Value in a Reopening World
CIO-US Equities at Harris Associates, Bill Nygren, shares his insight on value opportunities today, value’s recent outperformance, inflation, and the importance of a long-term investment horizon.
To gain insight into value investing as life slowly gets back to normal, the Natixis Access Series hosted Bill Nygren, Partner, Portfolio Manager, CIO-US Equities at Harris Associates, the Investment Advisor to Oakmark Funds. Highlights of his talk with Ken Herold, Head of Investment Strategies at Natixis Investment Managers, are below.
What do you look for in a company before investing in it?
Clearly, stock selection is the strength we bring to the table. We are not market timers in any way and, in order to maximize the impact our stock selection has on the portfolios, we run very focused portfolios. The Oakmark Fund is our most diversified equity portfolio; it owns about 55 names. The Oakmark Select Fund, which I also co-manage, cuts that down to a favorite 20 names. Compare that to a typical mutual fund today that owns somewhere between 100 and 150 names. Each stock that we decide to own has a much bigger impact on our performance than it does for our peers.
We invest for a very long-term time horizon. If you have something that is undervalued and the value’s growing at least as fast as other companies – and management is aligned with outside shareholders – it gives us the luxury to think really long-term.
How long is your time horizon?
Many private equity firms typically buy poorly managed companies where they have to change out the management teams. We differ from them by trying to identify well-managed companies where we want to partner with the existing management teams. This helps us avoid getting into a situation where there could be somewhat of a race against time of the team destroying value while we try to change out management.
Has your investment analysis changed since Oakmark Funds was created in 1991?
How did your high conviction approach help you during the Covid crisis?
That thinking has always been a big part of our process at Harris Associates, but it became even more important last year when our world turned upside down due to Covid. Suddenly, all our forecasts for our companies were completely off. There were some businesses whose growth was going to accelerate because of Covid and there were others that faced a couple of really tough years. I was really proud of our analyst team who, in about a week and a half, went from expecting normal growth in the economy to expecting a recession that would take a couple of years to exit.
We didn’t think 2021 would be a normal year – we thought that would take until 2022 – so we had analysts roll out their detailed forecasts through 2022, and we very quickly had an approved list that re-ranked the attractiveness of each of our companies. I think this quick reaction was one of the biggest reasons we were able to significantly outperform our value peers in the six months after March 2020 – before value really started to rebound.
When might equities be back to “normal” pre-pandemic levels?
With the disruption in 2020, we immediately went to a severe recession scenario, thinking we wouldn’t see any recovery until the second half of 2021 – in hindsight we weren’t too far off, maybe a little bit too pessimistic – and that by 2022 we’d be back to normal levels. Forecasting out five to seven years from now that the world will be normal typically doesn’t give much of a macro-overlay tilt to our portfolios. The view that we would get back to normal relatively quickly, in say, less than five years, gave us an outlier projection – the result of which was that our portfolios were heavily oriented toward business reopening.
What value trends are you focused on currently?
We also think the new normal is going back to work. For most businesses, collaboration and collegiality is an important part of corporate culture, and it’s difficult to maintain those elements via video conferencing. We think industry leaders in commercial real estate like CBRE, and even something in consumer products like single-serving coffee distributor Keurig Dr Pepper, are well positioned.
We believe the ultimate beneficiaries are some quality financial sector companies. The move to online banking is going to allow them to have a permanently lower expense ratio than they had pre-Covid. Because some of these stocks are cheap at single-digit price-to-earnings, we think it’s the most attractive area in the stock market. We are very much looking for a modern-day version of the Roaring Twenties to match what happened in the 1920s after the Spanish Flu pandemic.
What are your thoughts on value outperforming?
We think value’s underperformance has been historic, and that we’ll be in a good position to benefit from any reversion in that growth outperformance. We believe that the fundamentals should dictate a continuation of value outperformance. Valuation extremes are very similar to what we were facing back in 2000, and if I’m right on that, then this value run has a good distance left to go.
Are you concerned about inflation? Could it impact your portfolios?
Our oil stocks have benefited already this year with the fear of inflation’s return. That’s because hard assets do pretty well against inflation and people will stop talking about $70 per barrel being an unsustainable price for oil.
How do you think about ESG considerations?
We don’t buy a company unless we think it’s managed by people that are highly talented and have goals consistent with outside shareholders. So governance has always been hugely important to us in terms of stock selection. But it’s important to keep the distinction between ESG investing and impact investing clear. We aren’t accepting lower returns on anybody’s capital because we think we know what the right thing to do for the world is.
Why does quality matter in your portfolio? What types of investments do you avoid?
To us, it’s just as much value investing to buy a great business at an average multiple, as it is to buy an average business at a cheap multiple. Value investing is buying businesses that are worth more than you have to pay for them. So it’s part of our process, and we absolutely do not limit ourselves to below average businesses like some deep value investors do.
We avoid parts of the market where speculation runs rampant. I would say that’s in some of the cryptocurrencies and some of the SPAC names, especially the ones run by celebrities. I think the meme stocks – like GameStop – that appear to be selling at multiples of very low fundamental value are extremely risky and not sustainable.
Oakmark Fund Risks:
- Equity Securities Risk: Equity securities are volatile and can decline significantly in response to broad market and economic conditions.
- Value Investing Risk: Value investing carries the risk that a security can continue to be undervalued by the market for long periods of time.
- Concentration Risk: Concentrated investments in a particular industry may be more vulnerable to adverse changes in that industry or the market as a whole.
- Foreign Securities Risk: Foreign securities may involve heightened risk due to currency fluctuations. Additionally, they may be subject to greater political, economic, environmental, credit, and information risks. Foreign securities may be subject to higher volatility than US securities, due to varying degrees of regulation and limited liquidity.
Top Ten Holdings for the Oakmark Fund as of 3/31/2021:
Alphabet Cl A
Bank of America
Capital One Financial
Facebook Cl A
Comcast Cl A
|Percent of Net Assets
Before investing in any Oakmark Fund, you should carefully consider the Fund's investment objectives, risks, management fees and other expenses. This and other important information is contained in a Fund's prospectus and summary prospectus. Please read the prospectus and summary prospectus carefully before investing. For more information, please visit oakmark.com or call 1-800-OAKMARK (1-800-625-6275).
Investing in value stocks presents the risk that value stocks may fall out of favor with investors and underperform growth stocks during given periods.
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