, as well as a decline in international trade, Rodriguez says.

And even bigger issue, as he sees it, is the ballooning debt being racked up at the federal, state and local levels. It’s an issue he has frequently written about and discussed. So along with his plans to travel next year—“to South America, maybe around the world”—and read books, Rodriguez hopes to get involved with organizations that are focused on issue of the U.S. debt.

What about working with the U.S. government itself? Rodriquez dismisses the notion. “Whether it’s the Republicans or Democrats,” he says, “the government just recycles the same people.”

Meanwhile, both FPA Income and FPA Capital are investing cautiously. FPA Income holds only short-term high quality debt, including a stake in Treasury Inflation-Protected Securities; it’s up 3.73% over the past 12 months, which beats 90% of its peers. And FPA Capital has stashed more than third of its portfolio in cash, with the rest invested mainly in energy stocks. It’s down 42%, which places it in the top 28% of mid-cap value funds.

– Penelope Wang

Like any self-respecting value house, the Oakmark funds had a horrific 2008. The low-lights include: Oakmark International Small Cap Fund, -45.7%; Oakmark International, -41.1%: Oakmark Global, -38.8%: Oakmark Select, -36.2%.  

Firm president John Raitt went for the glass half full/half empty spin, writing in Oakmark’s most recent shareholder letter (dated Dec 31. 2008): “While all of our Funds performed better than the market averages for the year, we are still not satisfied with large negative returns.” Presumably neither are their shareholders.

But the beleaguered Oakmark shop decided what’s needed in this massive down market is a bit of levity. So it opened the shareholder letter with a comic smack dab on page 1, courtesy of the creative minds at someecards.com. The punch line: “Let’s never speak of 2008 again.”

You can check it out here:

While humor—especially from the typically humorless fund industry—is appreciated, it remains to be seen if Oakmark shareholders are ready to laugh off their huge portfolio losses.

– Carla Fried