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.