2009 was a year in which nearly every asset manager made money for investors, with major indexes up over 25% following a disastrous 2008. But some managers did extremely well versus their benchmarks, and are worthy of your attention as we enter a year in which many of the 2009's themes may persist in 2010.
Some are familiar faces, while others are newcomers that deserve a nod for their extraordinary returns. We'll look at which managers could be poised to deliver market-beating returns in 2010, and how retail investors can participate along with them.

  1. Bill Gross – The Bond King
    Mr. Gross is the co-founder and Managing Director of the Pacific Investment Management Co., otherwise known as PIMCO. There's a reason why he runs the largest bond fund on the planet – there's little debate that Gross is the greatest bond fund manager alive. Gross' Total Return Fund earned an average return of 7.7% in the past decade, trouncing the category average of 5.5%.

    Even though the PIMCO Total Return Fund (PTTRX) has grown to a size that could make it too unwieldy at over $200 billion in assets, Gross keeps making the right calls at the right time. His keys to success are in making big macro calls on interest rates, currencies, and the broad economy.

    Many investors can find his fund or a proxy of it within their 401(k) programs, and choosing it for your fixed income allocation is pretty much a no-brainer.

  2. Phil Condon, Rebecca Flynn – DWS Strategic High Yield Tax Free Fund (SHYTX)
    These municipal bond fund co-managers racked up a 32% gain in 2009, an astonishing number considering the historical and expected returns of your typical bond fund. The outsized returns were possible because the managers took selective risks on some lower-rated municipal bonds, which were badly bruised by the credit crisis last year. The fund still maintains an overall credit quality rating of around an "A", in order to preserve a measure of safety while reaching up to grab some of the attractive fruit higher up the risk tree.

    Can their success spill over into 2010? We shouldn't expect a repeat return in the 30% range, but given the weakness of many U.S. state economies, the municipal bond market should provide some opportunities to managers with a proven trained eye. Also, the fund seeks to provide income that is free of federal income tax, a big bonus for tax-conscious investors.

  3. Bruce Berkowitz, the Fairholme Fund (FAIRX)
    Morningstar recently named Berkowitz the U.S.equity fund manager of the decade, and for good reason. The founder and manager of the Fairholme Fund, Berkowitz invests in the mold of Ben Graham and Warren Buffett, seeking deeply undervalued stocks and companies trading below their intrinsic value. Since the fund's inception in 1999, investors have tripled their money while the S&P 500 is down over the same time period. (To learn more about intrinsic value investing from the masters, check out The Intelligent Investor: Benjamin Graham.)

    That type of outperformance may prove to be a once-in-a-lifetime feat, but there's no reason to think that there aren't more companies out there to Mr. Berkowitz's liking. In this struggling economy, many stocks are still trading below their historical valuations on metrics like price/earnings and price/cash flow, so there should be plenty of opportunities for the Fairholme Fund to add to its growing portfolio. Also, Berkowitz likes to concentrate his holdings, so he's willing to make big bets on the companies he likes. This is the recipe for beating benchmarks, because the more spread out a mutual fund becomes, the more likely it is to resemble an index fund and perform just like a broad benchmark like the S&P 500.

  4. Jeff Cardon, Wasatch Small Cap Growth (WAAEX)
    This small cap U.S. equity fund had been closed to new investors for several years in the past decade, then re-opened its doors in 2008. This can sometimes be seen as a bad sign, often coming on the heels of lackluster performance. But Mr. Cardon insisted that he was seeking new investors because of opportunities he saw in cheap small-cap stocks, and his performance in 2009 backs up that claim.

    The Wasatch fund was up over 48% last year, beating the Russell 2000 Index by 20 percentage points and the Russell 2000 Growth Index by 14%. The fund is also handily beating the benchmarks over 10 years and since its inception in 1986.

    Cardon employs a strategy of mixing steady, cash-flow rich stocks with riskier growth companies that could become future blue-chip companies. Traditionally, small caps do well in the beginning stages of economic recovery, so if the economy continues to improve this year, it could be another strong year for smaller companies.

  5. David Herro, Oakmark International (OAKIX) & Oakmark International Small Cap (OAKEX)
    David Herro is another Buffett disciple who holds up intrinsic value as the most important metric in his investing philosophy. Once he determines the intrinsic value of a company his team is evaluating, he demands a steep discount (around 40%) to that value before purchasing the stock. This provides a wide safety net in case a company turnaround story takes a while to take shape, or if the market takes a while to appropriately value the worth of a given stock.

    After having a mediocre 2008, these two funds roared back in 2009 with returns of 56% for Oakmark International and 68% for the small-cap version. The long-term focus of the funds shows up in the multi-year comparisons; Oakmark Internationals' 10-year annualized return of 8.25% handily crushes the MSCI EAFE index's annualized return of 1.15%, the most common benchmark used for international stock managers.

Parting Thoughts
Chasing performance can be a classic trap for investors. I've seen many investors choose a "racehorse" for the year based on who did the best last year. Those investors usually found themselves having to choose a new fund each and every year, because many managers are good for a single pop, but fail to do well perennially.

While no manager is ever a sure lock, these five have proven to be successful over long time periods, and all have philosophical safety nets to protect against bad bets, which are bound to happen. Always remember to decide your asset allocation first, but once you've done that consider these two bond managers, two domestic stock managers, and one international stock manager. (For further reading, check out Asset Allocation: One Decision To Rule Them All.)

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