Redeeming Value? Sanborn's Former Fund Gets Belated Boost

You wouldn't blame Robert Sanborn if he chucked his Bloomberg terminal out his office window one of these days.

That's because it looks like the legendary value manager may have stepped down from his post as manager of the sputtering $2.2 billion (OAKMX)Oakmark fund just a few weeks before a long-overdue recovery. On March 21, Sanborn left the large-cap value fund he'd run since its 1991 inception for the more comfortable anonymity of managing private accounts at Chicago-based Harris Associates, adviser to Oakmark. In the five weeks since, his former fund is up 9.6%, rising from the cellar of Lipper's multicap value category to its penthouse -- a No. 1 ranking -- on the strength of many of his stubbornly held picks.

Is this vindication at last for a deep-value guru that stuck to his guns? Not really, say some market watchers.

"The fund is still in the bottom 1% of value funds over the past three and five years. This pop doesn't really make up for the fund's poor performance or vindicate Sanborn. It also doesn't mean value is necessarily in for good times," said Morningstar's Russ Kinnel, who thinks the fund will perform better with new manager Bill Nygren.

Indeed, the momentum investing frenzy has resulted in many casualties among the esteemed value-picking ranks -- Sanborn and hedge-fund manager Julian Robertson among them -- just before a recent spurt in value stocks' prices. But fund managers face job qualifications akin to pro sports coaches and movie studio executives -- namely, what have you done for me lately? While some fund managers may cherish the virtues of value, they are finding that few shareholders can afford to support them for the long haul in this market.

Sanborn didn't return a call for comment, but one wonders if he appreciates the irony of his belated reversal of fortune.

"It's ironic that the timing was similar to the management change. There's not much room for comment," says Kelly Arnold, a fund marketer at Harris Associates.

Missing the Boat Robert Sanborn's picks didn't pay off until he dropped the reins on March 21.
	Since March 21	Rank	1-Year Return	Rank	3-Year Annualized Return	Rank
(OAKMX)Oakmark	9.6%	1/469	-21.8%	440/445	1.8%	288/294
Source: Lipper. Data through March 2. Rankings are within Lipper's Multi-Cap Value category.

As a deep-value investor, Sanborn stuck with a strategy that had been out of favor for several years. Deep-value investors typically buy shares of a company only when they think it is profoundly underappreciated, selling for much less than they think it's worth. The strategy has produced solid returns in the past, but more recently, investors' obsession with high-priced, high-growth stocks caused Sanborn's modestly growing favorites to sag.

The past few years have been brutal on Sanborn's fund. He has seen it plummet to the bottom of its already downtrodden peer group. Investor redemptions have cut the fund's assets in half.

Oakmark lagged behind the S&P 500 by 9 and 17 percentage points in 1998 and 1999, respectively, ranking near the bottom of the value-fund category, according to Morningstar. Sanborn, who had beaten his average peer four out of five years from 1993 to 1997, suddenly found his skills in question.

"It weighs on you when the stocks you think are overvalued go on to be the best performers," says Nygren, Sanborn's replacement. "All of us value managers were in the same boat. We faced redemptions and had to sell stocks we thought were undervalued, putting more pressure on our own stocks."

Although Oakmark managers pick from the same list of stocks, Nygren had considerably more success with (OAKLX)Oakmark Select, a more concentrated value fund that he still manages. Since the management change, Oakmark has outperformed Select, but Select is still leading in every other time period.

Oakmark, designed to hold 40 to 50 stocks, had become concentrated, too. To meet redemptions, Sanborn had whittled his portfolio down to 23 stocks, Nygren says. Instead of dumping Sanborn's stocks when he took over, Nygren trimmed positions and added some 20 new picks to diversify the fund and reduce risk.

Then something strange happened: Techs tanked and Sanborn's picks started to take off. Lockheed Martin(LMT), Philip Morris (MO)and Brunswick(BC) have shot up 51%, 17%, and 16%, respectively, since Sanborn left the fund.

Stocks that Nygren added went up, too. Picks like First Data(FDC), Toys R Us(TOY), and BF Goodrich (GR) are up 12%, 18% and 16%, respectively, since Nygren took over.

"We've done OK," says the affable and understated Nygren, who manages the fund with Sanborn's former assistant Kevin Grant. He says Sanborn still exchanges ideas with other managers, but he is no longer officially part of the fund's management team. He adds that redemptions have slowed, buoying the fund's holdings simply by slowing the fund's need to raise cash by selling stocks.

The fund is still down 21.8% over the past year, but its recent bounce shows that it's well positioned to benefit if value investing storms back into vogue. In an odd twist, the recent resignations of value managers like Sanborn and Robertson combined with the white-hot demand for tech-fund managers might signal a sustained value comeback.

"If you tracked a database of manager firings and signings for big increases, it would probably be a great contrarian indicator," says Morningstar's Kinnel.

Of course, that's probably little consolation to Sanborn, his former shareholders, or his Bloomberg terminal.

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