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A star fund’s mystery man

March 12, 2012, 1:00 PM UTC

The manager of the country’s top-performing mutual fund is a reclusive former biochemist. What’s his secret?

Who is James J. Wang? It’s one of the most intriguing questions in the mutual fund world today. Over the past five years, Wang’s tiny Oceanstone Fund (OSFDX) has outperformed every single mutual fund in every category — and it’s not even close. His 40.5% annualized return since 2007 is almost triple that of his nearest competition and dwarfs the 1% average return of the S&P 500 (SPX) over that span. But the reclusive investor, who runs the $17 million fund out of San Diego, has repeatedly declined interviews.

The combination of such a spectacular record with such resolute silence has prompted some to wonder if it’s all too good to be true. “We have people calling us and asking, ‘What’s going on with this? Are those numbers right?'” says Jeff Tjornehoj, a research manager at fund tracker Lipper. Oceanstone has received a top score for consistent returns from Lipper for 27 consecutive months, a feat achieved by just 1.7% of funds over that span.

Rajendra Prasad, a doctor in Long Beach, Calif., who has served as a trustee for Oceanstone since its 2006 launch, says Wang — who did not reply to Fortune’s phone calls — instructed him not to talk to the press. “I know him well; he is very private,” Prasad says. “I don’t want to give out anything because he will be upset with me.”

Oceanstone first attracted attention in 2009 when the fund returned an astonishing 264%. Wang benefited especially that year from big investments in rental-car operators Dollar Thrifty (DTG) and Avis Budget (CAR), both of which rose more than 1,000% after he bought them.

True, it’s much easier to produce such a huge percentage gain while managing a pee-wee fund than it is if you’re running big money. But a close look at Oceanstone’s SEC filings during the past five years reveals that Wang is no one-hit wonder. He’s had consistent success investing in companies of various sizes and in different sectors. And he has outperformed in both up and down markets. In 2008, a year in which the S&P 500 plummeted 37%, Oceanstone fell just 10%, thanks to his bets on small-caps like pet pharmacy PetMed Express (PETS). He also doubled his cash position to 40% right before the market collapsed, then reduced it to 3% just as stocks bottomed the following spring. After scorching the market in 2009, Oceanstone outperformed again in 2010, returning 31% while the S&P returned 15%.

In 2011, Oceanstone rose 1% — nothing spectacular, but still better than 92% of its peers. Wang has thrived not only by picking winners, but also by avoiding land mines. He bought Bank of America (BAC) at the beginning of 2011 but sold before the stock nose-dived over the summer.

3 small but mighty funds

Oceanstone’s filings reveal little about Wang or his methods. But a study of his paper trail and interviews with former colleagues reveal an unusual career arc. It turns out that Wang, 48, started out as a scientist. He studied biochemistry at Johns Hopkins in the early 1990s, after emigrating from China. (In 2005 he changed his name from Jinting Wang to James Wang, according to San Diego County records.) Frank Chen, a scientist at the Lawrence Berkeley National Laboratory, says he worked with Wang at the Los Alamos National Laboratory in New Mexico in the late 1990s. The two scientists studied DNA repair. But Wang’s real passion, says Chen, was always investing. “He played with his own money and got pretty good returns,” says Chen. “He reads all of the books of Buffett, and also Ben Graham, Philip Fisher. He’s a bottom-up investor.”

According to Chen, Wang quit his job at Los Alamos to focus fully on finance. Later, Wang moved to San Diego, where, Chen says, he could enjoy his preferred lifestyle: working early in the morning and then jogging and relaxing in the afternoons. In 2003, Wang became a registered investment adviser. He took a tax course at a community college and asked his teacher, a lawyer named Thomas Severance, to be a trustee for his mutual fund. “He spent hours and hours analyzing these things, and he had his own way of doing it,” recalls Severance, who served as a trustee for a year.

Fund managers typically expound on their strategy in shareholder letters. Wang’s notes are short, esoteric, and humble. (After his incredible results in 2009, he noted, “It is much easier to manage a very small portfolio.”) Wang writes that he uses a specific equation to calculate what he calls the “intrinsic value” of stocks: IV = IV/E x E. But the equation — in which IV stands for intrinsic value and E represents earnings — appears to make no sense. IV/E x E is the same thing as IV, which of course equals IV.

Chen, Wang’s co-worker at Los Alamos, offers insight into Wang’s approach. “He had a very simple screening method,” says Chen, who recalls that Wang used to look for companies with price/earnings ratios of less than 12 and projected annual earnings growth of more than 20%. After screening stocks, Wang would scour the companies’ annual reports, according to Chen. “He avoids companies he doesn’t understand,” Chen says.

His latest bet is on the financial services sector. In the third quarter of 2011, Wang bought shares of Janus Capital Group (JNS), J.P. Morgan Chase (JPM), and Goldman Sachs (GS), all of which had meager price/earnings ratios at the time. The move paid off: So far this year, Oceanstone is up 14%, nearly doubling the S&P 500’s return.

Wang’s secrecy has no doubt deterred potential investors. Despite its amazing performance, Oceanstone hasn’t grown much. One of Wang’s biggest shareholders, a Michigan doctor named Raymond McDonald, says the manager won’t reply to his queries. “I’ve actually asked to talk to him, and he won’t talk to me,” says McDonald, who owns 5.99% of the fund. McDonald — a self-described “mutual fund junkie” — says he took a large stake partly because “the whole thing is curious.” He wasn’t put off by the fund’s size. Says McDonald: “Warren Buffett didn’t get big for a long time.” If Wang keeps posting outsize returns, he may find it hard to avoid the spotlight forever.

Reporter associate: Doris Burke

This article is from the March 19, 2012 issue of Fortune.