A candid chat with Bill Nygren, who has been manager of the Oakmark Select Fund (OAKLX) since 1996. The fund ranks in the seventh percentile of large-company value funds the past 15 years. Mr. Nygren discusses finding value in today's market, what stocks to avoid, and whether the Chicago Cubs will go to the World Series.
InvestmentNews: Is it harder to find decent value in today's market?
Mr. Nygren: It depends on how you define value. Value is relative to something else. In a period when you have short-term investments such as Treasuries with zero risk that pay zero, an average-risk equity that's paying more than 2% a year in dividends and growing earnings 5% to 6% a year plus a bit of PE appreciation – that's a pretty attractive holding.
If you look back to the 1950s, the Standard and Poor's 500 stock index was yielding 3% when government bonds were yielding 2%. It was so easy to be an investor back then. I thought we'd never see it again: You got more current yield from dividends than from a bond, with the expectation that the dividend would rise over time. The same is true now. Instead of people thinking this is the greatest thing since sliced bread, they worry that the market is overpriced.
Even if there's no growth in the global economy any more, your starting point is that the dividend on the Standard and Poor's 500 stock index is higher than a 10-year Treasury note. Payout ratios on stocks are still lower than when I was starting to invest. Back then, a typical company was paying out 50% of its earnings in dividends.
InvestmentNews: So where are you finding good values?
Mr. Nygren: We think the banking sector is unusually attractive. One thing I hear about banks is that regulatory excess makes them much like electric utilities. Banks are selling for 80% of book value. Utilities are selling for 150% of book. Citigroup stock is at $42 a share; it's 60% of book value. Investors have penalized banks for lower returns without rewarding them for how much they have reduced the riskiness of their business model.
InvestmentNews: What are you avoiding?
Mr. Nygren: What we don't own much of are safety stocks. Frustrated fixed-income investors have gone for low-risk business models with limited growth and that pay out most of their earnings through dividends. They don't have good growth.
InvestmentNews: What about oil stocks?
Mr. Nygren: We own some oil stocks. Global demand growth has been disappointing, but with oil going from the $20 a barrel range to $50, we see supply and demand tightening. We think they have to be in the $60 to $80 range to make supply and demand meet. In the oil culture, bigger is better. But there are a few companies that will trade off doing a new project for something else, such as share repurchases. A few oil companies, such as Apache (APA), are not just focused on top-line growth.
InvestmentNews: How do you like the Cubs this year?
Mr. Nygren: This is an exciting year. Like the economist who has predicted nine of the last five recessions, this is the third year in a row that I thought, “This is the year.” The kids who are playing this year are giving 100% effort.
