Morningstar Advisor - February/March 2013 - (Page 51)

Zimmerman: Over what period of time? Zimmerman: How do you have confidence Because if the core business isn’t expanding, in the value of a bank’s book? What is the Oakmark OAKMX isn’t that problematic over the long term? 15000 work that the team at Oakmark does to really $15K scrub a bank’s financials, which probably are Nygren: If the core business never expands and 40 the least transparent of all of the industries? they take out 10% of their shares every year, which is the path that this management team is on, that never becomes a problem. Nygren: I’m not sure it’s much less transparent Zimmerman: How did you get comfortable with the current management team and their ability to allocate capital in ways that you would clearly find to be shareholder-friendly? Nygren: The easiest way is they went through a period where they were constrained by capital, and there wasn’t much that they could do with that. So, you know that when they are capital constrained they can’t go out and make larger acquisitions. As they are exiting that period, it’s seeing the stock ownership that they have, the incentives that are in place for them where they make more money if the stock price goes higher, and it’s hearing them talk about how they think about capital allocation. We have met with Brian Moynihan numerous times. He consistently talks about using share repurchase as a hurdle and how almost no acquisitions can be as value-additive as buying back Bank of America stock at less than two thirds of book value. You can’t go out and buy a healthy bank in an acquisition at two thirds of book value. Zimmerman: Do you think that as Countrywide recedes in the rearview mirror that attitude might change over time? Nygren: Maybe the fear of making a bad acquisition might diminish. But the discipline of saying, “We can buy our own stock at two thirds of book value versus however much we’d have to pay for an acquisition,” that discipline will remain and will guide the firm toward maximizing the value that it can add through its capital allocation. 10000 20 than other sectors. Sometimes other sectors 5000 are just as hard to peel away the onion and figure out what’s really in there as the banking industry is. Investors’ concern about what’s on a bank’s balance sheet is probably at an all-time high. They got burned five years ago. Most of the assets on the banking industry’s balance sheet relate to home loans, and banks got sloppy with how they decided to lend money. There is no faster way for a bank to get in trouble than to lend money to people who won’t pay it back. That changed abruptly at the end of 2007. So now, we’re into five years of good old-fashioned bank-lending standards. Most anyone would say that loans that have been put on the books in the past five years are of substantially higher quality than what were put on the five years ahead of that and are probably at least dollar-good today. 10 S&P 500 TR (IA Extended) (Index) 01/ 08 01/ 09 01/ 10 Category 01/ 11 01/ 12 01/ 13 Expense Ratio (%) Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Feb-08 Aug-08 Feb-09 Aug-09 Feb-10 Aug-10 1.03 Jun-11 Dec-11 Jun-12 Dec-12 Mar-08 Sep-08Mar-09 Sep-09Mar-10Sep-10Mar-11 Sep-11Mar-12 Sep-12 Apr-08 Oct-08 May-09Nov-09May-10Nov-10May-11Nov-11May-12Nov-12 May-08Nov-08 Jun-09 Dec-09 Jun-10 Dec-10 Aug-11 Feb-12 Aug-12 Jun-08 Dec-08 Feb-11 Large Blend Apr-09 Oct-09 Apr-10 Oct-10 Apr-11 Oct-11 Apr-12 Oct-12 QQQQ Morningstar Rating 5-Yr Anl Total Rtn (%) 6.16 Minimum Investment $1,000 5-Yr Anl TR % Rank Cat 2 Morningstar Analyst Rating Morningstar Pillars Process TPositive Performance TPositive People TPositive Parent TPositive Price YNegative Data as of Dec. 31, 2012 were thinking about Disney during a period when theme-park attendance was on the Then, you look at the liabilities side of the balance sheet, and the banks are paying almost nothing for retail deposits. In today’s world, that advantage of cheap funding isn’t getting them an awful lot because you can’t earn that much by investing those funds. But we think as interest rates normalize and get back up to levels that have been more historically average—and that might be three, four, five years away—the liabilities side of the balance sheet will prove to be a good asset for the banks because savings deposits are on the books dollar-for-dollar, but they don’t have to pay as much on that as they would on a bond. decline. Talk a little bit about that, your area of focus, and what made you feel good about purchasing shares when the theme-park attendance wasn’t what Wall Street wanted it to be. Nygren: A situation we like is when we think investors are applying the 80/20 rule inaccurately; 80% of their attention is on 20% of the business value. That was a situation that we saw at Disney, where themepark attendance had been down a little bit and almost everything that was written about the company was about the outlook for theme parks and how that was likely to change over upcoming years. 80/20 Rule Zimmerman: The last time we spoke, we talked about Walt Disney Co. DIS, and you When we looked at business value, the cable networks that the company owned—ESPN and the Disney Channel, along with some other MorningstarAdvisor.com 51 http://www.MorningstarAdvisor.com

Table of Contents for the Digital Edition of Morningstar Advisor - February/March 2013

Morningstar Advisor - February/March 2013
Contents
Contributors
Letter From the Editor
Social Media, the Old- Fashioned Way
Do You Use Active Strategies?
Youth Appeal
How to Buy the Unloved 2013
Morningstar Managers of the Year
Investments á la Carte
Investment Briefs
Approaches to Absolute-Return Investing
In Agriculture, It’s Good to Be Strong
Yes, There Are Good Active Funds
The Decoupling
Where It Could Pay to Be Active
The Active Fund That Defies Obsolescence
The Epitome of an Active Manager
Lines of Communication
The Existence of Market Timing ‘Intelligence’
A Route to Commodities that Bypasses the Futures Market
Best Positioned for Health-Care Reform
Diversified Stock Funds That Earn Their Stars
Our Favorite Mutual Funds
50 Most-Popular Equity ETFs
Undervalued Stocks With Wide Moats
A Twisted Debate

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