Great money managers are the rock stars of the financial world. While Warren Buffett is a household name to many, to stock geeks, the names of Benjamin Graham, John Templeton, and Peter Lynch are cause for extended discourses on investment philosophies and performance.

The greatest mutual fund managers have produced long-term, market-beating returns, helping myriad individual investors build significant nest eggs.

Criteria

Before arriving at our list of the best of the best, let's take a look at the criteria used to choose the top five:

  • Long-term performers. We only consider those managers with a long history of market-beating performance.
  • Retired managers only. We include only managers who have finished their careers.
  • No team-managed funds. These were not evaluated because the teams might change midway through the performance period. Besides, as John Templeton put it, "I am not aware of any mutual fund that was run by a committee that ever had a superior record, except accidentally."
  • Contributions. The top managers must have made contributions to the investment industry as a whole, not just to their own companies.

Benjamin Graham

He is known as the father of security analysis, although few would think of Benjamin Graham as a fund manager. He still qualifies for our list, however – from 1936 to 1956 he managed the modern equivalent of a closed-end mutual fund with partner Jerome Newman.

Investment Style: Deep value investing. (For more on value investing, read "Stock-Picking Strategies: Value Investing" and "Value Investing Using The Enterprise Multiple.")

Best Investment: GEICO (NYSE:BRK.A). It spun off to Graham-Newman shareholders at $27 per share and rose to the equivalent of $54,000 per share. Although not an obvious fit with Graham's deep discount strategy, the GEICO purchase would become his most successful investment. Most of Graham's positions were sold in under two years, but he held GEICO stock for decades. His main investments were numerous low-risk arbitrage positions.

Major Contributions: Graham wrote Security Analysis with fellow Columbia professor David Dodd (1934), The Interpretation of Financial Statements (1937), and The Intelligent Investor (1949), which inspired Warren Buffett to seek out Graham, then study under him at Columbia University, and later to work for him at the Graham-Newman Corporation.

Graham also helped start what would eventually become the CFA Institute. Starting on Wall Street in 1914, long before securities markets were regulated by the Securities and Exchange Commission (SEC), he saw the need to certify security analysts – thus the CFA exam. (For more on the CFA exam, see "Prepare for Your CFA Exams.")

In addition to mentoring Buffett, Graham had numerous students who went on to have fabulous investment careers of their own, although they never achieved the cult status of their teacher or most famous fellow pupil. (For more on Graham, read "The Intelligent Investor: Benjamin Graham" and "The Three Most Timeless Investment Principles.")

Estimated return: Reports vary in accordance with the time period in question and the calculation methods used, but John Train reported in The Money Masters (2000) that Graham's fund, the Graham-Newman Corporation, earned 21% annually over 20 years. "If one invested $10,000 in 1936, one received an average of $2,100 a year for the next 20 years, and recovered one's original $10,000 at the end."

Sir John Templeton

Dubbed "the dean of global investing" by Forbes magazine, Templeton was knighted by Queen Elizabeth II for his philanthropic efforts. In addition to being a philanthropist, Templeton was also a Rhodes Scholar, CFA charterholder, benefactor of Oxford University, and a pioneer of global investing who excelled at finding the best opportunities in crisis situations.

Investment Style: Global contrarian and value investor.

His strategy was to buy investment vehicles when, in his words, they hit "the point of maximum pessimism." As an example of this strategy, Templeton bought shares of every public European company trading for less than $1 per share at the outset of World War II, including many that were in bankruptcy. He did this with $10,000 of borrowed money. After four years, he sold them for $40,000. This profit financed his foray into the investment business. Templeton also sought out underappreciated fundamental success stories around the world. He wanted to find out which country was poised for a turnaround before everyone else knew the story.

Best Investments:

  • Europe, at the start of World War II
  • Japan, 1962
  • Ford Motors (NYSE:F), 1978 (it was near bankruptcy)
  • Peru, 1980s
  • Shorted technology stocks in 2000

Major contributions: Built a major part of today's Franklin Resources (Franklin Templeton Investments). Templeton College at Oxford University's Saïd Business School is named in his honor.

Estimated return: He managed the Templeton Growth Fund from 1954 to 1987. Each $10,000 invested in the Class A shares in 1954 would have grown to more than $2 million by 1992 (when he sold the company) with dividends reinvested, translating to an annualized return of ~14.5%.

T. Rowe Price, Jr.

T. Rowe Price entered Wall Street in the 1920s and founded an investment firm in 1937, but didn't start his first fund until much later. Price sold the firm to his employees in 1971, and it eventually went public in the mid-1980s. He is commonly quoted as saying, "What is good for the client is also good for the firm."

Investment style: Value and long-term growth.

Price invested in companies he saw as having good management, being in "fertile fields" (attractive long-term industries), and positioned as industry leaders. Since he preferred to hold investments for decades, Price wanted companies that could show sustained growth over many years.

Best investments: Merck (NYSE:MRK) in 1940; he reportedly made over 200 times his original investment. Coca-Cola (Nasdaq:COKE), 3M (NYSE:MMM), Avon Products (NYSE:AVP) and IBM (NYSE:IBM) were other notable investments.

Major contributions: Price was one of the first to charge a fee based on assets under management rather than a commission for managing money. Today, this is common practice. Price also pioneered the growth style of investing by aiming to buy and hold for the long term, combining this with wide diversification. He founded publicly traded investment manager T. Rowe Price (Nasdaq:TROW) in 1937. (For more insight on growth investing, see "Stock-Picking Strategies: Growth Investing.")

Results: Individual fund results for Price are not very useful, as he managed a number of funds, but two were mentioned in Nikki Ross' book Lessons from the Legends of Wall Street (2000). His first fund was started in 1950 and had the best 10-year performance of the decade – approximately 500%. Emerging Growth Fund was founded in 1960 and was also a standout performer, with such names as Xerox (NYSE:XRX), H&R Block (NYSE:HRB) and Texas Instruments (NYSE:TXN).

John Neff

The Ohio-born Neff joined Wellington Management Co. in 1964 and stayed with the company for more than 30 years, managing three of its funds. One of John Neff's preferred investment tactics was to invest in popular industries via indirect paths. For example, in a hot homebuilders' market he may have looked to buy companies that supplied materials to homebuilders.

Investment Style: Value, or low P/E, high-yield investing.

Neff focused on companies with low price-earnings ratios (P/E ratios) and strong dividend yields. He sold when investment fundamentals deteriorated or the price met his target. The psychology of investing was an important part of his strategy.

He also liked to add the dividend yield to the growth in earnings and divide this by the P/E ratio for a "you get what you pay for" ratio. For example, if the dividend yield was 5% and the earnings growth was 10%, he would add these two together and divide by the P/E ratio. If this was 10, he took 15 (the "what you get" number) and divided it by 10 (the "what you pay for" number). In this example, the ratio is 15/10 = 1.5. Anything over 1.0 was considered attractive.

Best investment: In 1984-1985, Neff began acquiring a large stake in Ford Motor Company; three years later, it had increased in value to nearly four times what he'd originally paid.

Major contributions: Neff authored an investing how-to book covering his entire career year by year, titled John Neff on Investing (1999).

Results: John Neff ran the Windsor Fund for 31 years ending in 1995, earning a return of 13.7%, versus 10.6% for the S&P 500 over the same time span. This amounts to a gain of more than 55 times on an initial investment made in 1964.

Peter Lynch

A graduate of Penn's Wharton School of Business, Lynch practiced what he called "relentless pursuit." He visited company after company to find out if there was a small change for the better that the market hadn't picked up on yet. If he liked it, he'd buy a little, and if the story got better, he'd buy more, eventually owning thousands of stocks in what became the largest actively managed mutual fund in the world – the Fidelity Magellan Fund.

Investment style: Growth and cyclical recovery.

Lynch is generally considered to be a long-term growth style investor but is rumored to have made most of his gains through traditional cyclical recovery and value plays.

Best investments: Pep Boys (NYSE:PBY), Dunkin' Donuts, McDonald's (NYSE:MCD); they were all "tenbaggers."

Major contributions: Lynch made Fidelity Investments into a household name. He also wrote several books, specifically, One up on Wall Street (1989) and Beating the Street (1993). He gave hope to do-it-yourself investors, saying: "Use what you know and buy to beat Wall Street gurus at their own game."

Results: Lynch is widely quoted as saying that a $1,000 invested in Magellan on May 31, 1977, would have been worth $28,000 by 1990.

The Bottom Line

These top money managers amassed great fortunes not only for themselves but also for those who invested in their funds. One thing they all have in common is that they often took an unconventional approach to investing and went against the herd. As any experienced investor knows, forging your own path and producing long-term, market-beating returns is no easy task. Given this, it's easy to see how these five investors carved a place for themselves in financial history.

For more on mutual funds, see our Special Feature: Mutual Funds.

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