The awardees are an eclectic mix of managers and management teams that cover the investing universe -- everything from large-cap value to foreign stocks to municipals bonds. Those who run each of the 18 winning funds have weathered a variety of market conditions and have shown they have the right stuff. Half of them, including the well-known Bill Miller of Legg Mason Value Trust, have been honored before. The others include many people you may not have heard of, such as Lawrence Babin of Victory Diversified Stock Fund, a large-cap fund, and muni-bond whiz Thomas Fetter of Eaton Vance Municipal Bond Fund.
Our winners from the past two years have maintained a strong batting average. The 2004 top equity-fund managers earned 13.3% on average, compared with 12.3% for the S&P 500-stock index (from Mar. 11, 2004, when the best awards were announced, to Mar. 4, 2005). Our two 2004 bond-fund managers beat the Lehman Brothers (LEH
) Aggregate Bond Index, 2.8% to 1.4%, over the same time period. The class of 2003 did even better, with our honorees averaging 43%, vs. the market's 37% in the year after they were named.
To select the winners, we put each fund through a rigorous vetting. We start with BusinessWeek's Mutual Fund Scoreboard, searching for funds with an A or B+ rating in their respective categories. Those top marks identify which ones have performed the best over the past five years on a risk-adjusted basis.SIFTED AND SCREENED
There were other considerations, too. We wanted managers with at least five years at the helm, so we could be sure they were the people really responsible for the ratings. We also ruled out funds with less than $100 million in assets. That's because it's easiest for managers of small funds to stand out and much harder when the funds are bulked up.
The funds have to be readily accessible to our readers, so we eliminated those with a minimum investment greater than $26,000. Also gone were funds now closed to new investors. That narrowed the list to 40 finalists. Then the S&P analysts dug deeper, examining the year-by-year returns. "We think it's a better test of stock-picking ability to provide a trail of consistent performance rather than one great year followed by several mediocre years," says Philip Edwards, managing director of S&P's Investment Services. Expenses, turnover, and management style factored into the decision.
The team also sat down with the managers -- asking, for instance, "How do you handle risk?" and "Do you change strategies with the market conditions?" "We're looking for managers with a clear philosophy," says Edwards. "If you don't know where the goal line is, you're never going to make it."
No worries about that here. Our best managers have shown they know how to score. By Adrienne Carter