Value Added


A Time-Tested, Low-Risk Fund for This Market

Steven Goldberg

What's wrong with boring? In a volatile market, Oakmark Equity & Income isn't just for widows and orphans.



The managers of Oakmark Equity & Income (symbol OAKBX) are loading up on stocks. At last check, the fund had 68% of its assets in stocks -- the highest since co-manager Clyde McGregor launched the fund in 1995. The fund typically has about 60% in stocks.

But McGregor, 58, and co-manager Edward Studzinski, 62, are hardly pound-the-table bullish. Rather, they’re bearish on bonds. “Stocks are okay, but we think fixed income is very unattractive,” McGregor says. The managers are down on all kinds of income-oriented investments, including bonds, real estate investment trusts and master limited partnerships, because they don’t think yields will stay low for long. The bonds they do own are mainly high-quality, short-maturity issues.

McGregor’s words remind me of Bill Gross’s keynote address at the Morningstar conference earlier in June. Gross, who manages Pimco Total Return (PTTDX) and is known as the king of bonds, told investors that bond yields are too low and encouraged them to buy high-quality, dividend-paying stocks (see VALUE ADDED: Should You Dump Pimco Total Return?).

Oakmark Equity & Income doesn’t focus on dividends. Instead, like the managers of all Oakmark funds, McGregor and Studzinski seek stocks trading at hefty discounts to “intrinsic,” or true, value. Then they wait for the market to come around to their point of view.

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The fund’s record is superb. Over the past ten years through June 24, Equity & Income returned an annualized 7.9% -- an average of 5.4 percentage points per year better than Standard & Poor’s 500-stock index. Over that period, the fund ranked in the top 2% of Morningstar’s “moderate target risk” category. The fund’s current yield is a paltry 0.76% after deducting the fund’s 0.79% expense ratio. The fund is available to most new investors only if you buy directly through Oakmark.

The managers are worried that the nation’s economic recovery will remain lackluster. As we now know, the housing bubble led too many consumers to use their homes as ATMs. That has left many people mired in debt, a situation that has been exacerbated by the continuing decline in home prices.

Large and midsize companies are awash in cash -- and many are spending on new technology, research and development, and acquisitions. But consumer spending is lagging, which makes for an achingly slow recovery.

Equity & Income’s managers spend most of their time analyzing companies and picking stocks accordingly. That has led them to put 20% of the fund’s stock money in health care, although they’re avoiding big drug makers. McGregor worries that relatively few new blockbuster drugs will come to market over the next few years.

But the fund has found value in other corners of the health sector. Examples include Laboratory Corporation of America Holdings (LH), which conducts medical tests; insurance giant UnitedHealth Group (UNH); Hospira (HSP), which makes injectable generics; and Varian Medical Systems (VAR), which manufactures and sells systems used for treating cancer with radiation therapy.

McGregor also likes MasterCard (MA). The stock fell on news that the Dodd-Frank financial reform law would restrict transaction fees the cards levy on merchants. New regulations, in fact, do limit those fees. But the banks that issue the cards, not MasterCard and Visa, are the big losers from the change.

Equity & Income has delivered its fine results with an enticingly smooth ride. Over the past three years, it exhibited 42% less volatility than the S&P 500. That paid off big during the 2007-09 bear market, during which the fund lost 27.1%, compared with the S&P 500’s 55.3% plunge.

Even so, McGregor says he’s not satisfied with his bear-market performance. He says he and Studzinski manage the fund as if it might be its shareholders’ only investment. Indeed, if you wished to invest in a single fund, Equity & Income would be an excellent choice. Even if you own several funds, Equity & Income is a great pick for your lower-risk money.

Steven T. Goldberg (bio) is an investment adviser in the Washington, D.C. area.



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