Transforming AI fears into opportunity

In today's global markets, we believe there's risks that are unseen by investors but are quite important.

How does volatility offer opportunity for value investors?

Over the last 50 years at Harris | Oakmark, we've learned that volatility is indeed opportunity. We're seeking out businesses that are trading at a discount to intrinsic value, that are growing per share value, and run by management teams that think and act as owners. During volatile times, markets de- risk, and that gives us an opportunity to find companies that are trading at a discount different from their business fundamentals. Today is no different with the war in Iran and also fears of AI disintermediation. We're finding a lot of value in equity markets. Specifically in the United States, there's 150 stocks trading less than 14 times earnings. Across the globe, we're finding multinational businesses in Europe, specifically the high quality European businesses, really cheap today.

How are you identifying companies poised to truly benefit from AI?

We are a big believer in the impact of AI and the potential of AI to market, but we think each company is impacted in a different way by AI.

Today, we're pricing in AI on an individual basis, company by company. We find actually that many companies with strong relationships, sticky revenues, and great data sets will benefit from AI. Specifically, in the software sector, we're finding very good value, where the market today is starting to interpret that software might be put out of business. In fact, we think it'll make their businesses stronger.

We also find in the contract research organisations within healthcare that they have very good data on patients, on doctors, and it'll help them run clinical trials for pharmaceutical companies better. Those stocks have been down on fears of AI, whereas we believe by deploying AI on their data sets, it'll make clinical trials more effective.

What do you see as the biggest risk investors are not paying enough attention to?

In today's global markets, we believe there are risks that are unseen by investors but are quite important.

Number one, valuation risk. Number two, style risk, and number three, concentration risk.

If you look at the S&P 500 today, we think it's a very highly valued mega cap growth fund, whereas the Russell 1000 value is much more diversified and looks like what the S&P looked like 20 years ago. So we think it's a perfect time for active management, especially active managers that don't have to look like the benchmark.

Has value investing changed in the 50 years since Harris | Oakmark was founded?

At Harris | Oakmark, we believe value investing is just as effective today as it was at our founding in 1976. What has changed is how you find value. Intrinsic value is our approach, and we think that that measures free cash flows of the economy and the assets in the economy very effectively. In 1976, the economy was a manufacturing economy where if you knew the property, the plant, and the equipment, which is captured in book value, you knew the majority of the value of a stock. Now, today, only 10% of the value of a stock comes from book value.

Instead, it's coming from software code, brand value, research and development. Our approach still measures those cash flows that come from those assets that are not captured by GAP accounting. And so we think it's very important to take an intrinsic value approach rather than just an approach that screens for value.