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By Shannon Zimmerman | 11-06-2012 03:00 PM

Few Problems in Oakmark's Manager Search

Oakmark's Bill Nygren discusses the broad talent pool from which to choose new comanagers for several funds, and he also touches on portfolio capacities and constraints.

Shannon Zimmerman: Oakmark Select is not actually bursting at the coffers, so to speak, but a $3.2 billion is a pretty sizeable fund 20 stocks. And Oakmark Global Select certainly isn’t too big yet, about $600 million the last time I looked, but also has a concentrated portfolio. Both of those portfolios have very stringent valuation requirements, as well. So when you think about those constraints and the strategic constraints by design, what’s the capacity in your mind for those funds in particular? Then with Oakmark Fund--even though it is more expansive, it's not a huge portfolio, and it has $7 billion and also has a stringent valuation requirements--how much in the strategy do you think you can run?

Bill Nygren: I think when you think about capacity for funds, what you have to think about is how quickly is someone trying to get in and out of a position and how big a position are they trying to build relative to the types of companies that they're looking for, the universe of investable companies.

When you look at something like Oakmark Fund, all we’re trying to buy in Oakmark Fund is big businesses. We’ve limited ourselves to that, whether the fund had $1 billion or $10 billion in assets; that's our investable universe in the Oakmark Fund. We typically take positions of about 2% of the portfolio. So when you're buying big businesses and you're only trying to put 2% of a portfolio to work, we really don't think about Oakmark as having a capacity limit that's anywhere near the current size.

Oakmark Select is a little different. Oakmark Select, we're trying to buy both mid- and large-cap companies. I would like to be able to buy a 5% position in Oakmark Select without having to own more than 5% of the company I am purchasing. That means we can’t buy companies that are much beneath the size of the Oakmark Select fund.

The midpoint of the mid-cap universe is something like $5 billion or $6 billion. I think if Oakmark Select got to that level, we would either have to look at further constraining our investable universe or close the fund. We did reach that level once before, and we made the decision at that point in time that it was best for our shareholders to stop new investors from coming into the fund.

Now with Oakmark Global Select, like Oakmark and like Oakmark International, we are limiting two large-cap stocks on a global basis. So because of the limit we’ve put on our investable universe there, Oakmark Global Select has a large runway on capacity before we’d have capacity issues.

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