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Tech Stocks for Value Hounds

The sector isn't just for growth managers.

Shannon Zimmerman, 06/14/2012

The tech sector isn't the exclusive domain of growth managers--the S&P 500 sports a 20% stake, after all--but relative to their blend and value counterparts, it is a favorite growth fishing hole. Growth funds are the biggest shareholders of bellwethers such as Apple AAPL and Google GOOG, and the bulk of holdings in Technology Select Sector SPDR XLK, an exchange-traded fund that carves out the S&P 500's tech and telecom components, lands in the growth column of the equity style box. The typical fund in Morningstar's growth peer groups has over a fourth of its assets (26.4%) in tech stocks.

Apple's recent evolution from R&D-focused cash-hoarder to modest dividend-payer, however, coincides with increased tech exposure among blend and, especially, value funds. Across Morningstar's value categories, the typical fund has allocated roughly 12% of assets to technology companies. That more than doubles the figure from five years ago (5.5%) and comes close to doubling the percentage from 10 years ago (6.1%). The increase has been especially pronounced among small- and large-value funds. For that subset, the five-and 10-year average tech exposures are 3.4% and 4.4%, respectively.

Case in Point
There are many forms of value investing, but for managers who pursue absolute value strategies, any stock can be a bargain, potentially. Provided the gap between the manager's estimate of a firm's intrinsic value and the market's measure of its worth is sufficiently wide, the company can be a portfolio candidate.

That's the tack at Harris Associates, the parent firm behind the Oakmark fund family. The Chicago-based asset manager has a well-earned reputation for value investing, not least because its roster includes Bill Nygren and David Herro. Those two managers have racked up kudos and peer-besting returns with a strategy that permits them to buy bargains wherever they find them. They've also been instrumental in crafting the absolute value approach that Harris has used with remarkable success across the Oakmark lineup. (Four of the firm's seven funds have earned the Morningstar Analyst Rating of Gold, two have earned the Silver rating, and one has earned the Bronze rating.)

At the end of 2012's first quarter, most of Oakmark funds had something else in common: substantial technology exposure. On the domestic side of the shop's lineup, Nygren's concentrated Oakmark Select OAKLX charge held the largest tech stake. With just over 30% of assets invested in the sector, the latest portfolio sports a double-digit overweighting relative to the category norm, the S&P 500 benchmark, and the fund's historical average. As with most of Oakmark's funds, Select's tech exposure has been ticking up in recent years. The fund didn't crest the 30% mark until September 2011, though, and during the past 10 years, it's averaged just less than 18% in the sector.

Elsewhere, Nygren's more expansive Oakmark OAKMX has averaged 13.3% during the past decade; now its tech stake stands at more than 25% of assets, a smaller but still significant overweight position.

Among the firm's international funds, more than 35% of assets at both Oakmark Global Select OAKWX and Oakmark Global OAKGX were invested in tech firms at the end of the first quarter. As with Nygren's domestic-equity funds, these exposures are also significant overweightings to both the benchmark (the MSCI World) and the fund's historical averages. Oakmark Global has averaged just over 20% in the sector during the past 10 years. And since its 2006 inception, the concentrated Oakmark Global Select--which Nygren and Herro comanage--has averaged 24%.

Tech Tea Leaves
Oakmark's managers don't invest in the tech sector, per se. They invest in individual firms that meet their stringent fundamental and valuation criteria and let the sector allocations fall where they may. With that in mind, it's telling that Oakmark's purely bottom-up process has recently led to big tech stakes in most of its funds. Connecting the dots between the firm's overarching strategy and its tech exposure may help explain what other like-minded value hounds have been seeing in the tech sector.

Shannon Zimmerman is an associate director of fund analysis at Morningstar.
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