The Best Steward for Your Capital

As you're reviewing the year-end statements from 2008, you're probably reassessing your strategy and thinking of firing some fund managers. Rightly so -- many money managers don't deserve to be in charge of your hard-earned money.

Yet even among the underperformers, there are still a handful of managers worth their weight in gold.

So rather than bash this year's losers (which would be far too easy for me to do), I'll share with you one manager whose fund has held up better than the market in 2008 and who is poised for profit heading into 2009 and beyond.

But first, let's look at how you could have found a fund like this before the market tanked.

The obvious
The returns investors receive are net of managerial expenses. Contrary to what you might assume, higher expenses never equate with better performance because of the hurdle these expenses present. So it's best to go with funds that have no front-end loads and below-average expenses -- as a broad rule of thumb, 1.5% is a good cut-off.

When you invest in a mutual fund, you're paying for an "expert" to manage your money. The best confirmation that the manager believes his or her strategy will pay off is by determining the manager's ownership stake in the fund, which you can find in the fund's Statement of Additional Information. If the manager doesn't have a dime invested, why should you?

And lastly, you must have proof that the manager knows what he or she is doing. Though impressive historical returns will never be replicated ad infinitum (see Bill Miller and Bernie Madoff for the gory details), looking at a manager's track record through the last bull and bear market will give you a decent indication of whether you have an adept stock picker.

So how does this fund stack up? It charges just 1% in expenses, the manager has nearly all of his liquid net worth invested in this fund, and since the fund's inception through the end of December, it has delivered annualized returns of 10.9%, while the S&P 500 has brought an annualized loss of 3.6%.

The not-so-obvious
A fund's turnover is also an important gauge of quality. Turnover is a measure of how frequently stocks are bought and sold by a manager, expressed as a percentage. For those investing through a taxable account, more turnover means more taxes. But even for those investing in tax-sheltered accounts, high turnover could be a sign that the manager lacks conviction in his or her investments, makes too many mistakes, or invests with a short-term horizon. So be cautious of funds with turnovers above 100%.

Also important is the fund's concentration -- i.e., how many stocks compose the overall portfolio. A large-cap fund that holds 500 stocks, for example, is unlikely to return much more than an index fund, yet you'll be paying quite a bit more. And although it works both ways, a stock that doubles in a portfolio of 20 holdings has a much more positive effect on returns than even a stock that triples in a portfolio of 200 holdings.

Lastly, it's important to gauge a manager's process. Put simply, you want to uncover evidence that the fund manager has experience with a winning strategy and the conviction to remain committed to that strategy -- regardless of the market conditions. An ability to admit mistakes and learn from them is also a plus, as is moving out of sync with the larger market, since a contrarian strategy makes for some of the best returns.

The fund I'm going to point out to you currently has a turnover of just 14% , a portfolio composed of just 24 holdings, and a manager who actively seeks out proof that he's wrong so he can admit it, apologize, and move on to the next investment.

The manager
The fund I've been alluding to is The Fairholme Fund (FAIRX), a large-cap value fund managed by Bruce Berkowitz that we recommended in our Motley Fool Champion Funds newsletter back in April 2005.

Here's a snapshot of some of his fund's top holdings:

Data from Morningstar.

Many of these stocks are in out-of-favor industries, or are out of favor themselves -- most notably Sears Holdings. And though Berkowitz admitted on a recent conference call to fundholders that he was a bit too early in his jumping into many of these stocks, he also assured them that there is very little downside at current prices.

What's more, since he maintained a hefty cash cushion this year -- about 10% of assets -- he's been able to continue buying into these companies as their share prices have fallen. I think his fund will reward investors tremendously over the next five to 10 years.

The Foolish bottom line
But although Berkowitz's Fairholme is one of the best funds out there right now, it isn't the only one that has low fees, an ownership stake, managerial tenure, low turnover, optimal concentration, and excellent management. And you'd do well to seek out others with the same profile.

If you'd like some leads, consider a 30-day free trial to Champion Funds. You can check out all of our fund research, analysis, and recommendations just by clicking here -- there's no obligation to subscribe.

Adam J. Wiederman owns shares of The Fairholme Fund, Sears Holdings, and Leucadia. The Motley Fool owns shares of Pfizer and UnitedHealth Group. Fairholme is a Motley Fool Champion Funds recommendation. Pfizer, Sears Holdings, and United Health Group are Inside Value picks. UnitedHealth Group is also a Stock Advisor choice, and Pfizer is also an Income Investor selection. The Motley Fool's disclosure policy is hoping 2009 will be the best investing year ever.