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Meet Morningstar's fund managers of the year

Four plays from Morningstar's top fund managers

Morningstar announced on Wednesday its fund managers of the year, those it believes are the best in the business.

However, it isn't just about choosing the highest-returning funds

"What we're looking for are managers whose 2014 performance was outstanding but was also emblematic of a longer-term record of excellence," Jon Hale, Morningstar's director of manager research, North America, said in an interview with CNBC's "Power Lunch."

Here are the winners for 2014.

International-stock fund manager

Morningstar's top international fund pick

Dodge & Cox International Investment Policy Committee: Dodge & Cox International Stock

"Dodge & Cox International managed to not lose money, which was unusual for a foreign stock fund last year," said Laura Lallos, senior analyst at Morningstar.

Fund manager Diana Strandberg credited the team approach for its success, noting that members have worked together a long time.

"We share the same investment philosophy, which is to be long-term owners of individual companies at the right price," she said.

The team focuses on long-term value, with the fund typically holding a stock for seven or eight years, she said.

With slowing global growth, interest rates potentially rising in the U.S. and some sort of quantitative easing expected in Europe in 2015, Strandberg said her team looks at what's already priced into the market, instead of trying to predict what's going to happen.

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She thinks there are attractive valuations in companies across the globe, including Europe. The fund is also a little more heavily weighted in emerging markets than its peers. It owns 21 individual companies that are domiciled in emerging markets. They comprise about 22 percent of the international stock fund.

"We do see that emerging markets have greater growth prospects than the developed world," Strandberg said.

Domestic-stock fund manager

Theo Kolokotrones, Joel Fried, Al Mordecai, Mohsin Ansari and James Marchetti: Primecap Odyssey Agressive Growth, Primecap Odyssey Growth, Primecap Odyssey Stock, Vanguard Capital Opportunity, Vanguard Primecap Core and Vanguard Primecap.

Morningstar's staff selected the team based on their strategy of picking names with good long-term growth prospects. Last year, its big biotech and pharma holdings paid off for the fund in a big way, with names like Biogen Idec, Amgen, Eli Lilly, Roche and Novartis (NVS) posting strong returns for the second-straight year.

The team believes the market was underestimating the pipelines and growth potential of those companies, according to Morningstar's Jon Hale.

Fixed-income fund manager

One contrarian bet pays off

Ken Leech, Carl Eichstaedt and Mark Lindbloom: Western Asset Core Bond and Western Asset Core Plus Bond.

"What really helped the fund stand out in 2014 was a contrarian bet on interest rates," said Morningstar analyst Sumit Desai. "They were expecting rates to decline, and that really paid off."

Leech, Western Asset Management's chief investment officer, also praised teamwork for the funds' banner year. The funds returned about 7.5 percent to investors last year thanks to that contrarian call.

"We really felt the inflation backdrop was much more subdued in the United States but really extraordinarily more subdued globally, and that would keep the Fed from raising rates as much as everybody thought early last year," he explained.

He believes rates are going to continue to stay low in 2015 and thinks the Federal Reserve will have difficulty raising rates in June.

"Interest rates will eventually rise. We just think it will take quite a bit of time," Leech said.

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He sees no value in the Treasury market and looks more at credit quality, agencies, mortgage backs and corporates.

"We think that the opportunities, the higher yields, the fact that the economies are healing, even if it is gradual, give us a chance to get better total return in those sectors," he said.

Allocation fund manager

2014's Top allocation manager

Anne Lester and team: JPMorgan SmartRetirement Target-Date Series (JSIIX), (JSFIX), (JTTIX), (JNSIX), (JSMIX), (SRJIX), (SMTIX), (JSAIX), (JTSIX) and (JFFIX)

"The series tends to be more diversified than a lot of its peers," Morningstar analyst Leo Acheson said. "It's an all-weather type of series. It's not really just relying on one specific market environment that it will do well in."

It is all about getting the mix of assets right, how to select underlying active managers and how to make tactical shifts out of different asset classes, JPMorgan's Ann Lester said.

All of the funds have outperformed their peer groups over the last five years, and are comprised of other funds within the JPMorgan asset management group.

First and foremost, the team thinks about whom the person is they are managing money for, she said.

"It starts with understanding how do we help them to get to a place where they can retire safely when they want to at 65."

Read More What your portfolio says about you

Lester also admitted there is a risk with investing for 401(k) plans because investors have an implicit assumption that the plans will be able to generate returns. In fact, the money they put in is as important, or more important, than what JPMorgan will be able to do to generate those returns, she stressed.

"If somebody is putting away at least 10 percent of their salary and their company is hopefully matching some of that so that their overall savings rate is between 10 and 15 percent of their gross paycheck, they're going to be fine, and what we do for them will absolutely get them there safely," she said.

Alternatives funds manager

2014's Top alternatives manager

Robert Jones and Ali Motamed: Boston Partners Long/Short Equity.

"They short overhyped companies that they believe overhyped, with deteriorating fundamentals," Morningstar analyst Josh Charney said. "The theme for 2014 is that alternatives generally performed relatively sloppily. I think these guys knocked it out of the park."

Boston Partners' Ali Motamed said the fund is generally fully invested on the long side and has a variable short strategy where its managers are trying to short names they think it can make money on.

The fund has been anywhere from 90 percent net long to 20 percent net long. Right now, its long positions comprise 24 percent of the fund.

"We don't think prospective returns are going to be as attractive in the near future as perhaps when we're much more long," Motamed said.

As for what they look for in a long position, they like good companies with cheap valuations and things getting better.

For short positions, he looks at three types of companies: deteriorating businesses, stocks that are going through a period of unreasonable profitability and concept stocks that that have massive valuations and no financials to support it.

One category that would fit that short bill at the moment is biotech, Motamed said.