Sanborn Out at Oakmark -- a Reflection of Value Investing Under Siege

Robert Sanborn, one of the most high-profile practitioners of value investing, is stepping down from the $2.7 billion (OAKMX Quote)Oakmark fund, which he's managed since its 1991 inception.

He was replaced Tuesday by Bill Nygren, manager of the $1.6 billion (OAKLX Quote)Oakmark Select fund, and Kevin Grant, a senior analyst who's worked with Sanborn.

Oakmark also named senior analyst Henry Berghoef co-manager of Oakmark Select and said Edward Studzinski will join Clyde McGregor as co-manager of (OAKBX Quote)Oakmark Equity Income.

Sanborn will remain with Harris Associates, the Oakmark Funds adviser, where he'll manage private accounts. All Oakmark managers work from the same "approved" list of 80 to 120 stocks set by the firm's investment staff. Nygren has outperformed Sanborn over the past few years.

A deep value investor, Sanborn has adhered strictly to a style that has lagged the market for several years. Value funds tend to focus on stocks that are cheaper in comparison either to their peers or to valuation measures such as price-to-earnings ratios. Deep value managers are more extreme, typically buying shares of what they think are profoundly underappreciated companies at cheap prices, on the assumption the market eventually will recognize their value.

In years that were kinder to value investing, Sanborn routinely beat the S&P 500 and his peers. For example, in 1993, Sanborn posted a 30.5% gain, beating the S&P 500 by more than 20 percentage points and 98% of his peers, according to Morningstar. As recently as 1997, he earned a 32.6% return, barely trailing the S&P 500 and beating 88% of his peers.

But the past few years have heavily favored growth stocks. Large-cap growth funds have posted a 30% average annual return over the past five years, compared with just more than 19% annually for their value peers, according to Lipper. Over the past year, growth is outperforming value 37% to 0.5%.

Sanborn's strict approach has put him at the bottom of the value category's scrap heap. Despite tech stocks' sharp run-up, he stuck to his guns and avoided them and other pricey sectors. Instead he focused even more heavily on cheaper Old Economy stocks, such as Philip Morris (MO Quote) and top holding Brunswick (BC Quote), down 27.6% and 11.3%, respectively, so far this year.

On Feb. 29, the fund's average price-to-earnings ratio was 14.7, less than half the S&P 500's.

The fund's commitment to deep value in a growth market shows in its returns. Sanborn trails 99% or 100% of his peers over the past one-, three-, five- and 10-year periods, according to Morningstar. Since Jan. 1, the fund is down more than 15%, trailing nearly all of its peers and the S&P 500 by more than 14 percentage points.

Oakmark shareholders probably will cheer the move, although many already have given up on the fund. Redemptions and losses have cut its assets in half over the past two years. At Select, a more concentrated value fund, Nygren has managed to stay ahead of his peers. In fact, the fund's 24.2% annualized return over the past three years beats 98% of its peers. He's run the fund since its 1996 inception.

A company spokeswoman says the move wasn't driven by the Oakmark's sagging performance, but that Sanborn had tired of the "spotlight." That spotlight had probably grown quite hot as the fund continued to sag.