Morningstar Magazine - February/March 2014 - (Page 25)

Global Briefs Americas United States How the Fund Managers of the Year Excelled By Michael Herbst 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. 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 Last year was a great year to be a stock-fund manager but a challenging one for fixed-income fund managers. For the 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. Domestic Equity Dennis Lynch and team, Morgan Stanley Institutional Growth The Morgan Stanley Growth team, led by 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 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, International Stock David Samra and Daniel O'Keefe, Artisan International Value and Artisan Global Value Samra and 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 billion Artisan International Value ARTKX and $1.4 billion Artisan Global Value ARTGX, the duo 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. Fixed Income Daniel Ivascyn and Alfred Murata, PIMCO Income PIMCO's decision to take on greater interestrate risk and maintain emerging-markets exposure backfired during the 2013's second quarter, when yields rose and emerging markets sold off. Yet Ivascyn and Murata also got a lot of things right at PIMCO Income PIMIX. 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. Making the most of a tough market is where a fund can really help shareholders. While PIMCO won't get all of its calls right, its concerted efforts to prevent any single bet from overwhelming performance played out for this fund in Steven Romick, Mark Landecker, and Brian Selmo, FPA Crescent Romick and crew let security selection and a strict valuation discipline drive the asset allocation of $15.9 billion FPA Crescent FPACX 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. Alternatives Brian Hurst and Yao Hua Ooi, AQR Managed Futures 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. That the $5.8 billion AQR Managed Futures AQMIX gained 9.4% 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 outpaces all but one of its rivals. Michael Herbst is director of active funds research with Morningstar. 25

Table of Contents for the Digital Edition of Morningstar Magazine - February/March 2014

Morningstar Magazine - February/March 2014
Letter From the Editor
Preparing for the Next 50 Years
Morningstar Managers of the Year
Fixing the Trust Deficit
Rethinking the Path to Retirement
Same Old, Same Old
Global Briefs
The Economic Implications of an Older World
Banking on Performance
Is the Affordable Care Act Healing Health Care’s Woes?70
Baxter Has a Positive Prognosis
Leading Fidelity’s Charge for RIAs
Our Favorite Mutual Funds
50 Most-Popular Equity ETFs
Undervalued Stocks With Wide Moats
Moving the Goal Post

Morningstar Magazine - February/March 2014