The Oakmark mystique

Kiplinger's Personal Finance Magazine, August, 1998 by Robert Frick

On a Tuesday morning, the managers and analysts of Oakmark's six funds seem button-down and somber as they file into a spartan conference room for their weekly stock-selection meeting. Not so the rooster that guards the door to that room above Chicago's financial district. It's a big, incongruous bird, welded from chrome bumpers, that hums lightly when the El rumbles past.

The rooster, a symbol of frugality in Chinese culture, speaks volumes about Oakmark and its people, who dare to be different. You will not find here a fund in every flavor, unless your tastes run exclusively to undervalued stocks. Nor is Oakmark, currently a $12-billion fund company, hellbent on amassing assets and becoming the next T. Rowe Price or Vanguard. Its people reflect that same juxtaposition of the conservative and the quirky, the relaxed and the resolute.

The Oakmark brand is a creature of the '90s and has become a phenom, rolling out a modest number of high-octane, low-volatility funds. This year, however, there's a disquieting contrast between performance past (stellar) and performance present (sluggish). For example, the flagship fund, Oakmark, returned 16.9% in 1998 to June 15, trailing most growth funds, though its five-year record is pristine. For the year to date, the best any of the funds has done is middle-of-the-pack, and for the past 12 months, only a couple of the company's funds are standouts.

That bothers Robert Levy, chief executive of Harris Associates, the company that runs the Oakmark funds. "I really like to win every day," says Levy, with a hard edge to his Georgia drawl. But big changes in the game plan at this point would be as likely as moving a 100-foot oak tree in your front yard a bit to the left. Levy chalks up recent results to "crazy valuations" in sectors the company avoids, and underscores his faith in its investment approach. "We are very strong-willed. But I think it's something people can come to respect and like."

If anything, Oakmark's managers seem embarrassed by their gangbuster performance in past years. William Nygren, whose Oakmark Select fund returned 55% last year, says investors who expect continuously great results "don't have reasonable expectations." Adds Steven Reid, manager of Oakmark Small Cap fund: "We embrace an investment philosophy that is very consistent and disciplined. My job, basically, is to be consistent."

To appreciate Oakmark's independent streak, travel back to Chicago circa the late 1950s, when Irving Harris amassed a fortune by selling his Toni Home Permanent business to Gillette. Rankled at having to pay for advice--and at high brokerage commissions--on investments he was managing for himself and wealthy friends and relatives, Harris started his own investment firm.

A premium was put on safety. Victor Morgenstern, now chairman of Harris Associates, puts it this way: "They made this money once, they don't want to have to make it again." Morgenstern vividly remembers the test Harris applied then: "Am I willing to own the whole business at this price?" he'd say. "If so, then it is a stock we want to take a look at." That idea of buying stock in a business at a discount to what a "rational businessperson" would pay to own it all remains the core philosophy at Harris Associates, and the reason the volatility of Oakmark funds tends to be much lower than their category averages.

Starting in 1970, and for the next 20 years, the public face of the investment group Harris founded was Acorn fund. The approach of legendary manager Ralph Wanger--buying small, fast-growing companies--was markedly different from the unadulterated value philosophy used to manage the group's private accounts.

In the 1980s, as Acorn's cachet grew, Harris Associates expanded its private money-management business to include institutional accounts such as pension and profit-sharing plans. The next logical step was another mutual fund, although this time the firm wanted one that followed its core value philosophy, Wanger's Acorn fund already had its own team of analysts, its own board of directors and a considerable reputation. So, Morgenstern says, the decision was made to start a new family of funds, independent of Acorn.

In August 1991 Oakmark fund was born, and in January 1992 Wanger moved to separate Acorn fund from Harris Associates. The atmosphere at the time of the divorce, Morgenstern says, was "very unpleasant." Wanger downplays it by saying that "his team" was not happy at Harris because of the company's management style and its method of compensation. "I didn't think it was a very newsworthy event," he says.

Morgenstern remembers it differently. He says Wanger didn't consult with his partners--he simply went to the Acorn board and told them he wanted out because of "all these bad things going on at Harris Associates." And, in fact, the private money Harris managed wasn't performing well. Acorn had about a third of all the assets under management at Harris, and Wanger's sharp remarks in the press about Harris shook confidence in the firm.