Oakmark Fund searches the globe for value stocks

  @Money June 5, 2013: 5:01 PM ET
oak tree

Oakmark searches globally for companies trading well below their potential acquisition price.

(Money Magazine)

Bill Nygren, manager of the $8.6 billion Oakmark Fund, invests as if he were in private equity.

He searches for companies with strong business models that are trading well below the price a potential acquirer might pay for the firm. Then he is willing to wait for five years or longer for the market to recognize the company's true worth.

Value stocks
Nygren thinks it's not that hard to find cheap stocks in this market.
Average P/E ratio
Oakmark 12.1
Large-cap funds 14.2
S&P 500 14.6
Notes: Price/earnings ratios are based on estimated profits. Source: Morningstar

He also ventures into areas where value-minded managers rarely go, including economically sensitive and risky sectors such as technology. In a market near its all-time high, that may be a necessary move. But is it a smart one?

Deep values

The price/earnings ratio for the S&P 500, based on 10 years of averaged profits, is more than a third above its historical average. Yet in an interview with MONEY, Nygren scoffs at the notion that equities are expensive.

He points to a different measure -- the fact that the dividend yield for stocks is consistently greater than bond yields for the first time since the 1950s. It should be like "shooting fish in a barrel," he says.

Nygren looks for companies trading at 60% of their true business value -- the price an acquirer would be willing to pay to buy the entire firm. In 2009 this led his portfolio to Apple (AAPL, Fortune 500). Though the shares are double what they were then, even with their recent slide, he says the stock is still cheap at a projected P/E of around 9.

Risky sectors

In his quest for undervalued businesses, Nygren doesn't just venture into sectors "surrounded by controversy," as he puts it. He's willing to concentrate his bets there.

Take financials: Oakmark (OAKMX) took a large stake in the troubled group in 2008, in the midst of the credit crisis. He still holds many of those shares today, such as Bank of America (BAC, Fortune 500), which has yet to fully recover and is still vulnerable to another economic shock.

Related: Is it too late to get in on Pimco's bond ETF?

He also has a healthy dose of tech, another underperforming group dependent on a strong economy.

Morningstar analyst Shannon Zimmerman warns that "even value companies can fall precipitously." Nygren counters that since he buys already cheap stocks, they have less room to fall if conditions worsen.

Inconsistent returns

There are inherent contradictions to this fund. For starters, while Oakmark is predicated on discounts, the portfolio's 1.03% annual expense ratio is actually a tad higher than the category average of 0.93%.

Investing strategies with low tax costs

Also, while Nygren's approach is slow and steady, his contrarian views often lead to rocky performance.

Related: Money 70 - Best funds and ETFs

Over a holding period that lasts five years or more, his beaten-down stocks will lag the broad market when they're down, only to dramatically outperform when they're rebounding.

This fund "is not for an investor that gets a lot of jitters by looking at quarterly statements," says Zimmerman.

If you have the time and patience, though, it's worth the wait. Oakmark has beaten 85% of blue-chip funds over the past 10 years. To top of page

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