Portfolio Manager and CIO-U.S. Bill Nygren, CFA® at Harris Associates, adviser of the Oakmark Funds, takes a look at today’s evolving market dynamics, including the growth of passive investing and popularity of low-beta stocks, and how it is creating attractive value opportunities for active, research-driven investors.

Here are a few value investment ideas from Nygren:

Avoid overpriced low-beta stocks: Investors may be overpaying for what we consider low-beta companies. Today, companies whose businesses are quite predictable are in great demand by investors. We think there are attractive opportunities to take on some volatility in companies that may go up or down a little bit more than others in the business cycle.

Hunt for bargains in out-of-favor sectors: We also think there are areas where investors may have a stale perception of risk, such as the financial services industry or the energy industry. We believe there are reasons to expect cycles to be more muted and long-term prospects to be better for some quality companies in these sectors. We are seeing management in both financial services and energy sectors willing to return more capital to shareholders, rather than pursue growth that might create more extreme cycles.

Take on risk for long-term results: Today, the typical investor views risk as either how volatile your strategy is on a day-to-day basis relative to the market or how much your results might deviate from the market over a slightly longer time frame.

We focus on the long term, so when we try to mitigate risk, we're trying to reduce the chance that we lose capital. We're willing to take on the risk of looking a little different from the index on a day-to-day basis when we think we will be adequately compensated for taking on that incremental level of risk.

Consider concentration risk in index funds: Some index funds that sound like they'd be really diversified are not. The Russell 1000 Growth Index might seem to be diversified with more than a thousand names, but almost half are concentrated in the largest five or six positions – which is more than 5% of the portfolio.

As active managers, we still focus on identifying the most undervalued investment opportunities in the market, waiting patiently for the gap between price and value to close.

Value Investing Ideas

Short-term stock price volatility may create opportunity over the long term with actively managed portfolios from the Oakmark Funds. Value investors at Oakmark follow a disciplined, research-driven approach focused on buying quality businesses at discounted prices and allowing enough time for their convictions to play out.

The information, data, analyses, and opinions presented herein (including current investment themes, the portfolio managers’ research and investment process, and portfolio characteristics) are for informational purposes only and represent the investments and views of the portfolio managers and Harris Associates L.P. as of the date written and are subject to change and may change based on market and other conditions and without notice. This content is not a recommendation of or an offer to buy or sell a security and is not warranted to be correct, complete or accurate.

There can be no assurance that developments will transpire as forecasted. Actual results may vary.

Russell 1000® Growth Index is an unmanaged index that measures the performance of the large-cap growth segment of the U.S. equity universe. It includes those Russell 1000® companies with higher price-to-book ratios and higher forecasted growth values.

Investing in value stocks presents the risk that value stocks may fall out of favor with investors and underperform growth stocks during given periods.

The Oakmark Fund’s portfolio tends to be invested in a relatively small number of stocks. As a result, the appreciation or depreciation of any one security held by the Fund will have a greater impact on the Fund’s net asset value than it would if the Fund invested in a larger number of securities. Although that strategy has the potential to generate attractive returns over time, it also increases the Fund’s volatility.

The Oakmark Funds are distributed by Harris Associates Securities L.P., member FINRA.

Natixis Distribution, LLC (Member FINRA|SIPC) is a marketing agent for the Oakmark Funds, a limited purpose broker-dealer and the distributor of various registered investment companies for which advisory services are provided by affiliates of Natixis Investment Managers.