More than a decade ago, Bill Nygren fielded a call from a financial adviser who was upset that he wasn't holding any technology names in his portfolio, the Oakmark Fund. "Can you please just buy one or two tech stocks?" she implored. "Otherwise I won't be able to explain to my clients why I own this fund."
In the midst of the technology heyday of the late 1990s, Nygren had trouble keeping up with other large-cap funds on account of his refusal to buy technology. The adviser — and others — eventually sold the fund.
"It's not that I didn't like the sector, I just didn't like the prices," Nygren said. "I told her there would be a time when I would be overweighted in tech names and she would be just as frustrated with me then."
Take a look at Oakmark now. The $3.5 billion offering has a whopping 24% of its assets in the technology sector, largely because there are so many appealing businesses selling at substantial discounts. With names like Apple, Intel and Dell, Oakmark looks like a 1990s large-cap growth fund.
Yet Nygren is once again having to make a case for his fund, and for all equities, as a matter of fact, because this time investors aren't being lured away by the promise of riches in highflying stocks, but by the presumed safety of bonds.
Nygren has been at the helm of Oakmark since 2000, when he took over the offering from the deep-value manager Robert Sanborn. Harris Associates had lost faith in Sanborn's brand of value investing, which trailed the market and other comparable offerings.
Nygren has a more flexible view of value stocks and routinely pays small premiums for well-managed companies. A premium is a small price to pay, he said, for a stock that can deliver time and again. What sets him and co-manager Kevin Grant apart, Nygren said, is that they take an unconventional view.
For example, Nygren said, most investors' outlook for the economy, and stocks, is too gloomy. "Yes, this economy is falling a little behind the typical recovery pattern," he said. "But it's not as bad as the no-growth crowd says."
Typically Nygren and Grant like to purchase shares when they are trading at 60% of what they estimate to be intrinsic value, and sell them when they reach 90%, which is how they define full value. In early 2009, Nygren was able to snap up some great deals.
"In March 2009, we were buying stocks that were selling at 40% of their intrinsic value and selling them at 60%," Nygren said. It would have been foolish to wait until the stocks reached 90% of their value, because doing so would have meant missing out on even bigger bargains, he said.
Among Nygren's biggest holdings is Apple, maker of the ubiquitous iPhone and the early-adopter's darling, the iPad. Nygren first bought the stock in early 2009, when it traded around $80. (Apple closed at $314 on Oct. 15.) The stock had faltered for several reasons: the overall market swoon, plus Chief Executive Steve Jobs' cancer diagnosis and the fear that few consumers would buy Apple's pricey wares during the downturn.
Nygren was confident that Jobs had built a deep enough bench around him that the firm could withstand its founder's absence. And consumers continued to flock to Apple goods. Thanks to the iPod and iPhone, Apple posted record earnings through most of 2009.
Despite the run-up, however, Nygren insists that Apple has room to run. More growth opportunities are around the corner for Apple, the biggest being the availability of the iPhone through carriers other than AT&T. "For as high-quality a company as Apple, the premium is not large," he said.
Dell, another Nygren favorite, is taking a very different path. It has positioned itself as the low-cost computer provider as prices of PCs continue to fall. But Dell has not convinced investors that it can become an enterprise solutions provider like Hewlett-Packard or IBM. "Analysts don't give them as much credit as they deserve," Nygren said.
Firms have put off IT purchases in the downturn to the point that they can no longer operate efficiently. "You can skip one upgrade, but you can't skip several generations," Nygren said. When IT spending rebounds, Dell will benefit as the incumbent provider.
Nygren is also fond of media, particularly Liberty Interactive, owner of the home shopping channel QVC. Investors have only recently cottoned on to the charms of the 24-hour channel. "For people who don't shop through their televisions, there's an outdated impression of what home shopping is and what a leader QVC is."
Financial stocks are making a comeback in the Oakmark portfolio. In addition to banks, Nygren holds Capital One, the credit card powerhouse. Over the years, Capital One has added other financial activities to its business line, including auto financing and credit cards in England and Canada.
After suffering through the bad economy, Capital One is poised for a rebound, Nygren said. "We will see a return to normal chargeoffs."
