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By Shannon Zimmerman | 09-07-2012 09:00 AM

Oakmark Opportunistic About Energy

Despite the drop in natural gas prices, certain firms in the energy sector are showing their value, says Oakmark manager Clyde McGregor.

Shannon Zimmerman: So, let's talk about the equity part of Oakmark Equity in Income. We were talking before we began taping this segment, and the fund does have a pretty substantial exposure to industrials, overall more of a cyclical bent than a defensive cast right now.

I understand that shopwide Oakmark managers are not making any kind of top-down calls. They're not looking at sector allocations per se in the way you back in to your sector allocations through the bottom-up process, the stocks that you find most attractive. At the end of that process though, the result among many, one result is that you do have sector allocations that can be out of whack, or out of sync relative to the index.

Clyde McGregor: To the benchmark. Sure.

Zimmerman: Exactly. How do you think about risk in that context? For instance, given the fund's substantial industrials exposure right now, the next industrials name that seems attractive to you, will it become less attractive because you already have such a significant allocation there?

McGregor: As we've often said, every asset in the portfolio and in all of our portfolios has to compete with every other asset for space in that portfolio, and any new asset will also have to compete on that basis. If it is the case that we decide we want to add another industrial to the portfolio, it would obviously have to be a name that on its own, we'd want to own the entire company at its current price if we could never sell it again.

So if it meets that kind of basic understanding, then we move to the issue of portfolio construction and how does it fit into the portfolio at this point in time. I will say it doesn't have to be an industrial, but in another sector where we have a fairly large exposure. Today, actually I am cutting back one issue and adding to another issue in the portfolio, both for valuation reasons and in one case for a tax-reduction issue, as well.

So, we do think about that issue, but it's not primary. Again, as you mentioned, things percolate up from the bottom. The value decision ultimately trumps everything else. We find out that we have sector overweights after a while when we realize that we have been adding to the health-care space, or to the industrials space, or the energy space, and find out that we have overweights versus the index. We're benchmark-agnostic, but we do find out from people like you that we have overweights in such sectors.

Zimmerman: From your shareholders, as well, when the fund is more volatile than it might otherwise be?

McGregor: Yes. Although, today the fund is more volatile relative to other balanced funds because of the equity allocation rather than because of the sector weights.

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