McGregor: A Number of Businesses We Like in Japan

Christine Benz: You mentioned Japan, Clyde, and I know that Oakmark, particularly on the global fund, has been watching that situation very closely, and you have a number of Japanese holdings.

Can you discuss your positioning with respect to some of those names and also the spillover effects that you are seeing in the supply lines coming out of Japan?

Clyde McGregor: That's obviously a very big question.

Benz: Yes.

McGregor: Let me just touch on the second one first because we've only in our portfolio seen two names, domestically, claim an effect so far from the spillover, and that's Texas Instruments, which actually has a significant factory in Japan, and the company it used to be called Tyco Electronics, now called TE Connectivity, unfortunately, that has a lot of its connectors go into the automotive industry, which is seeing a bit of a slowdown because of what's happening with Toyota, Nissan and others.

Japan is very interesting because 10, 12, 15 years ago, on the international side of the organization, we had no money invested in Japan. We were finding it very difficult to satisfy one part of our value investing idea, which is to have managers who think can act as owners of the business, who treat their shareholders as their partners--and over the last 10-12 years, we have found more and more companies that, in our own opinion at least, meet that description, who are acting in their shareholders' interests.

So, we have increased our Japanese exposure in the international portfolios and in the international side of the Global Fund, and in fact, my co-manager of the global fund was in Tokyo when this terrible earthquake hit, along with one of our younger analysts. You don't want to travel with him. He was also in New Zealand when the earthquake hit there as well, but be that as it may, they all were safe and sound and are back in the States today.

We are finding that investors' perception of what is going on in Japan is colored, in our opinion, too much by the aggregate indices and not by seeing what's going on with the individual companies. We're finding many companies in Japan that have achieved 8%, 9%, 10% earnings growth per year over the past decade; they have ramped up their return on equity significantly. They've improved their balance sheets. They've bought back stock. They are making sensible capital allocation decisions, and they already had good businesses. They've already had good franchises in many parts of their business. So whether it's a company like Hirose that makes connectors or Rohm, or OMRON Global, which competes with Reko Automation, a company we have in the Equity & Income Fund, and does it very effectively.

We're finding businesses that we'd like to own. Another way we think as value investors, we want to own the entire company at its current price if we could never sell it again. We're finding a number of businesses like that in Japan before the earthquake hit.

Obviously, Japan is going to be affected for quite some time. The power outage situation over the coming summer could be quite difficult. It is something we don't know how to forecast. You don't know how the weather is going to be; that affects air-conditioning demand, and that will have an impact on the ability of these companies to function in this environment. But we have a lot of faith in the Japanese and the managers with whom we've invested that they will find a way to cope and that Japan will come out of this a better, stronger country.

Benz: Okay, well, Clyde, thank you so much for sharing your insights--really terrific to hear from you.

McGregor: Well, thank you.

Benz: Thanks for watching. I'm Christine Benz for Morningstar.com