Whitman, Nygren Take New Look at 'Value'

The stock-market crash has forced value-fund managers like Marty Whitman and Bill Nygren to tweak their strategies and, in some cases, redefine "value."

Whitman, founder and co-chief investment officer of Third Avenue Funds, is still troubled by the rush of redemptions his firm was forced to fill last fall, often selling at a loss to meet obligations. "I got so buffaloed by the market," he said at the Morningstar Investment Conference in Chicago last week. "It was so discouraging to be hammered day after day."

The sell-off had nothing to do with the underlying health of value stocks, he said. "Prices were driven by short sellers and day traders, market participants who focus on short-term earnings," Whitman said. "It's ludicrous to think those participants have any message for those who invest for value."

Now that the panic has mostly subsided and stocks have risen in the past three months, major value-fund managers are sticking to their proven strategy: starting with a company's fundamentals, rather than taking a top-down, macroeconomic approach based on larger market forces.

"We haven't altered our approach overall," said Meggan Walsh, senior portfolio manager at Invesco Aim. "We're bottoms-up fundamentalists."

As for the importance of overall market forecasting, she noted, "even the best economists on Wall Street are only right 50% of the time."

For Nygren, manager of the Oakmark Fund(OAKMX Quote) and the Oakmark Select Fund(OAKLX Quote) at Harris Associates, three conditions must be met for his funds to buy a common stock. First, the company must have very strong financials. Next, the stock must be available at an attractive price. Finally, a company must show it can increase its net asset value by double digits in the next five years. To meet that growth criteria, half the funds' equity holdings are with companies that have a large presence in China.