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.
Zimmerman: Oakmark has lost a couple of managers to retirement this year, including your partner at Select, Henry Berghoef. How goes the search to replace Henry?
Nygren: The search is going well. The biggest problem we've got at Oakmark, thankfully, is we have so many talented people that are younger than myself, that we could name anyone of half a dozen people as comanager for that fund. Clyde McGregor has got the same issue with the Equity and Income fund. We've got a lot of talented in-house candidates, and it will not be a problem at all finding somebody who can step into Henry's shoes and Ed's shoes.
Zimmerman: Well, you raised interesting point in your answer and you avoided the succession. The word succession, is that a part of the thinking as you look for the next person who will be your comanager at Select.
Nygren: Well, both Henry and Ed were older than myself and Clyde. So people probably never viewed them as the ones who would be around when Clyde and I retire.
I think it's quite likely that the managers that Clyde and I name will be younger than we are. In fact, almost a certainty is that we're two of the older people at Harris Associates. But this is an industry where there are no physical demands in the work. Your indoors is air-conditioned.
It's not the kind of business that when somebody is 50 years old, you have to start thinking about maybe they don't have much time left.
Zimmerman: Look at Marty Whitman, how long he stayed in the game.
Nygren: It's not like professional athletics.
Zimmerman: Right. Exactly.
Nygren: There are a lot of leaders in the investment fund industry that are in their 70s.
Nygren: There was just an article in the Wall Street Journal [recently] with numerous 70-plus-year-old managers asking them about succession plans. We think about succession at Harris Associates. Accidents happen. People don't stay as healthy as we would like them to. So we are thinking about it. We would have succession plans in place if something unexpected happened to Clyde, me, or David Herro, but it's not something that any of us are thinking about as a near-term need.
Zimmerman: What's the nature of the relationship between comanagers on your funds or David Herro's? I think people have the impression, "Oh, well, Bill Nygren runs this fund and David Herro runs this fund." And you [Oakmark has] obviously a capable of research staff. What's the day-to-day division of labor among you and your comanagers?
Nygren: On a day-to-day basis, Henry Berghoef and I always spoke to each other for Oakmark Select. Kevin Grant and I always talk to each other about the Oakmark Fund. We bounce ideas back and forth off of each other. But when it comes to external communication, I've handled more of that responsibility than Kevin has. I think over time you'll see that come into a better balance. And same thing [will happen] when Clyde and I name comanagers who are going to work with us on those funds; over time we'll see them take on more external communication responsibility, as well.
Zimmerman: Bill Nygren thank you very much for being with us today.
Nygren: Thanks, Shannon.
Zimmerman: For Morningstar, I'm Shannon Zimmerman.