The Year's Top Stock Fund Managers Are Bullish

Four of the top-performing fund managers of 2010 have a cautiously optimistic outlook for the year ahead. "By the end of 2011, I hope the economy will be growing at a rate of between 3 percent and 4 percent or more," says Jerome Dodson, who oversees $4.5 billion as president of Parnassus Investments in San Francisco. That should lead to job growth, he says, "and if that does happen, the stock market will do very well."

Dodson's Parnassus Small Cap Fund (PARSX) has returned 29 percent this year through Dec. 7, compared with 9.7 percent for the Standard and Poor's 500-stock index and ranks in the 95th percentile of its peer group. Among the stocks he owns are Finisar (FNSR), a maker of fiber-optic networking equipment, and Administaff (ASF), a human-resources services provider. "Over the next 18 months, I expect interest rates to move higher and employment to increase," lifting shares of Administaff, says Dodson, whose fund has beaten 99 percent of similar funds over the past five years. "Networks need more investment to remain competitive, and Finisar provides a good product that phone companies will have to buy if they invest in their networks."

Walter Price's Allianz RCM Technology Fund has beaten 95 percent of its peers this year and returned 31 percent, boosted by a 51 percent rally in Apple (AAPL) and a 97 percent advance in business-software supplier Salesforce.com (CRM). "Our view is that we will continue to see a recovery in the economy that is tepid, with growth around 3 percent," Price says. "But we also expect to see good cash flow and earnings at most companies, and this scenario will continue to foster investment in technology."

Whitney George is the co-chief investment officer at Royce and manager of the $4.2 billion Royce Low-Priced Stock Fund, which is up 28 percent this year and is in the top 2 percent of its peer group for the past five years. "Once one looks past the employment numbers and the housing data, the whole world starts to look a whole lot brighter," he says. "A lower dollar helps that, but also demand from emerging markets and the rest of the world is driving manufacturing."

George has been acquiring Allied Nevada Gold (ANV) shares throughout 2010. The shares have gained 85 percent this year, besting the 20 percent rise in a group of S&P 500 metal companies and beating the 27 percent climb in gold. "In the case of anything that is hard-asset-related, the prospects look very bright because of all of the stimulus money being created," George says. "That gets to wanting to own things that are finite because the dollar or euros or yen that we use to buy them with all seem somewhat infinite right now."

Thomas Galvin at Columbia Management Investment Advisers is among those who believe below-average valuations will keep the bull market intact during 2011. The S&P 500 traded for 15.3 times earnings as of Dec. 7, compared with an average of 16.4 since 1954, according to data compiled by Bloomberg. The multiple has declined from a high of 18.8 in March as profits increased faster than share prices.

"We invest in high-quality, high-growth companies, and they are particularly well positioned today...because they have the best balance sheets," says Galvin, whose $3.6 billion Columbia Select Large Cap Growth Fund ranks in the top 2 percent of its peer group this year. Its largest holding as of Sept. 30 was Amazon.com (AMZN), which is up 31 percent this year. "You need to have strong balance sheets to invest in new developments and bring to market new products that are gaining market share even in an economy that's showing little lift."

The bottom line: Top-performing fund managers see continuing gains for stocks in 2011 amid modest economic growth and increased employment.

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