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By Jeremy Glaser | 08-24-2015 02:00 PM

Nygren: Find Your Balance in a Rocky Market

Despite relatively frequent corrections of 10% or more, equities are still good long-term performers for investors, says the Oakmark manager.

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. I'm pleased to be joining by Bill Nygren--he is the portfolio manager of Oakmark Fund. We're going to look at some of the market turmoil and see if it's opening up any opportunities.

Bill, thanks for joining me.

Bill Nygren: Thanks for having me.

Glaser: It seems like at least the financial media is saying that this sell-off is due to issues in China. Do you buy that explanation? Do you think that the Chinese economy has that big of an impact on U.S. equities, for example?

Nygren: Well, I think sometimes we just forget that the market doesn't really need a reason to have a 10% correction, which we basically had over the past four trading days. They occur pretty frequently--about once every year and a half, on average, historically--and they are really nothing for investors to worry about as they are pretty common.

I think you are right--the media is attributing this recent concern to China. But for long-term investors, like we are at Oakmark Fund (OAKMX) where we're trying to estimate the value of a business five to seven years from now, it's hard to imagine China being important enough to cause a 10% reduction in values. China is something like 16% of world GDP. A 5% to 10% change in China output would only affect global GDP by 1% and U.S. multinationals by less than that, as much of China GDP relates to Chinese-based companies. So, we're seeing this as increased opportunity of values falling substantially less than prices.

Glaser: I did want to look at some specific sectors--the first being energy. Oil prices have fallen pretty considerably as well along with the market. When you look at an energy company, how do you decide how it's going to be able to withstand a lower energy price if it does stay this low for a while?

Nygren: Well, I think that's where quality of balance sheet becomes so important. We want to invest in companies that can weather a reasonable-length depression in the commodity price. One of the advantages of oil investing compared with other international commodities is that because decline curves are relatively rapid on existing wells, it doesn't take very long for production to slow down. Because of that, market forces have to push the price more toward a level that justifies new investment by oil companies.

You could contrast that with some of the metals businesses where you could go a decade or so with existing mines and not have a collapse in supply. What excites us about the oil and gas opportunity--and I think here, too, you're seeing a big reaction to the short-term drop in Chinese demand--what excites us about this is that the market seems to be pricing a lot of these companies as if $40 oil is going to be a permanent fixture, but we're quite confident that prices need to get back up to that $70 or $80 level to incentivize oil companies to invest in new wells. Without that, a couple of years down the road, we're going to be in seriously short supply.

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