Q&A with Bill Nygren 2006

Sub-advisor to the Masters’ Select Value Fund

The opinions and conclusions expressed herein are those of Litman/Gregory Fund Advisors, LLC and Bill Nygren at the time the material is written and may not be reflective of current conditions.

Bill Nygren is the portfolio manager for the portion of the Fund’s assets allocated to Harris Associates, L.P (“Harris Associates”). Nygren has been in the investment business since 1981 and is a partner and portfolio manager at Harris Associates. He joined Harris Associates as an analyst in 1983 and was Director of Research at the firm from 1990 through 1998. He has managed the Oakmark Select Fund since its inception in 1996, and became portfolio manager of the Oakmark Fund in March 2000.

What attracted you to the investment business?

I think it was an odd combination of my love of sports and my talents being more oriented to numbers than words. Since I was a kid, the pure competition in sports has fascinated me. The challenge of trying to outperform my peers in the stock market has that same attraction.

How did your investment philosophy develop?

I grew up in a middle-class Midwestern home. My parents taught me that by being a smart consumer I could buy more with my allowance. When I started reading about the stock market, the writings of Graham, Buffett and Templeton intuitively made sense to me. They approached the stock market in the same way that I had been taught to behave as a consumer — that is, when something is on sale, you should buy more of it.

Can you briefly discuss the key elements of your stock picking discipline?

We look for three things in any stock. First, a stock that is at a significant discount to our estimate of the price an acquirer would pay to buy the entire company (we generally sell when the price exceeds 90%). Second, we want a business where value grows as time passes. And third, it’s important for company managements to be on the same side of the table as outside shareholders. When those criteria are met, we are prepared to be patient, waiting for the market to reward this value. We would not buy a stock we were unwilling to hold for a three to five year time horizon.

What factors have been most important to your success?

One of the most important factors has definitely been our organization’s strict adherence to a well-developed value investment philosophy. A reason many investors fail is that they don’t truly have an investment philosophy. Then, they have no solid basis for deciding when to buy and sell stocks. Other important factors include a long-term investment horizon, our very strong research team, a comfort for making decisions that go against the crowd and a passion for winning.

How do you and your team work together and how do the research efforts of the team contribute to the portfolio you run for Masters’ Select?

I am supported by a great research team and I rely very heavily on them. I do some of my own research, but I’d estimate it’s 10% me, 90% the research team. They spend all their time looking for stocks that meet our value criteria and then honing their estimates of intrinsic value. Once they have developed conviction on a new stock, I’m a pretty easy sale!

As you and your team research companies, what are the most important sources of information?

We generally are attracted to a stock for one of two reasons: First, low price compared to a valuation metric such as earnings. Either a large price decline brings a company to our attention or the market hasn’t responded to improving fundamentals. Our second source would be industry contacts saying that certain customers or competitors are improving. Importantly, we rarely use Wall Street buy recommendations as a starting point for researching new ideas.

How does running a very concentrated portfolio that is part of a diversified fund differ from running a more broadly diversified portfolio? How do you choose the 8 to 15 stocks you hold for Masters’ Select from your more diversified portfolios?

Concentrated investing is consistent with how we manage money at Oakmark. The approach is basically the same with a more diversified portfolio; however, the more concentrated the portfolio the more I focus on the chance of being wrong, as opposed to simply maximizing expected returns. Effectively, I’m willing to sacrifice a little of the possible upside in exchange for more certainty that the upside outcome occurs.

Neither the information contained herein or the opinions expressed shall be construed as an offer to sell or a solicitation to buy any securities mentioned herein. Click here to view the most recent portfolio holdings of the fund.

The fund may invest in foreign securities, which exposes investors to economic, political and market risks and fluctuations in foreign currencies. The Fund is non-diversified, which means it concentrates more of its assets in fewer securities than a diversified fund.

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