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By Shannon Zimmerman | 06-12-2013 12:00 PM

Nygren: Value Managers Love Growth but Don't Overpay for It

The Oakmark manager discusses a value case for Google, his team's three-pronged investment approach, and why capacity is not a major issue for the Oakmark Fund.

Shannon Zimmerman: For Morningstar I’m Shannon Zimmerman here today with [Oakmark manager] Bill Nygren. We’re at the Morningstar Investment Conference, circa 2013. This is our 25th conference, so this is the Silver Jubilee. We’re here with an industry veteran, Bill Nygren. You’ve been in the industry for what, 30, 35 years,

Bill Nygren: 32 years.

Zimmerman: Wow. With Oakmark since 1991?

Nygren: I’ve been with Harris Associates since 1983, and we started the Oakmark Fund family in 1991.

Zimmerman: Today we’re going to talk primarily about the Oakmark Fund, which you’ve managed since March 2000, I believe. We’ve talked about this in the past, but I think it’s important to raise it now in the context of the conference. Oakmark is not a traditional value shop, in a way it doesn't have a focus on single-digit P/E companies, or those that just reside in certain sectors that people traditionally regard as being value-oriented. You’re looking for just a bit gap between what you think the company is worth and what the market has priced it at. So let’s start with a name that I think a lot of folks would not regard as a company that a value manager would hold, Google, which is in the lineup of the Oakmark Fund. From a value investor’s perspective, what’s the case for Google?

Nygren: To start with, Shannon, I think investors have a misperception that value managers don’t like growth. We love growth; we just don’t want to pay as much for it as most people will pay. The reason is because investors tend to stretch their time frames out too long. They think they see a company that’s growing at a high rate in the short term and they assume that can continue for a decade or two. We think Google is one of the exceptions to the mean reversion in the near term, where there is a very strong tailwind of advertising shifting from traditional media to online, and Google being the leader in the online-advertising category, likely to remain the leader for years, and online has a very small percentage of advertising dollars today. You talk to almost any consumer product company and their marketing department, and they will tell you that five years from now, 10 years from now they expect to spend substantially more of their advertising budget on the Internet than they do today. We think Google is very well-positioned to have an above-average growth rate for a very long time.

Now, with that advantage, if you look at Google's P/E after adjusting for the cash on their balance sheet, it’s maybe about 1.3 times the S&P 500 multiple. The low-interest-rate environment that we have today basically says the future is worth paying for, and when that happens, multiple spreads theoretically should be growing. What we are seeing instead is compressed multiples and some really great companies available like Google for not too much of a premium over what the rest of the market is selling for.

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