The World's Greatest Investors

IN A MARKET CLIMATE like this, the title "World's Greatest Investor" can sound like faint praise — it's like getting the top grade in your remedial English class or being the best player on the Cincinnati Bengals. Sure, with the Dow and the S&P 500 down at least 12 percent since October, just breaking even is an accomplishment, but performance like that doesn't typically inspire anyone to throw the word "great" around.

But we're going to throw it around anyway, in honor of a rather elite cadre of five money managers. Experienced, superbright and at times a little lucky, their track records in choppy markets make them diamonds in the rough. With one exception — good to see you again, Uncle Warren — they aren't household names or even the best known in their field. But they have a few important qualities in common. They're the money-management equivalents of free agents, with the independence to buy whatever asset seems right for the times rather than hewing to some rigid investing style. "The fastest way to perdition is to hug benchmarks," notes Loomis Sayles bond guru Dan Fuss. One of our investors doesn't even have a conventional benchmark to hug: Jane Mendillo, the new manager of Harvard's endowment fund, works in a world where "alternative" investments like arbitrage and timberland have been the route to stellar returns.

At a time when U.S. stocks and bonds are struggling, our World's Greatest have the latitude to take their money overseas, and this year they're relying on that freedom — David Winters of the Wintergreen Fund, for example, has 70 percent of his invested assets parked abroad. (We've also spotlighted a top-performing international-only stock picker, Amit Wadhwaney of Third Avenue Funds.) And lest this crowd sound too esoteric, they share another quality that any avid investor can appreciate: They've made a religion out of buying cheap. Ultimately, it's a group with five very distinct approaches to building wealth — some unfamiliar, all great.

When the richest man in the world speaks, people tend to listen. Economists this year were slow to claim that the U.S. had met the technical definition of a recession, but after Warren Buffett said we had, investors seemed to react accordingly. So if there is a self-fulfilling prophecy in his words, we hope the markets will put equal weight into his prediction that the worst appears to be over in the financial sector. "There will be more write-offs, but the panic is pretty well taken care of," he told shareholders at his 2008 annual meeting.

Many investors have come to think of Buffett's Berkshire Hathaway holding company the way they used to think of the local bank and trust — back when they trusted the local bank and trust. One reason, of course, is its 42-year investment record: annualized gains of 21 percent, more than double the Standard & Poor's 500's 10 percent clip. The company's most recent year was bumpier than usual, with the housing slowdown hurting its carpet and real estate units, and the credit crunch dinging financial holdings like Wells Fargo. Even with those blemishes, Berkshire stock rose 16 percent in the past 12 months, compared with an 8 percent decline in the S&P 500, thanks to strong results from Buffett's transport, manufacturing and insurance investments.

Buffett's market forecast is reasonably upbeat. He thinks the housing crisis is now contained to a handful of hard-hit states. In recent months he bought more stock in some favorite names that got hurt in the market slump, among them insurers United Healthcare and WellPoint. He satisfied his food cravings by investing in Kraft and financing Mars Co.'s buyout of Wm. Wrigley Jr. But Buffett is also dipping a toe overseas, to hedge against the continued decline he expects from the dollar. On a European shopping trip in May, he sussed out companies that could gather non-U.S. revenue. "Give me a call if you've got the goods," he said to a Swiss audience. To prove he was serious, he gave them his Omaha phone number.

Buffett says small investors can find value right now in municipal bonds and small companies. But iconoclast that he is, he had a more surprising recommendation for the devoted investors at his annual meeting: "There are better places for them to invest" than Berkshire Hathaway, he said. The company is too big to grow very fast, and Buffett expects profits on its core insurance businesses to narrow in the short term. He has said things like this before, and chances are, many investors will decide it's smart to ignore the oracle.

Jane Mendillo recalls her first meeting with her then-boss Jack Meyer at Harvard Management Company, which manages the university's huge endowment. Mendillo was a humble analyst, but she boldly introduced herself and asked for a shot at running money. The reaction? Meyer blew her off. "He was, uh...noncommittal," recalls Mendillo. Six months later she summoned her resolve and asked again. This time he gave her an opportunity, and Mendillo proved herself, helping Harvard ride out the tech crash. By the time she left, in 2002, she was overseeing $7 billion.

This summer Mendillo, now 49, came back to run Harvard's whole $35 billion ball of wax as chief executive, having amassed a little-noticed but knockout record as chief investment officer of Wellesley College's endowment. A $100,000 gift from a Wellesley alumna at the beginning of her tenure, six years ago, would be worth about $214,000 today, with Mendillo beating the S&P 500 by more than 35 percent over that stretch. She moved the school's $1.7 billion portfolio away from stocks and bonds and toward assets like private-equity investments, commodity funds and real estate. That's a game she sharpened in her earlier stint at Harvard: One of her grand slams there was an investment in timber that nearly tripled between 1998 and 2001, even as the market tanked.

Mendillo's road to Harvard started at Yale. By age seven the New Britain, Conn., native was set on attending the nearby Ivy, even though it didn't admit women. That eventually changed, and Mendillo thrived at Yale as a literature major. After graduating, Mendillo casually accepted a position at the school's investment office — "I needed a job," she says — only to discover that she found investing energizing enough to make into a career.

In Mendillo's favorite book, A Tale of Two Cities, Dickens writes of the best of times and the worst of times. For her immediate predecessor, Mohamed El-Erian, times must not have been so hot: The star bond manager quit after 18 months. The job has challenges that most pros don't face, including scrutiny from faculty critics. Paul Kedrosky, a senior fellow at Kauffman Foundation, has said he expects Mendillo to last less than 18 months; he says her past reliance on alternative asset classes won't cut it in today's tight credit market.

Mendillo agrees that returns may get narrower in the endowment world, thanks to copycats and tougher market conditions. But she sees opportunities to make money in distressed real estate and credit. As for her skeptics predicting the worst of times, she shrugs them off: "I'm not worried."

Asked to identify one great call from his career, Dan Fuss stretches sheepishly in his green leather recliner. "There was the time I called the bottom on the market in 1974," he offers. "But I was only guessing so I could end a horrible meeting."

Fuss may be modest, but his record is not. Decades ago he became one of the first managers to adopt an eclectic, go-anywhere approach to bond investing, seeking what-

ever securities — high-yield bonds, emerging-market bonds, bank loans or convertibles — were right for the market. Today he oversees $50 billion, and his record shows just how right he's been: His $18 billion Loomis Sayles Bond fund, based in Boston, has a 10-year annualized return of 8.8 percent, clobbering the 2.8 percent return of the benchmark bond index. Fuss outperformed again last year, thanks to bets on long-term Treasury bills and Canadian dollar – denominated bonds.

Chasing deals wherever they lead remains Fuss's calling card. After serving in the Navy, he managed stocks for a while. That gives him an analytical edge over competitors, says Ken Heebner, manager of the CGM Focus fund: "It allows him to tread where others fear." Such aggressiveness can expose him to more risk. Indeed, Fuss is lagging the benchmark by 0.5 percent so far in 2008. The avuncular 74-year-old attributes his mini slump to buying out-of-favor bonds: The environment early this year offered a rare chance to buy corporate bonds, munis and loans at discount prices — a market where good deals "came swimming to you."

Right now Fuss's largest holdings include the finance company CIT Group, drugmaker AstraZeneca and retail giant Target, all of which have yields of around 7 percent. His advice to would-be bond buyers: Look for investment-grade corporate bonds at, say, 85 cents on the dollar from dominant companies in beaten-up industries. Owens Corning and USG, which make insulation and construction drywall, respectively, are two examples he cites. Buying bonds with longer maturities — at least 10 years — should allow some time for a company's credit to improve and the economy to rebound. In seeing myriad places to make money in the bond market, Fuss is in line with another titan, Warren Buffett — though he's less vocal about letting other investors know it. "I wish Warren would keep his mouth shut," he jokes.

Also like Buffett, Fuss has his mind on foreign markets right now. He says a U.S. rebound should arrive in winter, when the rest of the world starts buying more of our goods. But he predicts that a few years from now, he may hold 50 percent of his portfolio overseas, up from 20 percent today. "The opportunities will be where the people are," he says.

Money managers generally have the salary to dine anywhere they please. But employees of Third Avenue Funds can often be found eating $5 curry or three-for-a-dollar empanadas off plastic plates in remote corners of Queens and enjoying it just as much as any blowout at the Four Seasons. For that they can, and do, thank Amit Wadhwaney — a native of India who scours New York City for cheap international eateries and eagerly recommends them to his peers.

Wadhwaney invests pretty much the same way he eats, and his investors are as happy as his coworkers seem to be. Wadhwaney led the $2 billion Third Avenue International Value to the top ranks of its fund category in the first half of 2008 — through May it was up 2.6 percent year to date, six points ahead of the category average. His five-year record, with an annualized 21.4 percent return, is also impressive, and he's built it on the investing equivalent of underground kebab parlors: non-U.S. companies with low international profiles, like Viterra, a Canadian farmers' cooperative whose stock has doubled since he bought it in 2006, and WBL Corp., a Singapore conglomerate up 90 percent in the past three years.

The son of a Bombay cotton exporter, Wadhwaney came to the United States at age 16 to get a degree in chemical engineering. "That was duty," Wadhwaney explains. He went on to earn another undergraduate degree, in mathematics; a master's degree in economics; and another in business for pure pleasure. His polymath background gives him the tools to dig into and beyond a company's balance sheet. After that his approach to investing is pure Buffett. He looks for companies in industries with high barriers to entry — those in which it's expensive or difficult for new competitors to launch — and he won't consider a security until it's discounted by at least 40 percent of what he judges its assets to be worth. "He doesn't just look for cheap companies; he almost has to steal them," says longtime value investor Jean-Marie Eveillard, of First Eagle.

Indeed, Wadhwaney admits he's so focused on cheap stocks that he ignores bigger economic trends, which he calls "macro noise." Morningstar analyst Michael Breen says for that reason, his returns don't correlate with the international stock indexes: "When they zig, he zags." Between 2002 and 2006, when foreign markets took off, Wadhwaney did well but underperformed a few of his riskier peers. "In a raging hot market, I look stupid," he says. "But I was making a down payment on 2008." Today, with his rivals in the red, that down payment is looking like a good bet.

Compared with some of his peers, David Winters is downbeat about the U.S. economy. In fact, he says, it's "a gigantic mess." The write-offs aren't over, spectacular bankruptcies are yet to come, and the Fed's interest-rate cuts have unleashed inflation. Could it get as bad as the Great Depression? "History doesn't repeat — it rhymes," he says. But while he's paraphrasing Mark Twain, he's wearing a Cheshire

cat grin. For Winters a choppy economy means a chance to find bargains, including some that most managers wouldn't dare touch.

His $1.8 billion Wintergreen Fund, based in Mountain Lakes, N.J., is one of the few mutual funds that invest like a hedge fund — pursuing strategies such as short selling, arbitrage and distressed-debt investing. Winters, 46, says he has "an unfettered global mandate"; by any name it's paying off. Though 2008 has been choppy so far, Wintergreen's annualized return since its inception three years ago is 12 percent, double the S&P 500. Winters previously honed his chops at Franklin Mutual Advisers, specializing in bold bets on companies on the verge of bankruptcy. From 2001 through 2004 he rang up an annualized 9 percent return, while the broader market was slightly down. Among his coups: a 2002 investment in International Steel that paid off tenfold.

His invest-in-anything latitude helps Winters justify his fund's 1.85 percent expense ratio. As he reminded us, that's "fair and reasonable" compared with a hedge fund's, but it still eats up $1,850 for every $100,000 invested, twice as much as with some lower-cost competitors. High fees or not, many experts think such latitude is a boon to anxious investors. Of course, it's not without risk. "He's got enough rope to hang himself," says Fairholme fund manager Bruce Berkowitz, a fan who applauds Winters's instincts about foreign markets and his eye for value.

For now inflation is a theme fueling Winters's portfolio, as he shops for companies that can raise prices without driving their customers away. He likes high-end casino player Wynn Resorts; Mexico's Femsa, which he calls the best-run Coca-Cola bottler; and DeBeers, because as China's middle class continues to grow, "every Chinese bride wants a diamond." He thinks these securities are undervalued by at least 20 percent, with investors misjudging their potential. "The market is not efficient," says Winters, grinning again. "It's a beautiful thing."