Gray Matters How the Best Large-Cap Managers Rise Above the Rest By Karen Dolan Attribution analysis reveals the stocks and sectors that drive (or hold back) mutual funds’ returns. Bill Miller (Legg Mason Value LMVTX) got hurt owning stocks now resting in the financial company graveyard, Bruce Berkowitz (Fairholme FAIRX) cashed in on energy, and Will Danoff (Fidelity Contrafund FCNTX) scored big with Google GOOG. These are some anecdotal explanations for the performance of those funds, but a handy tool called attribution analysis allows investors to systematically dissect a fund’s portfolio to help explain performance. Combining attribution with qualitative knowledge of managers’ portfolios and strategies uncovers a complete picture of the underlying sources of their returns. Attribution analysis is commonly used by institutions to help explain which sectors and stocks contributed to a fund’s performance. Morningstar recently added this capability to its institutional software tool, Morningstar Direct, and Morningstar’s analysts plan to start harnessing its insights as we dig into fund performance. For our first foray into attribution analysis, we decided to look at large-cap funds that are Morningstar Analyst Picks and that have the S&P 500 as their benchmark. The large-cap universe is a notoriously competitive and difficult place for funds to gain an edge, making it a prime 22 Morningstar Advisor October/November 2009