- Business Insider spoke with five of the top-rated US equity fund managers to learn about their strategies, strongest convictions in the market, and advice for other investors looking to replicate their success.
- The funds featured below received perfect scores in Lipper's assessment of total return, consistent return, capital preservation, expense, and tax efficiency.
- Visit Business Insider's homepage for more stories.
With $17.7 trillion in assets still managed by US mutual funds, reports of the industry's death are premature.
Sure, it's shrinking as money gushes into exchange-traded funds. But a select group of fund managers have established track records that demonstrate why many investors still rely on the professionals to grow their money.
Business Insider interviewed five of the top-rated fund managers as screened by Lipper, which rates funds across five categories that capture the most important attributes investors want in a money manager: total return, consistent return, capital preservation, expense, and tax efficiency.
The funds featured below received a 5-out-of-5 score in all of these criteria.
We learned about the managers' strategies, the stand-out stocks boosting their performance versus peers', and their best advice for investors who want to replicate their success.
Andrea Frazzini, portfolio manager, AQR Large Cap Defensive Style Fund
Frazzini co-manages the $3.2 billion fund with Jacques Friedman and Michele Aghassi. He's also the co-head of the global stock-selection team that generates forecasting models.
Their fund's overarching goal is to hold a diverse slate of US-listed companies that can survive in any market environment.
Their investing style mirrors AQR's well-known adoption of quant strategies. Beyond the firm-wide approach, he is influenced by his other job as an adjunct professor of finance at New York University's Stern School of Business.
"A lot of what we do comes straight out of academia," Frazzini told Business Insider. "We develop theories and testable hypotheses, then use our findings and economic theory as guidance to build our portfolios."
Here's what that looks like: Frazzini's team lets their model make the decisions about which individual stocks to overweight or underweight. It forecasts stock-level risk — such as how connected a single stock's moves are to the broader market — and business risk, like cash flow or margins.
The model then assigns a score to every stock. From there, the scores are ranked from most to least risky such that the portfolio overweights safer securities and underweights the riskiest ones.
1-year return: 11.9%
Frazzini says his investing is rooted in data instead of personal judgment and feelings.
"Whenever I think of a particular idea or concept we'd like to develop, I like to collect as much evidence as I can to essentially prove it wrong," he said.
Clare Hart, JPMorgan Equity Income Fund
Hart's investing strategy has been virtually unchanged in her 15 years managing the $21.9 billion JPMorgan Equity Income Fund.
She has always screened prospects for three main attributes: quality companies with a reasonable valuation that pay at least a 2% dividend yield.
Her refusal to waver on these three requirements has been met with pushback over the years — and she has stood by each of them even when the market demanded otherwise.
The defense for quality is almost a no-brainer: If a company is on track to go bankrupt, that's not a stock she wants to own.
On valuation, she looks for cheap stocks but not the cheapest.
"I was investing during the tech bubble, the telecom bubble after, and the financial crisis," Hart told Business Insider. "I have seen cheap get cheaper, and cheap can get to zero if things go away."
She has also resisted pressure to increase the 2% yield requirement because doing so would raise the risk of buying overvalued stocks. Even when Apple prepared to announce its highly anticipated dividend in 2012, she did not buy the stock until she could confirm the yield met her requirement. While waiting, investors sold Apple shares to fund Facebook's initial public offering. It turned out to be a double win: a lower price and a satisfactory dividend yield.
Financial-services companies make up the largest chunk of her portfolio, and they include a smorgasbord of asset managers, insurers, and regional banks.
1-year return: 5.47%
Investing advice: "Find the smart people, work with the smart people," Hart said.
She continued: "Don't be afraid of the people who tell you things you don't want to hear about your stocks. You want to talk to those people.
"For women, I think this industry is a good fit because if someone wants to be biased against you, it's harder if you really have a track record, you have numbers, you have performance, and you can show you know what you're doing," Hart said.
Mick Dillon & Bertie Thomson, Brown Advisory Global Leaders Fund
Dillon and Thomson comanage a $211.4 million portfolio of companies across the world.
To them, the customer is the most important part of every company's value chain. That's why they put a premium on companies that solve customer problems in unique ways.
This criterion, and their go-anywhere capability, led them to invest in Bank Rakyat Indonesia, a microfinance lender that most US investors probably have never heard of.
"That company really solves customers' problems because otherwise they have no access to credit," Dillon told Business Insider. "These people are non-credit-worthy or outside the formal banking system. The average loan size is $1,000 to $2,000."
Dillon and Thomson are also invested in companies more popular with US investors like Mastercard and Microsoft. Once they enter a position, they strive to maintain it for as long as possible to reap the benefits of compounding.
"To some extent, we are in the rejection game," Thomson said. "It's about saying no to a number of investments that come across our path."
Every company that does make the cut must pass four key tests: customer satisfaction, a strong return on invested capital, quality management, and a reasonable valuation.
1-year return: 4.97%
"One of the ways we make better investment decisions is by having a third-party coach who analyzes every decision we make," Dillon said.
He continued: "You rarely find elite athletes who don't have a coach. Airline pilots have coaches. If all these people who are at the top of their fields have coaches, then why don't investors?"
"A passion for companies and learning will stand you in very good stead in the industry," Thomson said. "If you don't have that passion and that excitement about learning, especially learning about different companies, it's probably not the career for you despite the attractions that some people feel the industry has."
Eric Fischman, MFS Growth Fund
One of the first things Fischman examines in a candidate for his $22 billion fund is whether the company can raise prices in a recession.
After all, the growth fund he manages has a mandate to invest in companies that aren't tied to market cycles. That's why he says he'll probably never own commodities. And within the technology sector, the semiconductor industry isn't a prized corner because its fortunes are linked to cyclical growth.
This approach means he's not easily motivated to sell out of companies — even when market conditions go south — so he keeps the turnover of the portfolio low.
"It enables us focus on the long term and not get whipped around by day-to-day market swings, tweets that might be coming out, or earnings misses or beats," he told Business Insider in an exclusive interview.
One stock that he has stuck with since 2002 — and one that serves as a poster child of his investing strategy — is American Tower. The company signs long-term contracts with cellphone providers to lease the tower space they need to beam network signals. The contracts not only guarantee recurring revenue, but they also come with built-in price escalators.
1-year return: 10.69%
Investing advice: "Make sure that you're investing in businesses that you understand. Understand how a business makes money, understand how they're going to continue to make money in five years, and focus on that longer term," Fischman said.
He continued: "Don't get whipped around by the day-to-day or quarter-to-quarter events that are unfolding. If there's a company that you like the long-term outlook of and they miss a quarter, it doesn't necessarily mean anything. Something could have been going on that was unique to the business or a customer."