GuruFocus had the pleasure of hosting a presentation with Bill Nygren (Trades, Portfolio), vice president of the Oakmark Funds, manager of the Oakmark Select Fund and chief investment officer for U.S. Equities at Harris Associates.
Nygren has been a manager of the Oakmark Select Fund since 1996, Oakmark Fund since 2000 and the Oakmark Global Select Fund since 2006. He is also the chief investment officer for U.S. equities at Harris Associates, which he joined in 1983, and a vice president of the Oakmark Funds. He served as the firm's director of research from 1990 to 1998.
He holds an M.S. in finance from the University of Wisconsin's Applied Security Analysis Program (1981) and a B.S. in accounting from the University of Minnesota (1980).
The Oakmark Funds are a mutual fund family that utilizes a long-term value investment approach. Oakmark's investment philosophy centers on the belief that superior long-term results can be achieved through investing in companies priced at a significant discount to what Harris believes is a company's intrinsic value, with strong growth prospects and owner-oriented management teams. Oakmark's assets under management totaled approximately $49 billion as of June 30.
Harris Associates L.P., a Chicago-based investment management firm founded in 1976, serves as the adviser to the Oakmark Funds. Harris Associates also manages U.S., international and global portfolios for institutional and high-net-worth investors worldwide. Including Oakmark, assets under management at Harris Associates totaled approximately $86 billion as of June 30.
Watch the full presentation here:
Key takeaways
At Oakmark, the team focuses on three key criteria, which can be distilled down to buying at a significant discount to their estimate of intrinsic value, companies expected to grow per-share value over time on par with the S&P 500 and invest with management teams that think and act like owners.
All three of these criteria must be present for the team to consider an investment opportunity. Once it has determined that these have been reached, it is able to utilize its biggest competitive advantage. This advantage comes down to a long-term investment horizon and the team at Oakmark looks forward seven years to determine multiple factors that can affect a stock price.
When determining the intrinsic value of a company, the goal for Oakmark is to determine the maximum price that an all-cash buyer would pay to own the business and still earn an adequate return on their investment. It does this by analyzing acquisitions of private companies and using that data to compare public companies to their most closely associated peers. At the same time, all analysts on the Oakmark team have creative license to adapt their valuation techniques to reflect nuances of a specific company or industry.
Stocks
Nygren first dove into Apple Inc. (AAPL, Financial), a company that the Oakmark Funds had in its portfolio for a long time after the economic crisis of 2008. He explained that Apple had traded at an average of 13 times earnings from 2011 to 2015.
Come last quarter, the team sold out of the holding due to the price-earnings ratio skyrocketing. They watched the company start the year at 23 times earnings and watched it continue to climb upwards of 39 times earnings. He explained that it is hard for them to justify owning the company after it has tripled its price-earnings ratio and is trading at a value twice that of the market.
The second example Nygren looked at was Bank of America Corp. (BAC, Financial). He explained that the company has been eluded by the revaluation caused by lower interest rates. Over the last five years, the team has watched as the company's price-earnings ratio has only increased by 1 times earnings. This was much lower than the expected 25% increase in price-earnings ratios that Oakmark had seen from the lower interest rates.
Nygren's final example was Alphabet Inc. (GOOG, Financial)(GOOGL), parent company of Google. He dove into their calculation of intrinsic value for the company and explained that there are significant pieces of value that are not being utilized. GAAP accounting, in this instance, fails to recognize the value generated by venture capital investments in Nygren's opinion.
Questions
Nygren received many interesting questions during the question-and-answer section, including one asking if he believes that the market is currently in a bubble that people do not realize.
He explained that there are many investors that are buying small businesses that are trading at high valuations. These investors are paying top-dollar for companies that are relatively small and getting very little for their investment. These types of investors will not realize that they are in a bubble.
Nygren believes that many practices seen today are not sustainable. He does not believe that it is sustainable for "investors to invest in a bond market that is giving negative real return." Looking back, Nygren still cannot place exactly what popped the tech bubble in 2000. He said it likely was not one specific thing and that companies today are not helpless. He believes companies will help to bring the market back to the mean by utilizing their power in the market.
To end things off, a question arose of a time that Nygren and his team's analysis of intrinsic value was wrong and it came back to bite them. He explained that General Electric (GE, Financial) was one of their biggest fundamental mistakes.
Oakmark was one of the few companies that owned no GE stock until recently in the eyes of Nygren. He explained that they could never understand why it was selling at a high price in the 1990s. There were other companies involved in the same types of business that they could get for much cheaper.
Come the financial crisis and a change in leadership, the team saw GE refocus and the team at Oakmark welcomed those changes. The team failed to realize some practices that GE was using specifically in their power business. Since then, GE's power business has done poorly according to Nygren. Luckily, recent improvements in the aerospace and health care industries have helped to justify keeping the company in the portfolio rather than cutting losses.
Disclaimer: Author owns no shares mentioned.
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