In this video interview, Nygren delves into why investors should not bail on their equity investments during bear markets. He also explains why he thinks it is a stock picker’s market, Oakmark’s distinct value approach, and where the team is identifying opportunities. Below are a few highlights:
Why Should Investors Stay the Course?
It's easy to understand why investors are concerned today, because they've lost a lot of capital. And a lot of people are worried about “what happens if we go down this much more again?” But in the past 77 years, there have been seven bear markets. And on average, if you bought after the market went down 20%, the next two years you made almost a third on your money. That's one of the reasons the Oakmark strategy doesn't depend at all on market timing, because it's so hard to base your decision of how much you should be invested based on the news environment.
How Are You Looking at Today's Market?
In the market today, the spread across P/E (price-to-earnings ratios) has become very wide. Because the S&P 500® trades at about 18 times earnings, people worry that the market is too expensive or not. But, by looking for businesses that are undervalued in the market, as we do in the Oakmark strategy, we've constructed a portfolio that has a P/E of about 11 times. So not only is it significantly below the S&P 500®, but it's also significantly below the Russell Value Index.
Volatile time periods like we've been through recently typically widen the spread in P/Es. And then as the market comes out of that period, those spreads tend to narrow. We think today's market with that very large multiple spread between Oakmark and the S&P 500® is truly a stock picker’s market – and one that should lead to good performance from the Oakmark strategy.
What's Behind Oakmark's Distinct, Concentrated Approach to Value Investing?
We think the biggest skill we bring to the table is stock selection. And we want to magnify the impact that our stock selection has on the portfolio. There are some people that position size and they want their positions so small that when they make mistakes, they don't really affect the portfolio. The problem with that strategy is your successes also don't really affect the portfolio. So we take the opposite position. We think stock selection is our greatest skill, and we want the names that we have the most confidence in to have the biggest impact on the portfolio.
The Oakmark strategy doesn't use a typical value approach where you can only buy low P/E or low price-to-book value stocks. What we do at Oakmark is we look out 5 to 7 years into the future and we want to buy companies that, based on what we think they can be 5 to 7 years from now, are selling at much too cheap a price today. So we're looking for stocks that are selling at a big discount to intrinsic value – where we expect that value to grow over time. Because when we buy a stock at Oakmark, we expect we're going to own it for five years or so. And during that period, the decisions management make have a big, big impact on the ultimate return to investors.
Find Value in US Equities
Oakmark’s distinct, concentrated approach to value investing has helped long-term investors take advantage of volatility and price declines through the years – and stay invested to reach long-term goals. This US equity value strategy may fit as a core component of an investor’s overall portfolio or a complement to an index-based portfolio. Take a closer look at this approach – available as a mutual fund or a separately managed account strategy.
There can be no assurance that developments will transpire as forecasted. Actual results may vary.
The price to earnings ratio (“P/E”) compares a company's current share price to its per-share earnings. It may also be known as the "price multiple" or "earnings multiple", and gives a general indication of how expensive or cheap a stock is. Investors should not base investment decisions on any single attribute or characteristic data point. Price-to-cash flow is defined as a stock’s capitalization divided by its cash flow for the latest fiscal year. The Price to Book Ratio is a stock’s capitalization divided by its book value.
The S&P 500® Total Return Index is a float-adjusted, capitalization-weighted index of 500 US large-capitalization stocks representing all major industries. It is a widely recognized index of broad, U.S. equity market performance. Returns reflect the reinvestment of dividends. This index is unmanaged and investors cannot invest directly in this index.
Russell 1000® Value Index is an unmanaged index that measures the performance of the large-cap value segment of the US equity universe. It includes those Russell 1000® companies with lower price-to-book ratios and lower expected growth values.
CFA® and Chartered Financial Analyst® are registered trademarks owned by the CFA Institute.
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.
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.
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.
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