By Suzanne McGee
Most mutual-fund managers were more than happy to bid farewell to 2018.
With the S&P 500 index wrapping up the year with the worst December since 1931, and a 6.2% loss for the full year, the average manager overseeing a diversified U.S.-stock fund saw a total return of minus 7.73% in 2018, according to Thomson Reuters Lipper. Nor were international stock funds any refuge: On average, they fell 15.52% for the year.
But amid all that gloom, a handful of managers emerged as big winners, posting double-digit gains for the year.
In contrast to most of our previous Winners' Circle contests, however, this quarter's top-performing funds proved to be a motley group, with little in common.
They include two funds from a Fidelity manager who specializes in "value growth"; the small Copley Fund (only $88 million or so in assets), which benefited significantly from its ownership of utilities, one of the sectors that rode out the fourth-quarter stock-market storm; Alger Small Cap Focus Fund, an outperformer from the small-stock category that dominated most of 2018; and two Morgan Stanley funds comprising, according to the manager overseeing them, "unique businesses."
In the quarterly Winners' Circle contest, we identify the most successful actively managed U.S.-stock funds for the previous 12 months, based on Morningstar Inc. data. Only mutual funds with at least $50 million in assets and a track record of at least three years qualify; no index, sector or leveraged funds are included.
Anyone looking for a pattern here will be tempted to fall back on a newly popular saying by pundits -- that we're now in "a stock picker's market," one in which many different kinds of managers can make their mark against both the indexes and their peers.
But you'd be hard-pressed to find many independent observers who buy that argument. "The whole concept of there being such a thing as a stock picker's market belongs in the same category of men in big red suits who descend your chimney and leave gifts," argues Ben Johnson, director of global ETF research at Morningstar.
What's the common ground?
Instead, owning stocks for the long term and reaping rewards only after many years may be the single factor linking many of this quarter's top-performing managers.
That shows in the record of Kyle Weaver, manager of Fidelity Advisor Series Growth Opportunities Fund (FAOFX), who ranked first in this year's competition with a return of 17.03% for the year.
Mr. Weaver says that he focuses on identifying idiosyncratic business models in which to invest. One of his picks is American Tower Corp., a wireless and telecommunications infrastructure company that he has owned in several of the funds he has managed at Fidelity. "When I bought it, it was a $30 stock," he says. Now, years later, the stock trades at about $158 a share.
Another stock that helped Mr. Weaver's results: online used-car network Carvana Co. of Tempe, Ariz. Mr. Weaver bought into the company after its stock fell below the $15 IPO price. Carvana now trades at about double that amount.
Mr. Weaver also manages Fidelity Advisor Growth Opportunities (FAGOX), the fourth-ranked fund on our list, which ended the year with a 13.82% return. Several of his picks for the top-ranked fund show up in this fund as well.
Buy and hold
Holding stocks for the long term also paid off for Amy Zhang, manager of the third-ranked Alger Small Cap Focus (AOFIX), which wrapped up 2018 with a gain of 14.15%.
"I have held positions in companies for 10 years, and I invest in stocks like CareDX with a three- to five-year time horizon," she says.
CareDX, which researches and develops products targeting organ-transplant recipients, has seen its stock price climb from about $6.50 when she first began accumulating a stake in the company in late 2017, to about $22.60 today, even though it is down from its recent highs of $30 or so.
(North Star Investment Management Corp.'s Copley Fund placed second in our Winners competition, with a gain of 15.65%. Its manager, Peter Gottlieb, declined to comment. Mr. Gottlieb took over managing the fund's portfolio following the death of Irving Levine last spring at the age of 95.)
Wrapping up the list of funds in the 2018 Winners' Circle, at Nos. 5 and 6, are two Morgan Stanley offerings: Morgan Stanley Institutional Mid Cap Growth fund (MPEGX) and Morgan Stanley Multi Cap Growth fund (CPOBX). The No. 5 fund posted a 12.14% gain and the No. 6 entry returned 11.18% -- nearly 6 points, or about 50%, behind the top performer.
Dennis Lynch, head of the Counterpoint Global team at Morgan Stanley and lead portfolio manager for the two Morgan Stanley funds, describes turbulent periods as those in which "you often earn your keep."
Looking for outperformers
Building a portfolio that can outperform, Mr. Lynch argues, involves identifying "the small handful of companies that always outperform, generating the majority of index returns."
For his winning funds, that list today includes software-service companies, such as Veeva Systems or Workday, and Illumina Inc., a company with a compelling intellectual-property lead and thus a hefty share of the market for genetic sequencing.
Sometimes, he adds, it is easier to identify those businesses in hindsight: Who, today, would argue with the idea that owning Amazon.com was a great long-term call? "But along the way, there were tremendous drawdowns, and during those, [managers] need to balance their focus on the long term with the idea the maybe the market is trying to tell you something," Mr. Lynch says.
The recent market turbulence holds a lesson for our top managers: Investors will be watching to see which of these mutual funds can ride out this stock-market storm and demonstrate their ability to pick resilient businesses -- not just stocks.
Ms. McGee is a writer in New England. She can be reached at email@example.com.