When Bill Nygren (Trades, Portfolio) was growing up, his mother regularly went bargain hunting to stretch the family’s purchasing power.
The son carries on the tradition except Nygren searches for bargain stocks rather than bargain groceries. Using disciplined, bottom-up fundamental research, he and his team identify stocks that trade well below their underlying value. After they find and buy those stocks, they wait for the market to come back around to their view of that value, making them long-term investors.
While this approach produced some losing years, it also produced benchmark-beating results over the longer term.
This article is one in a semiseries examining the top stock-picking gurus (sometimes individuals and sometimes teams). The others are: David Tepper, Prem Watsa, Bill Ackman, Seth Klarman (by Rupert Hargeaves), Chuck Akre, Vanguard Health Care Fund, Yacktman Focused Fund, Jerome Dodson, Frank Sands, the Eaton Vance Worldwide Health Sciences Fund, PRIMECAP Management and Daniel Loeb.
Who is Nygren?
Nygren told Barron’s he grew up in a middle-class family and that his mother was always trying to get more value out of her limited budget. As a result, the family did things like shop in multiple stores to search for bargains and buy larger quantities of a product when it was on sale.
He earned a Bachelor of Science degree in accounting at the University of Minnesota and a Master of Science degree in finance at the University of Wisconsin.
His work experience began when he joined Northwestern Mutual Life Insurance Co. in Milwaukee as an analyst. Following that, he moved to Harris Associates in Chicago in 1983, again as an analyst. He became a research director in 1990, manager of the Oakmark Select Fund in 1996 and then took over the Oakmark Fund in 2000 (bio based on information at Barron’s).
Nygren went into Harris and Oakmark with a background in accounting and finance, which would have provided him with the skills needed to financially analyze companies under consideration. In the deeper background was an appreciation for bargains.
What is Oakmark Funds?
This Chicago-based fund family, set up in 1991, is a case of "eating your own cooking."
According to the Harris Web site, “The partners at Harris Associates wanted to start mutual funds in which they could invest their personal money with the same long-term, value-investing approach successfully employed in the firm’s client accounts.”
In addition, it says it prefers to invest in companies in which management has significant share holdings to ensure management’s interests are aligned with those of shareholders.
It operates seven funds; according to the Oakmark Funds Web site, Nygren manages three of them:
- Oakmark Fund: a diversified fund that aims for long-term capital appreciation through investments in U.S. large caps.
- Oakmark Select: a nondiversified fund, it holds only about 20 stocks, aims at long-term appreciation through U.S. mid- and large-cap stocks.
- Oakmark Global Select: a nondiversified fund with about 20 domestic and non-U.S. large-cap names.
Despite having seven funds, Oakmark has only one investing style, which is bottom-up, long-term value.
At the end of the first quarter, Oakmark had $76.7 billion in assets under management (AUM); of that amount, Nygren-managed funds had an AUM of $25.3 billion.
Oakmark takes a keen interest in corporate governance, to "maximize long-term, per-share value" for shareholders. The fund observes that manageent is a key criterion it uses when screening for investment candidates so it often follows management’s recommendations on voting questions. It publicly posts its record of proxy votes.
While Nygren is associated with Oakmark Funds, he is a partner at Harris Associates, which set up and manages this fund family. Although the funds come in several flavors, they are all managed with the same set of criteria.
Nygren’s philosophy and process
His philosophy, or strategy, is laid out in four pieces on the Oakmark Web site:
- A consistent investment process: Nygren and team do fundamental research that aims to find companies priced at a discount to what the team considers to be their underlying business values ("what a rational investor would pay to own the entire business"). After making a purchase, Oakmark waits for the gap between price and value to narrow.
- Focused portfolios: Nygren is sensitive to potential dilution; or to put it another way, they have relatively few names in their portfolios and want each name to have what's called a "meaningful impact on performance." This also means the funds may have more short-term fluctuations. The Oakmark funds generally have 75 or fewer stocks while the select funds hold about 20 companies.
- Investing in their own funds: In "walking the talk," the firm asserts that its own partners and employees should own units in the Oakmark funds as it expects managers of candidate companies to do. It reports that Harris partners and staff had over $400 million invested in Oakmark funds at the end of calendar 2016.
- Only value: Nygren and Oakmark say value is the only way they invest. They say it is the best way to maximize profit potential and reduce risk over a long period. In addition, they call themselves patient investors and see themselves buying a piece of a business rather than a number of shares.
In his Fourth-Quarter 2016 Commentary for the Oakmark Fund, Nygren develops some of these themes further.
For example, he writes that, unlike many fund companies, they have no interest in developing funds for everyone or every investing style. Rather, they want their brand to be focused on just one type of investment: “Oakmark would be synonymous with bottom-up, long-term value investing.”
On the issue of diversification, Nygren notes that other firms diversify because they believe it is a no-cost means of reducing risk. On the other hand, he argues Harris/Oakmark does intensive research on its limited number of stock names and consequently does not need this type of risk management, which tends to reduce the upside. Further, he argues that this type of diversification really reflects an inability to find mispriced stocks; those who can identify mispricings (such as Oakmark) can enjoy both managed risk and potentially higher returns.
He also addresses the importance of taxes in a fund manager’s philosophy and strategy: Oakmark focuses on after-tax returns, not pretax. Rather than trying to minimize taxes, they try to maximize after-tax outcomes. One tax management tactic is not selling (or rarely selling) a stock until they’ve held it for at least a year to capture long-term capital gains treatment. Another is actively tax trading losses throughout the year.
The Nygren/Oakmark process for finding appropriate candidates is a fixed one, as shown in this illustration from the Oakmark Web site:
This bottom-up process starts with a criteria screen that identifies potential candidate names; those companies that make it through the screen then become the subjects of intense qualitative and quantitative research. This results in a list of up to 180 securities, which comprises an approved list; there is one list for domestic stocks and a second for international stocks. When managers want to add a stock, they choose from one of the two lists.
Nygren has developed his own focused approach to value investing with emphasis on disconnects between market perceptions and underlying value; fundamental research, which aims to build confidence in concentrated portfolios; a business owner mentality and patience; and committed management.
Current holdings
As this chart from GuruFocus shows, Nygren favors the financial sector:
This list shows the top 10 holdings in the Oakmark Fund:
- Citigroup Inc. (C, Financial) 3.76%.
- Alphabet Inc. (GOOG, Financial) 3.3%.
- Bank of America Corp. (BAC, Financial) 3.09%.
- American International Group Inc. (AIG, Financial) 3%.
- General Electric Co. (GE, Financial) 2.96%.
- JPMorgan & Chase Co. (JPM, Financial) 2.9%.
- Apache Corp. (APA, Financial) 2.9%.
- Visa Inc. (V, Financial) 2.61%.
- Capital One Financial Corp. (COF, Financial) 2.56%.
- Mastercard Inc. (MA, Financial) 2.56%.
Among the interesting points in this performance table is how Nygren bounced back from a big loss in 2008:
The Oakmark Fund has outperformed the Standard & Poor's 500 on major cumulative anniversaries as well (average annual outperformance):
- 15-year: 1.3%.
- 20-year: 0.8%.
- 25-year: 2.7%.
Notable in the annual returns are the results from the company’s first two years: 1992 and 1993 (the first column shows Oakmark’s returns, the second shows the S&P 500 returns, and the third shows the difference between the two results):
Interestingly, this was the best two-year period in the history of the fund, and yet they could not have been generated by long-term appreciation because they were the first two years. At the same time, the S&P 500 had decent but hardly great years. Was the success of those years a coincidence, or was there some other unknown strategy in play?
Conclusions
Nygren has earned a place on the GuruFocus Scoreboard by consistently beating the S&P 500 benchmark on all significant cumulative anniversaries.
He and his team have done it with bottom-up, long-term value plays, finding mispriced stocks –Â mispriced because the market has driven the price well below a company’s underlying value. Once undervalued companies are identified and bought, they are patiently held until the market bids up the price to match the value.
All Oakmark funds hold a limited number of companies, and the Select funds run with only about 20 stocks, making disciplined and accurate research essential.
Given the modest number of companies in each portfolio, other investors might watch Nygren and Oakmark buying and selling to look for their own investment candidates.
Disclosure: I do not own shares in any of the companies named in this article, nor do I expect to buy any in the next 72 hours.
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