Jerome Dodson at Parnassus Investments says growing public pessimism about the economy in 2010 persuaded him to buy stocks.

At Allianz RCM Technology Fund, Walter Price ruled out a recession after executives told him business was improving.

And over at Columbia Management Investment Advisers LLC, Tom Galvin said record cash balances made buying equities impossible to pass up.

Unemployment close to 10% and falling home sales failed to deter the best-performing U.S. fund managers this year, and they posted average gains of 28%, according to data compiled by Bloomberg.

More to the point, they're bullish on 2011, boosting their stakes in oil producers, temporary-help providers and Internet companies.

"When everybody's depressed is absolutely the best time to buy stock," said Dodson, who oversees $4.5 billion as president of Parnassus in San Francisco. "Everyone was moaning and groaning this summer. At that time, had you been able to divorce yourself from your emotions and buy stocks, it would have been great. You just have to buy, and that's what we did."

Dodson, Galvin, Francis Claro at Wells Capital Management Inc., Dennis Lynch at Morgan Stanley and Whitney George at Royce & Associates LLC all beat 92% of their peers by holding 50% more in industrial and consumer stocks, the best-performing groups in 2010, than are represented in the Standard & Poor's 500 Index.

Price, who invests mostly in technology vendors, has returned about 30% to his investors, boosted by rallies in Apple Inc. and the business software supplier Inc.

The best money managers were buyers even as unemployment, which held close to its highest level since 1983, sent the S&P 500 to a 2010 low of 1,022.58 in July. Dodson, Price and Galvin said they bet on earnings growth, rising cash balances and below-average valuations to keep the bull market intact.

"This year has provided lots of reentry opportunities," said George, the New York-based co-chief investment officer at Royce and manager of the $4.2 billion Royce Low-Priced Stock Fund, which is in the 99th percentile of its peers for the past five years. "Valuations are pretty good, fundamentals are pretty good. There are lots of things going on in the market that are positive."

The S&P 500 is trading at about 15.3 times earnings, 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 grew faster than share prices.

Mohamed El-Erian and Bill Gross at Pacific Investment Management Co. warned in 2009 that gains in equities and bonds would be below historical averages for years to come.

El-Erian, a co-chief investment officer of the Newport Beach, Calif., fund manager, which oversees the world's biggest bond mutual fund, said in June 2009 that investors should prepare for an environment of slower growth and lower returns, curbed by rising government deficits and regulation.

"We summarized this outlook by the phrase, 'a bumpy journey to a new normal,' " El-Erian wrote in an e-mail to Bloomberg News last week.

"We also are careful to specify more than one scenario. Indeed, the bumpy journey to a new normal scenario, while the most probable, has been given a 55 to 60% probability during the last 18 months. We have also detailed the specific characteristics and probabilities of three other scenarios that involve either a faster recovery or the risk of a double dip."

U.S. equities have returned 6.2% a year since 1900 before dividends, according to inflation-adjusted data compiled by the London Business School and Credit Suisse Group AG in Zurich.

Stocks rose last week, pushing the S&P 500 up 3% after U.S. retailers reported sales that beat analyst estimates, Chinese and European manufacturing expanded and policymakers extended an emergency loan program in Europe.

Meanwhile, an Institute for Supply Management report showed that U.S. manufacturing expanded for a 16th straight month in November.

And the Labor Department said Dec. 3 that employers added 39,000 jobs in November, less than the most pessimistic estimate by economists in a Bloomberg News survey.

Dodson, whose fund was ranked the third-best for diversified U.S. equities in Bloomberg data through Nov. 12, has returned 28% so far this year.

He bought companies from Finisar Corp., the Sunnyvale, Calif., maker of fiber-optic networking equipment, to Administaff Inc., a human resources service provider in Kingwood, Texas, speculating they will gain as the economy improves in 2011.

Claro of Wells said that signs of an unemployment peak prompted optimism in 2010.

The proportion of U.S. workers unable to find a job reached a 26-year high of 10.1% in October 2009 and has since fallen to 9.8%, according to Labor Department data. "If you have this high unemployment rate, are we more likely to go to an 11% unemployment rate, or are we more likely to go to [an] 8% rate, or 7% rate, given time?" he said.

"The higher you are in terms of some of these indicators, such as the unemployment rate, the more opportunity you could find."

Claro bought shares of New York's Monster Worldwide Inc., the world's largest online recruiting company, as its shares surged 34% this year.

Monster returned to profit in the third quarter and will make money all next year, according to the average of analyst estimates collected by Bloomberg.

Lynch, the head of growth investing at Morgan Stanley Investment Management Inc., said he looked for companies with the highest free-cash-flow yields, or income after capital spending divided by share price and that had the potential to boost earnings as the financial crisis abated.

Internet companies such as the travel agency Inc. in Norwalk, Conn., were among the best examples, he said.

"Our portfolio is full of strong companies that have strong balance sheets and sustainable competitive advantages," said Lynch, whose $6 billion Morgan Stanley Institutional Trust Mid Cap Growth Fund has returned 31% this year, better than 96% of peers.

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