During a recent talk on CNBC, Bill Nygren from Oakmark Funds shared insights into a careful investment strategy that sheds light on how value managers operate.
His fund prominently features holdings like Alphabet, Citigroup, and Warner Bros. Discovery. Nygren emphasized the strategy’s principle of concentrating on successful investments to mitigate risk, acknowledging that while Alphabet is strong, they manage their exposure cautiously.
“We think it’s vital for risk management to avoid letting the ownership ratio in the market rise significantly,” he stated. “Alphabet had about a 3% weight in our portfolio… If we did nothing, it might have increased to around 5%. So, we concentrate on our strengths.”
Nygren believes this method allows for better capital allocation and higher potential returns. “You could make a reasonable argument that the stock could possibly double in value in the next three years, but that’s tough to assert with Alphabet,” he noted, comparing it to other investments.
The basis for this potential doubling stems from a mix of stock buybacks and profits growth seen in companies with lower valuation multiples. He cited General Motors as an example: “They’ve repurchased a third of their stock in the last three years. If profits remain stable over the next three years and they acquire another 25% of their stock base to sell at nine times earnings, that would result in a doubling of the current value.”
Applying the same rationale to Delta Air Lines, he pointed out that it trades at approximately seven to eight times its earnings. He considers this multiple too low for a leading airline; if earnings rise and the multiple expands even slightly, “we could see a potential doubling. A 2x market doesn’t strike us as unrealistic.”
The discussion shifted to broader structural challenges. Nygren highlighted the S&P 500 as the first truly non-diversified index. He explained the regulatory implications, noting that for diversified mutual funds, “Once you have 25% of your portfolio in stocks exceeding 5%, you can’t increase your holdings any further. As a result, there’s no efficient way for an active manager to overweight these four stocks in the S&P 500.”
This scenario creates distinct challenges and necessitates a reevaluation of what benchmarks are appropriate for investors looking to build diversified portfolios in concentrated markets.
You can view the full interview here:
