Summary and Conclusion

Oakmark Fund is one of our favorite funds in the large value space. Manager Bill Nygren is a true value investor, investing in companies that he believes trade at a substantial discount to what he considers to be their true business value. While still better than his average peer, the fund has struggled a bit this year, as the higher quality value stocks he favors have lagged lower quality fare. Bill is sticking with his discipline and that's one reason why we like him. Another is that going forward, we like his high quaility exposure.

Oakmark is one in the biggest funds in the large value category, as there are almost $7 billion in assets in the fund. Because Bill primarily invests in large, well-established businesses, the fund’s size has not been an issue and Bill tries to stay fully invested. He is primarily focusing his efforts on stocks with market caps above $5 billion and the median market cap of Oakmark Fund is over $20 billion. The fund’s expense ratio is 1.14% below the average of similar funds (as defined by the rating services) of 1.44%.

Bill has been running this fund for almost five years and has put up performance numbers that very few fund managers in this category have matched. Now how has he done it? Bill has created his great long-term track record with a disciplined process. Bill seeks undervalued stocks that are selling for less than 60% of what they would fetch in a private sale of the entire company. After purchasing a stock, he waits for the gap between the stock price and intrinsic value to narrow, and will sell when he does. Similarly, if Bill’s rationale for owning a stock has changed, he will sell his position in a company and move on. In terms of management, he seeks growing businesses run by management whose interests are aligned with those of the shareholders. Overall, Bill likes to position the portfolio such that the fund has both a higher overall growth rate and a lower P/E ratio than the S&P 500.

With less than 60 names, the portfolio is concentrated and Bill has almost one-quarter of his assets in the top 10 names. Bill is a bottom-up investor, meaning that he is focused on the individual companies and their prospects instead of investing based on the state of the economy. Unlike most of his peers, Bill does not try to mimic any benchmarks, and is willing to invest heavily in those sectors he likes and avoid sectors that he thinks are too pricy. Currently, Bill is heavily invested in consumer discretionary names, while he has essentially no exposure to telecom or utilities.

Bill has not deviated from his investment process during his 5 years on the Oakmark Fund. Bill is one of the best stock pickers in the industry and we are confident that the fund will provide solid exposure in the large cap value area of the market.