Shannon Zimmerman: I began at the top of the segment by saying there were two news items connected to Oakmark Equity and Income. We haven't gotten to the second one yet. The fund has recently reopened to all investors. For a good long while it was closed, except if you went through Oakmark directly.
Clyde McGregor: Two years.
Zimmerman: Two, right. That's a good long while, I think. And you could get in as well if you were an existing shareholder, but otherwise there was limited availability. Now, it's opened again. I know that during the last 12 months or so there have been some redemptions…
McGregor: Sure. When a fund is partially closed you are going to have net redemptions. That's a reality.
Zimmerman: Sure, sure. And it's still one of the largest funds in our moderate-allocation category, about $19.2 billion is what we show. I want to ask you about the decision to reopen the fund or to make it wider in availability. Was that driven by, "Assets have come down somewhat, and we think that we have capacity"? Or are there other considerations that you had?
McGregor: Well, the capacity issue was in the background, but it's more that we think that what the fund offers makes sense today. We think the equity side is very attractive. Our reasons for closing the fund were very fixed-income-specific, and when Ed Studzinski, my comanager, and I closed the fund in 2010, it was with the thought process that this suppression of interest rates being done by the [central banks] worldwide would not be a three-, five-, seven-year phenomenon, whatever it's going to prove to be.
McGregor: Now that that reality has been stretched out as it has, we came to the decision that our reasons were not quite moot, but no longer made as much sense. So, there is a reality of making it easier to manage the fund with more balanced flows, but with all the short-term issues we have, we didn't exactly have a redemption problem. The fund was $20 billion at its peak; it's $19 billion now. This has not exactly been a critical item that way. We just feel that the fund is attractive enough as it is that we want people to be able to use it.
Zimmerman: What is the demographic for the fund? Do you have a sense of that? I mean, are people drawing down their accounts because, "Oh, well this is the fund I was counting on for my retirement and I am retired now"?
McGregor: Well, there is some of that because there is a lot of 401(k) or corporate retirement plan money in the funds, and my generation is a very big generation. Unlike me many of my peers are choosing to retire at 60 or so. So, yes, there is some of that. But the fund is still by far the largest portion of my own personal financial assets, and I expect it to be that way for a long time to come.
Zimmerman: Let's shift gears and talk about Oakmark Global. On that fund you manage it with Rob Taylor. He is your comanager. Have you managed that one since inception?
McGregor: No, since 2003.
Zimmerman: '03, and Equity and Income you had managed since inception, however.
Zimmerman: And you are responsible primarily or exclusively for the domestic side of the portfolio?
McGregor: Responsible is a tough word in this regard. We collaborate on everything. For example, recently I suggested to Rob after he had done a trip to Japan and was very enthusiastic about a smaller-cap company named Kansai Paint. I suggested to him that we ought to think about adding this company to the portfolio. In the same light, he just two days ago has suggested to me that we should be adding a particular U.S. name to the portfolio. So, we collaborate on everything. I am more responsible for the domestic or the U.S. issues; he is for the international issues. I go to as many of his meetings as I can; he goes to as many of my meetings as he can. And frankly it's been a blast. I feel just so lucky to have been asked to takeover comanagement of that fund.
Zimmerman: Talk a little bit about the way the Oakmark analyst teams are structured. So, there is a domestic team and an international team, but there is cross-pollination between those teams is there not?
McGregor: Yes. So there are 20 analysts; 12 domestic, 8 international. They interact regularly. For example, Mike Manelli on the international team had prior experience following U.S. transportation industry companies ,and he follows the international ones, as well. The international guys have to be right under the domestic guys in terms of floors and he came up the stairs one day and said to our now director of research, "You got to look at Union Pacific." And he gave the reasons why, why, why, and Win Murray, our director of research, said that's an interesting idea, did the work, and wrote up the name. Mike was there to help buttress the case when we had our domestic meeting where this was approved, and it ended up being a very significant position in the Global fund.
Zimmerman: So, among the Oakmark portfolio managers, the way that it works is just as you described. Obviously, there is an approved purchase list on both international side and the domestic side, I think, about 300 stocks total of them?
Zimmerman: So, help me to understand the sort of variations among the portfolio managers. Obviously, the funds have different mandates, but they are fairly wide-ranging mandates. Yours I think is the most specific because of the income portion of the portfolio.
McGregor: It has to be the most risk-averse portfolio of the mutual funds that we offer. So I think there is more of a differentiation between the clientele for the Equity and Income fund than for the others. Now, the Global fund would be more similar to any of the other all-equity funds.
Zimmerman: But in terms of your own sort of idiosyncrasies as investors, and obviously you are like-minded since you are value investors and you are looking for that steep discount between intrinsic value and what the market has priced the company at. So that's a common thread and an important one. But what is the variation between you and Bill Nygren or David Herro or Rob Taylor even in the fund that you comanage with him?
McGregor: Recognize that with Bill, he has chosen to have Oakmark and Oakmark Select to be large-cap funds, and more than anything else, that and the fact that they are oriented to an all fully invested equity universe clientele, that's puts him in a different camp than the Equity and Income fund, which is an all-cap fund that has bonds and is for a risk-averse clientele. The Global portfolio again is all-cap. The funds themselves have their idiosyncrasies, and then the portfolio managers do, as well. Bill and I worked together in the research team for some years. I became a portfolio manager before he did, but we worked on individuals years ago.
We've worked together now for 29 years, this year. In fact, one of the great things about Harris Associates is we have a lot of people who have worked together for a long period of time. David Herro just had his 20th anniversary. We didn’t start the international business until 1992. So that's the reason why he just said his 20th anniversary. Rob and I have worked on the Global fund for the last seven years, but Rob has been around for 16 or 17 years, and we collaborate on everything. Yes, we have our idiosyncratic ways of deciding when a stock forces a way into the portfolio, but we are in harmony, if not identity.
Zimmerman: Sure. You mentioned that Bill has chosen to have Oakmark and Oakmark Select be large-cap funds. Let's talk a little bit about the history of Oakmark in small caps. You had a small-cap fund that shuttered, and give credit where it's due, in a commendable way it didn't merge the assets into another fund, which isn't always a problem, but you didn't do that. You returned money to shareholders. But you got out of the small-cap space on the domestic side. Oakmark International Small Cap has a good track record but not as good as Oakmark International. Is there something about the small-cap space that maybe doesn't align as closely with your approach at Oakmark as large caps do?
McGregor: I don't really think so. We weren't happy with how we had done in the small-cap space domestically during the period that we had the fund. We decided that at that point in time that this fund just wasn't well-grounded. We needed to start over again if we were willing to do it at all. So we did as you said. We sent the money back to the shareholders and made the decision at that point in time that we would all-cap products that would absorb the small-cap domestic universe. Could that change in the future, yes, but I doubt that it will. I think that we are comfortable the way we are, and that it is unlikely to have a domestic small-cap fund germinate.