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By Russel Kinnel | 09-29-2014 04:00 PM

Nygren: Banks a Safer Place to Invest Today

The Oakmark manager on what attracted him to financials, plus the benefits of bringing a private-equity perspective to public-equity investing.

Russ Kinnel: Hi, I'm Russ Kinnel, director of manager research at Morningstar. I'm very happy to be joined today by Bill Nygren, manager of Oakmark Select (OAKLX) and Oakmark Fund (OAKMX), former Morningstar Fund Manager of the Year.

Thanks for joining us, Bill.

Bill Nygren: Thanks for having me, Russ.

Kinnel: I'm really interested in some of the changes I've seen in your portfolio. You've added Fidelity National Financial (FNF), Citigroup (C), and your overall financial weighting is fairly sizable now. I was wondering if you could just update us on what financials are like today versus '08.

Nygren: Russ, I think the financials today are very attractive because of what they went through in '08. And so many investors lost so much money in the financials, not anticipating the housing collapse, that they kind of swore off financials and thought they were too opaque to understand.

We think the real problem with financials was--especially the banks--they did basically what they told us they were going to do. They collected retail deposits, they lent them against real estate stock, and we just never anticipated that real estate could crash the way it did in '08.

So, I think rather than think banks are too tough to understand, '08 actually proved banks are doing what they've always done. And when you look at how they're different today, lending is done based on old-fashioned lending standards. They are actually making sure that the loans they make are to people who are likely to pay them back. Housing prices are already down a lot. I think a repeat of a 20% drop is quite unlikely. And almost as important, capital levels are so much higher today. A lot of banks back in '08 had maybe 5% of their assets represented in equity. Today, most of the large banks are over 10%. That means it would take twice as big of a drop in real estate to cause the same degree of problems.

So, we think the banks are a much safer place to invest today. The market doesn't price them at anything like the levels it used to; you can buy almost any large bank at less than book value, and we think they're going to be good businesses going forward.

Kinnel: Of course, if you want to beat the market, sometimes that means buying the stuff that people don't like. It's tough to beat the market if you're always buying the most loved stocks.

Nygren: I think sometimes people forget that risk isn't just about the business; it's also about the price you pay. If you buy a bank at three times earnings, that's a risky investment. But a bank at 80% of tangible book, we don't think there's any reason to believe that's a riskier investment than most of any stocks in the stock market.

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