NEW YORK (FORTUNE) -
If you prefer not to navigate the tricky waters of the stock market on your own, there are plenty of mutual fund managers who will do it for you. Here are seven outstanding candidates:
Mairs & Power Growth (MPGFX)
In the Dakota Sioux language, Minnesota -- or minisota -- means "water that reflects the sky." But for Mairs & Power Growth, classified as a large-cap blend fund, Minnesota has meant a land of opportunity. The $2.5 billion fund invests predominantly in companies based near its St. Paul headquarters.
Rather than being a handicap, that upper Midwest bias has given the fund a critical edge. "Our proximity to the managements of these companies, to the corporate headquarters, has been very significant in our success," says former manager George Mairs III, who remains chairman of the fund firm. In fact, the fund has rocketed almost 17.5 percent a year over the past 15 years, besting its average rival by more than six percentage points and topping the S&P 500 by nearly as much.
Current manager William Frels oversees a portfolio of just 39 names that blends local stars such as Target and Medtronic with some companies from outside the region, such as Johnson & Johnson. Frels, who has built a standout record as manager of the Mairs & Power Balanced fund since 1992, co-managed the Growth fund for five years before taking the reins in 2004. He looks for profitable companies with earnings that should grow at least 10 percent a year over the next three to five years. He's also happy to venture beyond blue-chip names, using the firm's local expertise to find appealing mid-caps, which now account for more than a third of assets, and small caps, which represent some 10 percent of holdings. Those smaller names bring plenty of pop to the portfolio. One current favorite is Valspar, a Minneapolis manufacturer of paints and industrial coatings. The company's margins, squeezed by higher costs for petroleum-based raw materials, are rebounding and should get a further boost from cost-cutting plans. Once a company is added it's likely to stay for a long, long time; turnover in recent years has been 3 percent or less. That lifts the fund's tax efficiency and helps keep its expense ratio to a low 0.71 percent.
Scudder-Dreman High Return (KDHAX)
David Dreman has been called the dean of contrarian investors, and one look at Scudder-Dreman High Return shows why. The roster of top stocks includes large positions in controversial companies such as tobacco titan Altria and scandal-plagued insurer AIG.
Among the financial holdings he's gambled on are troubled mortgage giants Freddie Mac and Fannie Mae. Both have been hammered by accounting problems and continued pressure from high-profile critics, including those at the White House and the Federal Reserve. Fannie Mae shares, in particular, have taken a drubbing over the past year, sliding some 27 percent.
But true to his contrarian style, Dreman has loaded up; Fannie Mae recently constituted 4 percent of the fund. Sure, the political environment presents some risks, Dreman concedes. But with the stock trading for about seven times next year's earnings, as he figures it, he's enticed by the potential value. "They could," he says, "have a lot of upside."
Dreman won't buy into just any unpopular business for his large-cap value fund. He targets companies that trade at low multiples of earnings, book value or cash flow, and keeps an eye out for high dividend yields as well. He isn't afraid to make bold sector calls, either, as he has recently with energy, health care, and financials.
Dreman's deep-value approach means the fund may lag the market at times, but it produces remarkable results over the long term. In 1999, for example, High Return lost 13 percent as the S&P 500 was gaining 21 percent. In 2002 it lost 18.5 percent. Yet High Return has posted average annual gains of nearly 17 percent over the past decade and a half, which puts it about five percentage points ahead of the S&P 500 and the averagelarge value fund.
Calamos Growth (CVGRX)
The managers at Calamos know a thing or two about growth. Earlier this year the fund firm moved into new headquarters twice as large as its old offices, a move necessitated by the company's mounting success and increased staff.
Nowhere are those fast-rising fortunes better exemplified than at the Calamos Growth fund. The mid-cap growth portfolio has returned an annualized 18.7 percent over the past 15 years -- and about 21 percent a year over the past decade, better than double the S&P 500. It's not surprising, then, that the fund's assets have swelled, but the magnitude of the upsurge is truly astonishing: from less than $30 million at the end of 1999 to more than $16 billion today.
Steering that growth is a family affair. Co-managers John Calamos Sr. and his nephew Nick Calamos have run the fund since its 1990 inception, and John Calamos Jr. joined them in 1994. The trio use various sector-specific measures to ferret out businesses growing faster than their industry peers.
But before they buy, they also factor in broader economic conditions and scrutinize a company's financial structure the way a bond buyer would. The goal is to manage risk rigorously while searching for stocks that could jump 20 percent or more over three years. "We probably spend more time on the credit side and the balance-sheet side than most growth fund managers," Nick Calamos says.
That doesn't prevent them from making aggressive bets. Lately the portfolio of more than 170 stocks has been laden with health-care and tech names. Winners such as Apple, Motorola, and Google have bolstered returns, but one large holding that hasn't fared as well is eBay. The stock has fallen 25 percent from its 52-week high. Calamos, though, still likes the auction giant's ability to generate cash and notes that its return on capital remains strong. "The stock," he says, "has a good 30 percent to 40 percent upside from here."
Cushion has been key to Ron Muhlenkamp's success. Yes, cushion. As manager of this $3 billion fund, Muhlenkamp will load up companies of any market cap -- from giants such as Citigroup to small caps such as Meritage Homes -- just as long as the stocks promise to deliver solid profitability and are selling at a reasonable valuation.
To gauge those factors, Muhlenkamp considers the broader economic climate and then focuses on a company's return on equity and its price/earnings ratio. If those numbers look right, Muhlenkamp believes he's got limited downside; and avoiding big losses is a critical factor in building a great long-term record.
"If we can get a P/E below the ROE," he says, "we think we've got a cushion that allows us to be wrong every now and then and still not lose money."
And he hasn't been wrong very often. His mid-cap value portfolio, which now includes more than 70 names, has shot up better than 18 percent a year over the past decade and a half, topping the S&P 500 by six percentage points a year.
These days Muhlenkamp likes the cushion he sees in -- oddly enough -- a cement maker. Shares of Mexican company Cemex have rocketed more than 80 percent over the past 12 months, helping Muhlenkamp's stake grow into his largest single holding, at nearly 4 percent of the fund.
Yet the manager expects more upside ahead and notes that rebuilding efforts along the Gulf Coast will likely require lots of Cemex product. "It has been and remains rather cheap," Muhlenkamp adds. Given the stock's ROE of 14 and a 2005 P/E around ten, Cemex should have ample cushion.
T. Rowe Price New Horizons (PRNHX)
Unlike many small-cap fund managers, Jack Laporte lets little stocks blossom into big winners. At the T. Rowe Price New Horizons fund, Laporte hunts for companies with market valuations of $2 billion or less and earnings growth of 15 percent or more. And once he unearths a powerful grower, he makes a point of sticking with it -- even if it surges well beyond small-cap territory.
He says his willingness to ride stocks for all they're worth is responsible for his standout returns: "I believe really strongly that holding on to your winners is what helps a growth fund outperform over time."
Take, for example, Apollo Group, the for-profit education business best known as the parent of the University of Phoenix. Laporte, who has managed New Horizons for 18 years, bought into Apollo at its 1994 IPO. Shares have risen a hundredfold since, and Apollo's market size has ballooned to nearly $13 billion.
Yet Laporte still believes in the stock enough to leave it as his top position, at 3.4 percent of the portfolio. Apollo shares have struggled for some 18 months, but the company remains on course to grow net income at about 20 percent a year, and the stock now trades at less than 25 times estimated 2006 earnings. At those levels, Laporte thinks he'll be rewarded for hanging on.
That kind of conviction has kept New Horizons' turnover ratio below 30 percent in recent years. By contrast, small-cap growth funds average a 121 percent turnover, according to Morningstar. And the lower churn has lifted returns. Aided by the small-cap run-up of the past several years -- Laporte warns that the rally is now in "extra innings" -- New Horizons has gained 15.7 percent annually since 1990, topping the return of the average small-cap growth fund by more than a third.
Thanks in part to those returns, New Horizons, which holds 276 stocks, has grown to $6.2 billion in assets. That's high for a small-cap fund. But T. Rowe has closed the fund for extended periods in the past when Laporte was having trouble finding enough good stocks to buy -- and that's not a problem he's having today.
Oppenheimer Global Opportunities (OPGIX)
What's the big idea? That's the question Frank Jennings likes to ask when considering a potential investment for his Oppenheimer Global Opportunities fund. Jennings searches for stocks that can benefit from breakthrough concepts and economic shifts.
He also keeps an eye out for companies in the midst of restructurings and those with attractive valuations. Ultimately, what he wants is an investment that can pay off bigtime -- five- or tenfold over five or ten years.
The fund itself certainly meets that standard. Given Jennings's appetite for risk and his stomach for volatility, performance has been choppy at times. Over the past ten years, though -- the time Jennings has steered the fund -- he has racked up annualized gains of 15 percent, the best record of any world stock fund and seven percentage points ahead of the category average. (Over 15 years, the numbers are just as impressive: 13.3 percent a year, 4.4 percentage points ahead of the world stock category.)
Along with Randall Dishmon, who joined as co-manager in 2004, Jennings oversees an eclectic mix of stocks and bonds, large caps and small caps. They divide their portfolio fairly equally between U.S. and international stocks. They're also willing to load up on individual companies; 12.3 percent of the fund's assets were in chipmaker AMD as of the end of October. Another 5.5 percent was in Nektar Therapeutics, a biotech firm with a potential blockbuster in Exubera, an inhaled insulin that the company is developing with Pfizer and Sanofi-Aventis. Jennings calls it a binary bet -- all or nothing. With the drug on track for approval, though, Jennings thinks Exubera could change the way diabetics are treated. And that certainly qualifies as a big idea with a very big potential payoff.
The Chicago-based managers of this minuscule fund aren't looking for the limelight. In fact they're trying to avoid it. But beating the S&P 500 by 20 percentage points or more each year from 2000 through 2004 has made that difficult, garnering Robert Bruce and his son Jeff a considerable amount of unwanted attention. Without any advertising or marketing, total assets in the fund have zoomed from $3 million at the end of 2000 to $110 million today.
So much new cash can cramp a manager's style (much of Bruce's record was built when there was very little money in the fund), but we don't expect that to happen here. And part of that style is making big bets. An early move into zero-coupon bonds led to big losses in 1998 and 1999, for instance, a period when most everyone else was making money. But that same play paid off remarkably when the market tanked, and thanks to the fund's extraordinary run since 2000 -- including astounding gains of 67 percent in 2003 and 57 percent in 2004 -- Bruce tops its category by a wider margin than any other fund on our list. The portfolio has trounced the average moderate allocation offering by 7.6 percentage points over the past 15 years, though Jeff Bruce thinks his fund's Morningstar label is something of a misnomer. "There's nothing moderate about us," he says. "There's no allocation strategy."
He's not kidding. Rather than maintaining any specific asset mix, the father-and-son team have carte blanche to invest wherever they see potential gains. "We've got a U.S. Treasury bond, we've got a gold stock, we've got high-yield bonds, micro-cap stocks," says Bruce. "We're in stuff that's nuts and bolts, and we're in stuff that's just a wing and a prayer of a cure five years out."
The duo does however gravitate toward distressed securities, turnaround stories, and stocks that few on Wall Street follow, many of which are small or very small. Or as Jeff Bruce describes the process: They dig "through the trash and see if there's something there that the market's missing." Bruce declined to talk about any of his specific holdings, but recently the fund's largest position has been in Amerco, the parent company of U-Haul. Since the company emerged from bankruptcy in March 2004, it has seen its stock more than triple, making it a prime example of Bruce's knack for finding treasure in the trash.