Saturday, December 8, 2007

Nygren is out ...

Late last month, I finally sold Bill Nygren's Oakmark Select Fund (OAKLX). The most important reasons for doing so are:
(a) I was running a loss on the fund and did not see any point in not realizing that loss at the end of the year. After all, I needed something to offset capital gains from other transactions.
(b) The fund was due to make distributions - and this was almost 10% per share. No point in paying capital gains on a fund where I was running a loss.

So I sold the fund and will consider buying it again next year. Morningstar continues to pump up OAKLX, and its performance over the last 10 years is nearly twice as good as the S&P 500. So why the "maybe" - here are the main reservations against buying OAKLX:

(a) It has a concentrated portfolio of 25 or so stocks - that is fine, but its very skewed in its weighting. The biggest holding, Washington Mutual, is more than 13% of the portfolio and has been absolutely crushed this year's subprime debacle. Even as I type this, it is down about 8% after announcing severe dividend and job cuts. WaMu has been the single biggest reason that OAKLX is under performing the S&P 500 by almost 15 percentage points! Some say the bottom has been reached for the financial stocks - who can tell? Value pick or value trap? In addition to WaMu's situation, it would be good if Nygren didn't overload so much on a single stock.

(b) Absolutely no energy exposure - this is fine, since I have a pretty large exposure to the energy sector through other funds. But the fact that Nygren didn't see any "value" plays there seems strange.

Here are a few snippets about Nygren/WaMu/OAKLX from old-timers on the Morningstar forums
I don't think Nygren can unwind his OAKLX position without inevitable carnage in the stock, WAMU's intrinsic woes not withstanding. Even if WAMU was going up and Nygren started selling, people will notice and follow him out the door putting downward pressure on the stock.
Admittedly Nygren is in a tough spot. Regardless of how revered a manager is, excuses made normally circle around, "held on to housing stocks too long" (Muhlenkamp), or "did not invest in energy stocks" (Miller? and perhaps Nygren as well?). But with Nygren, he is insisting that WAMU is excellent value. Dunno what Nygren's average cost is for WAMU in OAKLX. But I have to believe he has been buying it for some time and his value must be lower than his cost. Wonder how he keeps shareholders from exiting his fund. [note - Ron Muhlenkamp of MUHLX and Bill Miller of LMVTX]
Here is one more:

Concentrated funds is a problem for a jackass manager simply investing in the top 20 stocks at any given point of time. Now if you give the same manager the mandate to invest in 50 stocks, he'll still do bad, because he is not really doing money managing. Managers like these are the usual suspects, Robert Loest, Kevin Landis, Van Wagoner, etc. These managers suck without necessarily having concentrated folios. I don't think I will say that about Bill Nygren and Muhlenkamp belong to the above category. I mean I can have 5% of portfolio in each stock and that gives me 20 stocks. Those who invest in stocks themselves instead of funds - how many stocks do you think they own?
The problem is with implementation. Clearly there is something to be said about having conviction in your ideas. So I presume maybe Nygren started with a 5% position for WAMU in OAKLX and he let his winner run eventually hitting 15%. The point is, when you stop and say enough is enough. The problem with this implementation is less with Nygren holding 15%. I mean if WAMU was 50% YTD, we would all be fawning over Nygren. The problem then IMO is that you cannot run a concentrated fund AND have too many assets. Because then, the games up. You cannot compensate when the market moves against you. (Therefore my move from OAKLX to OAKWX, not that it necessarily helps too much even though WAMU is 5% of assets here instead of 15%)
Let's look at CGMFX portfolio. I see 22 stocks with top holding of 7%. A tad high perhaps. Regardless, the difference is that Heebner is allowed to hedge his fund. Nygren doesn't - not that he wants too. Concentrated + Large Assets + No Hedging = Increased Market AND Individual Stock Risk. LMVTX could suffer from similar problem. Its top holding is also 7%. It happens to be Amazon which has done well. It might has well could have done badly. I dunno if LMVTX can protect itself by hedging.
And the final nail in the coffin - the mandate to be fully invested. You have a concentrated fund, unmanageably assets, unwillingness to hedge AND want to stay fully invested. Big Problem. I have mentioned on the boards in the past that I thought Turner Investment Partners were IMO the best growth managers in the business. Problem - they are always 100% invested and don't hedge. I wil just not invest in a fund like that. In retrospect, perhaps OAKLX was a mistake. Maybe OAKWX is too. I sold my THPGX at one point because inspite of having the flexibility the manager stayed fully invested - no can do.
So maybe, just maybe the way to buy a concentrated fund is to look at flexibility - either to go cash, or to hedge. Lower asset base can only help. So look at FAIRX, JORDX, CGMFX, WGRNX (though it has 50 stocks now), FMIRX, PVFIX, etc.
In summary, concentrated funds IMO is not by itself the problem. OAKLX has paid of handsomely for shareholders by being fully invested in few stocks. So has CGMFX. The difference I think is that CGMFX moves on when the market proves it wrong. And doesn't pay itself on the back too much the market proves it right. OAKLX on the other hand does the reverse on both ends. Kind of like M* who refuses to change their opinion on a fund for the most part. Give me concentration rather than over-diversification (translation : I dunno WTF I'm doing, but just maybe I'll beat the index) any day. But give me flexiblity. That is KEY.

Friday, June 1, 2007

Thoughts from a Fund Manager

Bill Nygren manages the Oakmark Select Fund (OAKLX) portfolio, and has been doing so since the fund was started more than 10 years ago. His fund has significantly outperformed the S&P 500 over this period (more than twice the index performance!). I was reading through the fund manager's quarterly commentary on fund performance - Nygren makes several important points about his (and the fund's) investing philosophy, and tries to explain his style to the investors. An important exercise, it allows the investor to understand how his money is being put to use. According to Nygren,
At Oakmark, we are long-term investors. We attempt to identify growing businesses that are managed to benefit their shareholders. We will purchase stock in those businesses only when priced substantially below our estimate of intrinsic value. After purchase, we patiently wait for the gap between stock price and intrinsic value to close.
Of course, one might argue that this is nothing but the classic definition of a value investor. So if Nygren is running a value fund, then what's so special if he is sticking to what he said would do. But then that's precisely what is important for me - to find out how closely is he following the fund's proposed plan. The sheer 'boring' nature of value investing can be excellently summed up as:
... successful long-term investing is much closer to "three yards and a cloud of dust" than it is to the West Coast offense!
In response to the stock market plunge of February 27 (when the stock market fell by 4%), Nygren clearly emphasizes his flair for value investing, sticking with basics in the face of panic:
Following that drop, I had several calls from reporters, all asking the same question: "The market is down 5%, what does that mean?" My answer, which not surprisingly wasn't used by any of them, was that five-year compound annual returns were now going to be 1% higher than they were before the market fell. That answer didn't convey quite the level of fear they wanted.
Nygren's commentary is a delightful read - as long as I believe that he can pick undervalued stocks correctly, I will hold the fund. I don't have to worry about his adherence to the value investing philosophy.

Thursday, May 24, 2007

YTD

just checked ... the YTD performance of my MFs is as follows, ofcourse the numbers have no meaning in isolation - the context is set by the benchmark. for comparison, overall benchmark - S&P500 index is up 8.07% YTD

a very good year so far, but everyone is predicting a correction coming up this summer (it hasn't materialized yet, but its 'sell in May and go away' time!!). This is what Chuck Royce said in the Spring report from Royce Funds,
I’m more than pleasantly surprised by small-cap’s strong returns, especially since the Russell 2000’s low in October 2002. I am also very concerned because market cycles normally don’t run this smoothly. A look back at the current cycle shows two corrections that fell in the 10%-14% range—one in 2004-5 and another in 2006. These have been the most significant small-cap corrections during the past five years, with other downdrafts in the 7%-9% range. However, at the end of the day stocks can only elude history for so long. Although the market has seen fit to prove me wrong over the last few years, I remain convinced that a more historically typical correction of 15% or better is in the near future.

[all numbers as of 05/23/07]
FBALX - 8.82% - Fidelity Balanced
FCNTX - 8.14% - Fidelity Contrafund
FSENX - 21.3% Fidelity Select Energy
JETAX - 10.9% - Julius Baer International
MINDX - 14.8% - Mathews India
OAKLX - 7.05% - Oakmark Select (Large cap value)
RYVPX - 12.85% - Royce Value Plus (Small cap growth)
SSEMX - 13.3% - SSGA Emerging markets

-------
following funds in retirement accounts
FPURX - 6.7% - Fidelity puritan (balanced)
FFNOX - 7.7% Fidelity 4in1 index
HLEMX - 9.7% - Emerging markets
UMESX -21.1% - Energy
UMBWX - 10.6% - International

p.s. It was too good obviously - as soon as I wrote this, the market crashed :)

Friday, May 11, 2007

What makes Buffet tick?

At the recent Wesco Financial Corporation meeting, Chairman Charlie Munger talked about key aspects of Warren Buffet (and hence Berkshire Hathaway) that have made him so successful over the years. Munger is also Vice-Chairman of Berkshire Hathaway, which owns more than 80% of Wesco. Very simple and basic points -
  • Mental Aptitude - no substitute for smarts, but of course smarts aren't enough.
  • Intense Interest - a strong interest and a passion for investing is necessary - but isn't that true about being successful anywhere!
  • Early Start - the power of compounding ....
  • Constant Learning - the ability to learn continuously, reinvent, and change with the times.
  • Concentration - I am not sure what Munger was trying to say here - but from what I understand, he means to say that concentrating Berkshire's strategy in the hands of someone as astute as Buffet as paid off handsomely.
Again - simple concepts - hard to follow, and easier said than done.

Munger also doled out advice for 'living a well-examined life':
  • Many smart people handicapped themselves with "nuttiness." One example is being an "extreme ideologue," which is the equivalent of "having taken your brain and started pounding it with a hammer."
  • Your life must focus on the "maximization of objectivity."
  • "You must learn the method of learning."
  • "It is totally unproductive to think the world has been unfair to you. Every tough stretch is an opportunity."
  • "You can get away with more than you deserve in life by being slightly more rational."
  • "I'm not going to complain about my age because without it, I'd be dead."
Certainly plenty of food for thought right there ...

Investment mistakes

A very nice article from Morningstar.comabout common investment mistakes - however straightforward these rules seem to be, its just easier said than done:
  • Don't rely on the past too much - as every mutual fund prospectus will tell you, past performance is no guarantee of future returns, don't extrapolate too much ....
  • Overestimating yourself - Everyone likes to think of themselves as being above average - that's statistically impossible, but being average is good in investing! Don't trade too much - you might be better of buying and holding, and just matching benchmarks.
  • Discipline - be systematic, be regular, be disciplined.
He closes out with a quote from Warren Buffet
Success in investing doesn't correlate with IQ once you're above the level of 25. Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing.
A humbling one indeed ...

Wednesday, March 14, 2007

The trouble with India is ...

India is front and center stage these days - the world is keeping a close eye on developments in India, on the economic front and also on the political front (as it relates to the economy). Last month, The Economist had a cover story feature about India's overheating economy, and now Businessweek is following that up with its own cover feature on India titled The Trouble with India. The article calls attention to one major drawback - inadequate infrastructure, including crumbling roads, jammed airports, and power blackouts. There is of course plenty of bureaucracy and red tape - getting things done is not easy. It cites examples of investments lost to China, Vietnam and other emerging countries. And add to all of that - corruption siphoning away large chunks of government budgetary allocations before they reach their intended goals.

A cover story like that is certainly unwanted publicity for the Indian economy .... but a reality check against the sugar coated stories of India Shining. The fact however remains that the Indian economy continues its march - the Indian Economy Blog has an excellent summary on whether the economy is sizzling or just right ...

Tuesday, March 13, 2007

The power of expat money

India received $23.4B (yes billion!!) in remittances last year, the single largest player now - and the amount has more than doubled in the last five years.

Some staggering statistics:
  • Remittances account for 3% of India's GDP
  • Remittances are more than both FDI ($4.7B in 2005-06) and FII ($12.5B in 2005-06) combined!!
  • Source of all this money - about 111million migrants from India worldwide! (and to think that we still have more than 1 billion people still left over in India ...)
  • Fate of these dollars: about 54% spent on family, 20% in bank accounts and about 13% invested in land and property
To put that in perspective - thats about $2.5B invested in real estate - no wonder that property prices are just not coming under control. The endless supply of liquidity into the system is pushing up prices to no end ... and about $5B in bank accounts - no wonder everyone's screaming inflation inflation ... and all this without even considering the increase in the purchasing power of the people as a result of local economic growth!!

No wonder the RBI is having fits trying to curb inflation ...