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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