Fund Watch
Where Oakmark's Bill Nygren Went Wrong
The manager of this former Kiplinger 25 fund admits that investing in housing and mortgage-related stocks was a mistake. Can he repair the damage?
By Andrew Tanzer, Senior Associate Editor, Kiplinger's Personal Finance
August 11, 2008
The bear market hasn't been kind to most value investors. Even before the bear started to growl, many prominent value investors were lagging Standard & Poor's 500-stock index.
In general, poor results were due to acts of both omission and commission. Underperformers typically didn't own enough energy and other commodity stocks and owned too many financial stocks, which a year ago appeared to be attractive on the basis of above-average dividend yields and low price-to-book-value ratios. We now know what happened to so many banks and mortgage lenders after the credit crisis erupted a year ago: Those book values were about as solid as the trap door in a gallows, and the dividends have all but vanished.
Bill Nygren, co-manager of (symbol OAKLX) and Oakmark fund (OAKMX), is candid and gracious enough to run us through his litany of errors in recent years. A former member of the Kiplinger 25, Select lost an annualized 3% over the past three years through August 8, an average of seven percentage points per year worse than the S&P 500 index. This is a concentrated fund with about 20 holdings, so every stock counts.
Nygren divides his weak performance into two periods: through the first half of 2007, and since then. The weak performance during the first period was due chiefly to his failure to invest in energy and other high-flying natural-resource stocks, he says.
Like many value investors, Nygren generally shies away from these types of companies. He explains: "By definition, they're commodity businesses without brands. The determinant of success is the underlying price of commodities, over which the companies have absolutely no influence."
He has few regrets about missing the bull run in commodities, which has reversed course in recent weeks. But Nygren is chagrined about his funds' heavy exposure to housing and mortgage-related stocks, which crushed his funds' performance in the second half of 2007. As a value investor, Nygren says, the risk he most wants to avoid is the permanent loss of capital. Nygren concedes that he blew it on several holdings: "When you misjudge business value, that's the most serious mistake you can make."
Nygren saw that residential housing markets were weakening in early 2007 but says he expected prices to steady -- the historic pattern in weak markets -- rather than plunge by 20% or more. Irresponsibly high loan-to-value ratios crushed many housing-related lenders and related businesses when the residential roof caved in.
Select was burned by its positions in Pulte Homes (PHM), "a horrible investment," and H&R Block (HRB), a company that wrecked a perfectly good tax-preparation business by a hare-brained diversification into the subprime-mortgage business.
But Nygren's largest blunder by far was his heavy investment in Washington Mutual (WM), the country's largest thrift. At one point, WaMu represented a towering 15% position in Select's portfolio. The Seattle-based bank has written off $20 billion of losses on home mortgages and dramatically diluted shareholder value by raising new capital. The stock price has plunged nearly 90% in a year. Nygren says that WaMu management was ill-prepared for a significant decline in housing prices. "In hindsight, that looks really, really stupid," he says. "The macro environment got much worse than we thought the case."
We don't know yet if there's a happy ending to this story, but Select's relative performance has improved dramatically in 2008. Nygren has ridden some canny investments in names such as YUM Brands (YUM), McDonald's (MCD) and Western Union (WU), and he thinks his large positions in media and entertainment stocks such as Comcast (CMCSA) and Discovery Holding (DISCA) are bearing fruit. A wiser Nygren may also be on the rebound.
Reader Comments (20)
Posted by: joe at 08/11/2008 10:16:33 PM
As a long-time investor with Oakmark Select, disappointed does not start to describe the feelings associated with paying a fund manager for making so many mistakes/blunders and underperforming its peers and indexes.
Posted by: Phil at 08/12/2008 03:02:41 PM
Mr. Nygren seems like a really nice guy but I got out of this fund a few years ago because on continuing low performance...You mention an improving performance. Yes, even a broken clock is right twice a day.
Posted by: Bob at 08/12/2008 04:21:31 PM
What is VALUE? If you think low P/E or low P/B is value, then a simple computer program can do the job. We don't need a money manager. A truly great investor can recognize fundamental things. Naturual resource boom will last at least another 10 years. US economy in general is on a longer-term down slope. High inflation will come. If you can not recognize these things, how do you out-perform? just by luck?
Posted by: jim at 08/12/2008 07:16:30 PM
Oakmark Select isn't the only Oakmark fund to greatly underperform - David Herro of Oakmark International has likewise underperformed the indices. It seems the whole shop has derailed since leaving the "railroad"!
Posted by: Larry at 08/13/2008 03:10:59 AM
What disturbs me about Mr. Nygren's position in Washington Mutual was that he believed the executives had the shareholders' intrests at heart. It is my understanding that the only thing the executives held dear was their compensation packages. Also, when it was clear that Washington Mutual was a disaster waiting to happen, Mr. Nygren held on to his position all the way down. When does he think he should sell? He can't believe that the best use of his shareholders' money was to watch this stock go down, down and down further.
Posted by: Bob at 08/13/2008 05:10:29 PM
Oakmark Select has been an absolute disaster for me and others...Nygren has lost all credability and should be sent packing!
Posted by: Weiwen at 08/14/2008 04:58:30 PM
I bought Oakmark Select in the second half of 2006, when it looked like he might make a recovery. I sold in early to mid 2007. I think I more or less broke even. there are other skilled value investors who didn't quite get the call right on the subprime crisis. but I think Nygren and Miller got hit the worst by far. I consider myself a value investor, but when an investment deteriorates, sometimes the best thing to do is just to sell it. had Nygren started selling Wamu nearer the end of 07 or even the beginning of 08, he wouldn't have done as badly as he has. It's dismaying to see that he's actually added to his stake as of 6/30(according to Morningstar). (I think) Wamu's franchise is permanently impaired.
Posted by: mike Rusinas at 08/14/2008 06:03:16 PM
"Nygren saw that residential housing markets were weakening in early 2007 but says he expected prices to steady"...Anybody with half a brain who paid any attention to the housing market could see things had to come down and not stabilize. Unbeleivable!!!!
Posted by: winslow at 08/15/2008 04:50:01 PM
In retrospect, it looks like bad decisions were made. However, if housing did bottom as Nygren expected, he would have been a hero. Many value funds that are well-divesified are also down. If you hold this fund, it should only be a small part of your portfolio.
Posted by: Investorguy at 08/21/2008 09:09:58 PM
Personally, I would avoid non-diversified mutual funds. The reason I own mutual funds is for diversification, not for concentration in just a few areas or companies that a single manager has chosen as his best ideas. How often are average and even above average money managers wrong? Even the results of the dozen or so truly outstanding managers could be due to chance alone. By chance alone, Nygren will eventually be a star again. You can bet on it.
Posted by: Rob at 08/27/2008 01:01:52 PM
I believe in Bill. Even smart guys make mistakes. He owns up to them like no other manager. Great returns over the Long Term is what investing in stocks is all about, and Bills record is more than competitive.
Posted by: chris columbo at 09/08/2008 09:44:08 AM
Nygren is stubborn and refuses to listen to the ideas of others. That is why he has suffered an ignomious reversal. The worm will turn of course as a broken clock is correct twice a day
Posted by: Jim at 09/09/2008 06:22:54 AM
Bill is a very talented stock picker who admits WaMu was his biggest mistake. I own the less concentrated Oakmark Fund and intend to stick with it. Oakmark funds in general offer good stewardship where fund managers invest alongside their clients. In the long run, I expect Bill Nygren will provide attractive after-tax returns while better managing risk. I believe he is wisest enough to have admitted and learned from the WaMu mistake.
Posted by: NT at 09/09/2008 05:22:41 PM
The people that are still rationalizing the stunningly stupid mistake at Oakmark could have worked are just not seeing the facts. People were screaming at Bill to get out of WaMu over a year ago. Instead he loaded it up into Global Select at $50+ a share. Today it looks worthless. The value trap was clear and predictable. This is the type of fund family that says value, yet they don't know anymore what it means.
Posted by: Cheryl at 09/11/2008 11:37:30 AM
While there is certainly more to equity analysis than crunching the numbers, the numbers strongly indicated that WaMu was at best fully valued in 2007, if not overvalued. I believe that the working relationship between Mr. Nygren and WaMu management blinded Mr. Nygren to what the numbers indicated, as he listened to what management was peddling. Even fund managers are vulnerable to laspes of objectivity.
Posted by: DocZeke at 09/12/2008 04:09:15 PM
I am extraordinarily upset at Nygren for his irresponsible "stewardship" of MY money. Having owned the fund in the past, I made the mistake of supposing that he still knew what he was doing when I invested 50K a year ago. I don't know where they get this "down 3% a year" on average or "doing better in 2008" nonsense. All I know is my investment is 50% lower with no sign of improvement on the horizon. I am just disgusted.
Posted by: Brent Carpenter at 09/22/2008 02:36:40 PM
It is clear that Mr. Nygren (and this also applies to his supporters at Morningstar) does not do what is expected of a professional stock analyst – truly KNOW THE COMPANY. The risks associated with WM and Pulte were well known for some time,and in fact were predictable. This is certainly NOT a case of 20/20 hindsight as to many folks to count were commenting on the dangers associated with subprime loans and the real estate bubble. Unfortunately, Mr. Nygren seems not to go much farther in his research then using Benjamin Graham type value metrics available to all on the Web. Looking at these metrics is fine, but it is only a FIRST step – a paid professional like Mr. Nygren needs to take a detailed look under the hood for each stock – particularly given the small number of stocks in his fund. Value traps like WM implode for a reason (i.e.; there are quite legitimate reasons why the market hates them). However, again, it is clear that Mr. Nygren does not do his homework - and clearly did not investigate how loans and risk management was being handled by WM. So the bottom line is folks, we need to stop paying for the "expertise" of fund managers like Mr. Nygren. It is well known that most fund managers can't beat a basic index fund consistently – so how sharp can they really be? Do your own homework, buy LEGITIMATELY undervalued stocks, and hold cash or use stop-loss orders when the broader market is clearly bearish. Don't let Mr. Nygren take any more of your money!
Posted by: Nikhil at 09/26/2008 11:10:05 AM
I remember reading this article a while back hoping that this might be a comeback fund basically hoping someone will buy WAMU. But after what happened to WAMU now, watch out for what happens to oakmark! Fasten your seatbelts for the downward ride....
Posted by: Michael Magee at 09/27/2009 09:56:38 PM
We hand our hard earned money over to these pros that are supposed to watch it while we work every day. How is it possible for them to ride a stock to being worthless?? They have a "sell" button on their console....
Posted by: Rahul at 09/28/2009 07:31:47 PM
Mr. Carpenter hits it right on! (Some) see a low price ("value") and pile on, based on Benjamin Graham metrics. They miss looking at the macro picture (your neighbor just bought a Lexus on his refi!) and stupidly mistaken "cheap" for "value".