Top Stocks to Own From the Best Fund Managers

Morningstar’s Top Stocks to Own From the Best Fund Managers series layers Morningstar’s stock recommendations over a cross-section of the stock picks of some of the industry’s best fund managers to uncover compelling investment opportunities to watch, buy—and, on occasion, sell.

As part of this process, we scour the quarterly and monthly holdings of the most-adept stock-pickers running high-conviction strategies focused on large-cap stocks in the US and abroad. We then share their top holdings, buys, and sells, along with Morningstar’s ratings and analysis on each stock.

Why do we focus on large-cap stock fund managers?

“By definition, large-cap stocks make up the majority of the available market, so it makes sense that they should make up a significant portion of most investors’ total equity exposure,” notes Morningstar portfolio strategist Amy Arnott.

Who Are the Best Fund Managers?

Our roster of best managers meet these screening criteria:

• They’re running actively managed funds that land in one of the large-cap stock US fund or foreign fund Morningstar Categories.
• They oversee a fund with at least one share class earning a Morningstar Medalist Rating of Gold with 100% analyst coverage.
• Management holds 100 stocks or fewer as of their most recently reported portfolios.

Our list of the best fund managers focused on large-cap stocks spans investments styles; these are varied playbooks from which investors can find new stock ideas. Yet many of the managers share a few qualities that investors can emulate.

They make investment decisions based on in-depth fundamental research. The best managers know their companies well: They understand the underlying businesses and competitive positioning of the companies they own.

They favor quality companies that can endure. Many of these managers have large positions in companies with wide or narrow Morningstar Economic Moat Ratings. We expect these companies to maintain their competitive positions for a decade or longer.

They have patience. As their turnover rates suggest, most of the best fund managers invest for the long term and are willing to wait for their investment theses to play out; they don’t sell stocks based on price weakness if nothing has changed fundamentally.

What Stocks Do the Best Fund Managers Own?

Some articles in the series focus on the stocks that are top holdings among the group of managers—or what we refer to as the high-conviction stock ideas among the best managers.

Not every high-conviction stock that the best fund managers own are stocks to buy now, though. High-conviction stocks can look fairly valued or overvalued according to Morningstar. These stocks make excellent watchlist candidates to buy on weakness. And if the stocks look undervalued through Morningstar’s lens, even better: Those undervalued stocks are potential buy candidates.

Which Stocks Are the Best Fund Managers Buying and Selling?

Other articles in the series reflect recent activities of the best managers—namely, the stocks they’ve been buying and selling. Here, too, investors may find stocks to add to their watchlists or to consider buying. Or they might find a stock they own is being sold by the best managers and might then review that stock’s place in their own portfolio.

How Does Morningstar Value Stocks?

Morningstar’s fair value estimates represent what we think a company’s stock is worth. Our fair value estimates don’t rely on fleeting metrics, such as recent earnings or current stock price momentum. Instead, Morningstar values companies by estimating their underlying cash flows. We consider stocks to be undervalued when they’re trading for significantly less than their fair value—not where stocks are trading relative to their historical prices or their competition.

To assign our Morningstar Rating, we also take into account the predictability of a company’s future cash flows—the Morningstar Uncertainty Rating. A stock with higher uncertainty requires a larger margin of safety before earning a 4- or 5-star rating, which suggests that the stock is undervalued.