MEDLEY & COMPANY
An Investment Advisory Firm
September 1999 Investment News
We have written before about the personal visits that we make to mutual fund management companies, whether they are in Chicago, New York, Washington or California. These visits are invaluable, but they are only a part of the ongoing process.
We also frequently talk with portfolio managers by phone. A call we recently made is a good example. A fund we like, Vontobel U.S. Value, is having an off yeardown 5%and we felt it necessary to understand why. We called Ed Walczak, the lead manager, and talked for thirty minutes about his decision to forego today's highest priced stocks (the large global companies, the internet companies) and to own a large number of financial companies (insurance companies, banks) which appear inexpensive on a historical basis. Later, we spoke with Ed's associate, Mark Robertson, who updated us on his thoughts regarding Berkshire Hathaway, the large holding company managed by Warren Buffett, and a sometimes holding of their fund. Ed was very optimistic about Berkshire's future returns.
Just as valuable as those personal calls, however, are the periodic conference calls initiated by the managers themselves. These calls are held every several months for a select group of investment advisors. Typically the manager begins with remarks about the fund or funds that he or she manages and comments briefly on stocks the funds have recently bought or sold. These comments are followed by questions from the investment advisor participants.
Some excerpts from recent conference calls should help illustrate their value. While the subject matter is always a bit technical, it is the kind of information that we, as advisors, need in order to make informed decisions about the fund.
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Bill Nygren, the manager of Oakmark Select, talked with advisors about his fund and some of its recent activities. A portion of that conversation follows:
Nygren: In the last quarter, there was quite a bit of change [in the portfolio]. Several of our long-term holdings achieved price objectives and were sold. That list would include Cablevision...one of the first names that was purchased in the Select Fund in November of 1996. Over the last two and a half years, a lot has changed. Cablevision achieved and surpassed our estimates for cash flow growth.... The private market...dramatically [increased] the valuation of public cable companies. And perhaps most important, the [cable] stocks became very much Wall Street favorites.... And much like what frequently happens to us, Cablevision stock has continued to rise after our sale. That's somewhat typical of our style. We are early sellers, and we want to be recycling into the names that we feel are more attractively priced and have more upside potential.
Could you talk a little about Partner Re [a reinsurance company in which the fund has a substantial position]?
Nygren: One of the reasons that I very much like our Partner Re holding, as opposed to some of the other re-insurers, is management's attitude on capital allocation. They're one of the few industry managements that I have seen that has explicitly said that they evaluate share repurchase [of their own stock] side by side with writing new insurance when it comes to allocating their capital.
When do you think you would consider closing the fund?
Nygren: If you look at a fund like Longleaf Partners that just announced they're re-closing, I believe their
asset size was about $5 billion. Their style is quite similar to ours. I think that's appropriate rather than leaving the
fund open.
"We buy and we patiently wait for the market to recognize value...."
Bill Nygren, Manager,
The Oakmark Select Fund
