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The Epitome of an Active Manager

With conviction and creativity, Oakmark’s Bill Nygren invests in any company that he views as a bargain—even Apple.

Shannon Zimmerman, 02/13/2013

Renowned value investor Bill Nygren manages three funds and roughly $11.8 billion for Chicago-based Oakmark Funds. Nygren joined Oakmark’s parent organization, Harris Associates, in 1983, and he is a key architect of the absolute-value strategy that drives stock-selection at the firm.

For Nygren, any company, irrespective of the sector in which it resides or its relative valuation profile, can be a bargain if the firm’s share price implies a steep enough discount to an estimate of its true worth. Oakmark’s valuation work is stringent, too, with the shop’s managers typically requiring a discount of at least 40% before adding a company to a portfolio.

As executed by Nygren, Oakmark’s straightforward approach has generated some unusual portfolios. In December, two of this value manager’s funds—Oakmark Fund OAKMX and its concentrated sibling, Oakmark Select OAKLX—tilted toward the growth square of the Morningstar Equity Style Box. In Oakmark Fund, companies from the technology and consumer discretionary sectors—areas of the market more traditionally associated with growth—accounted for more than 40% of assets.

As that allocation suggests, Nygren is a highly active manager. Just 22% of Oakmark’s assets overlapped with the Russell 1000, the large-blend category index. Only 4.5% of Oakmark Select’s assets aligned with the index’s exposures. Nygren is also a highly successful manager. Both of his domestic-equity charges have earned Morningstar Ratings of Gold, thanks in part to long-term trailing returns that rank among the peer group’s elite.

To get a better sense of Nygren’s stockpicking strategy and where it’s leading him, I interviewed him at Morningstar’s headquarters in November. Our conversation has been edited for clarity and length.

Shannon Zimmerman: I get email from investors in your funds because I’m the analyst who covers them here at Morningstar. People are sometimes confused and say, “Wait a minute, Oakmark is a value shop. Nygren is a value investor. What’s Apple AAPL doing in a portfolio? What’s eBay EBAY doing in a portfolio? Why does he have this much in tech? These aren’t traditional areas that are associated with value investing.” How can it be that a value investor is in these sectors that are not traditionally associated with value?

Bill Nygren: Well, there was a time back around 2000 when technology stocks were all selling at 50, 80, or 100 times earnings, when advisors and investors were begging us to please own just a few of them. And we didn’t own anything in technology, and people got the mistaken idea from that that technology was just a sector we would never purchase. We had nothing against the companies. There are a lot of good technology companies, but when you pay 50 to 100 times earnings, an awful lot has to go right for you to make money as an investor.

You fast-forward a decade, and a company the quality of Apple was available for less than 10 times earnings when we purchased it. The stock has done incredibly well, but the earnings have done just as well. Even today with Apple stock just below $600 a share— when you subtract out the cash that they have on the balance sheet and look at the earnings from their operations, investors are asked to pay only about 10 times earnings for Apple.

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

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