NICOLAS: When the Oakmark Fund launched we aimed to establish a brand that would mean something to investors and that would ultimately become synonymous with value investing.
NYGREN: The typical Oakmark portfolio will have about 50 securities in it, it will be diversified across industries, it will be overweight in names that tend to be out of favor because that’s where we find the most attractive values.
NICOLAS: Our fund looks quite a bit different than broader market indices and tends to be much more focused than other diversified mutual funds. We don’t pay much attention to short-term volatility of returns and we don’t manage to an index. Our goal is for the fund to outperform the market over long periods of time and to mitigate the risk of permanent capital impairment.
NYGREN: We’ve always defined value as a stock that’s selling at a significant discount to what a buyer could pay to own the entire business and still earn a good return on their investment. How we calculate that value has had to adapt some over the years. Especially as GAAP accounting has done a poorer job of handling long-term investments that are made through the income statement. So we have more companies in our portfolio today that a quick look at the P/E ratio or price-to-book ratio doesn’t give a clue as to what we believe the long-term business value is.
NYGREN: Everything we do at Oakmark is based on long-term value and we have set up three criteria for our stocks that we believe maximize potential returns and at the same time minimize potential risks.
NICOLAS: The first is we want to invest in businesses that are trading at a substantial discount to our estimate of their intrinsic value. Next we want to see a path to per share value growth over time. And finally we want to invest in management teams that think and act like owners of the business, preferably with a tremendous amount of skin in the game.
NYGREN: When we get all three of those things it gives us the luxury of a very long- term time horizon. So we can think about what we believe the business will be worth five to seven years down the road. By using a time horizon that’s so much longer than most of our competitors use, it allows us to focus on things that are really important to driving business value and to ignore the noise of the very short-term news that most of the industry is focused on.
NYGREN: We’ve structured our research department at Oakmark to have generalist analysts as opposed to industry-specific analysts. We think what our analysts can do really well that most analysts can’t is to make cross-industry comparisons. Our analysts are thinking all the time is this oil stock more attractive than this bank.
NICOLAS: We have a couple of unique attributes that we incorporate into our investment process. We regularly perform devil’s advocate reviews whereby one of our analysts will be tasked with presenting the bear case or the downside case on an existing long position. We do these devil’s advocate reviews in order to make sure that we defeat groupthink amongst the team, and that we’re properly sizing and surfacing all the risks that we can identify for any given business. We then typically debate the merits of these devil’s advocate reviews at our weekly investment committee meetings. And the outcomes of those discussions can ultimately have a tremendous influence on position sizing and our willingness to own a given company.
NYGREN: It’s just so easy on a day-to-day basis to get caught up in how many basis points did you outperform or underperform the S&P 500. And one of the nice things about being able to look back on a 30-year time period is to see the compounding effects that you have not only from investing in equities but also from investing in undervalued equities.