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JAMES BENSON - HARRIS ASSOCIATES LP
Money Manager Interview - published 04/10/2000
DOCUMENT # JAT504
JAMES P. BENSON is a Portfolio Manager and Analyst with Harris
Associates LP, where he co-manages The Oakmark Small Cap Fund.
Previously, he was an Executive Vice President and Director of Equity
Research for Ryan Beck & Co., Vice President and Special Assistant to
the Chairman of The Dime Savings Bank of New York, and Vice President
and Senior Equity Analyst for Drexel Burnham Lambert. A Chartered
Financial Analyst, Mr. Benson has 18 years of investment experience. He
holds a Bachelor's degree from Westminster College and an MM from
Northwestern University.
Sector: General investing
TWST: What is the philosophy behind The Oakmark Small Cap Fund?
Mr. Benson: What we try to do is find companies, irrespective of
industry, that are trading at a significant discount to their private
market value. We typically define that as 60% or less of their estimated
private market value. We arrive at the private market value usually
based on a discounted cash flow methodology.
TWST: Have you made any changes since you began managing the Fund?
Mr. Benson: We make small changes almost every day based on flows in and
out of the Fund as well as changes in share prices. The overall value
philosophy has not changed. A few companies come and go as prices
change.
TWST: What about capitalization? What are your limits on the upper and
lower ranges of a small cap stock?
Mr. Benson: Typically for the Fund, the low side is around $100 million
in market cap. The upper end of the band is in the $1.5 billion range,
with the typical stock falling in the $250-750 million market cap range.
TWST: How has it been for you as the Fund Manager during the last couple
of years in what has been a very difficult, volatile environment,
especially for value stocks?
Mr. Benson: The last two years or so have been challenging relative to
the technology and telecommunication stocks. What we find encouraging is
the fact that the companies underlying our stocks seem to be doing as
well or better than we hoped they would. It is just their stocks have
not reflected their improving fundamentals. The discount that we see in
the portfolio relative to what we think their ultimate value is, is
significantly larger than it was a few years ago. If you think of
yourself as an owner of these businesses, you are pretty excited about
what is going on. However, the most recent year or so in terms of stock
price performance has been a little depressing.
TWST: Can we talk about stocks that you have selected for your portfolio
now and identify what you think might be the driver that would move the
company and its stock to higher levels?
TWST: How about some others?
Mr. Benson: Another stock we like a lot is a smaller company called Ugly
Duckling Corporation (UGLY). The Duck is its nickname. It is the largest
buy-here, pay-here used car dealership chain in the country. They have
about 75 dealerships. Given what has happened in the last few years to
companies like Mercury Finance and others, it has become a discredited
area in the eyes of most investors. But, what intrigues us is that The
Duck does not have much in the way of large scale competition. Here, you
have a company that is growing revenues in the 30% per year range. The
stock trades at about two-thirds of book value and about 6 times
expected earnings. With that kind of growth and a lack of competition,
it just opens up the playing field for the foreseeable future, and we
think that the stock has the ability to move a lot higher.
TWST: Is Ugly Duckling a click-and-brick company does it have an online
presence?
Mr. Benson: Actually, they have a very good Web site. Customers can go
to their Web site to find their locations as well as submit credit
applications. One of the key things The Duck has found there is they are
now getting, I believe, 4-5% of all credit applications through the Web
site and those applications have turned out to be of higher quality than
the people who walk-in. It is not largely an e-commerce business, but
they have a very rapidly expanding e-commerce presence. It is helping to
drive sales at the physical sites.
TWST: Does an economic outlook influence your portfolios and your
investment decision process?
Mr. Benson: Generally, not a lot because we are a bottom-up stockpicking
firm. What we try to do is just isolate, in the case of a small cap
portfolio, approximately 40 companies that we like. If we buy the right
companies that are well-managed, we would not expect to see their
ultimate private market value change appreciably based on economic
conditions. Now, that does not mean we ignore economics entirely. If
there is a major macro shift underway, we will try to get out of the way
(if it is a negative development) or we will attempt to buy stocks in
industries that might benefit from a positive trend.
TWST: What guides your technology sector investment approach as a value
player?
Mr. Benson: It actually does not change. The way we value companies is
that we are agnostic with respect to what industry they are in. We look
at technology companies, banks, utilities, industrial companies. It
really does not matter. Right now, it is a little tougher to find
technology names that fit this criteria because many of them seem to be
at prices above their long-term economic value. But that does not mean
we cannot occasionally find a company that fits the right parameters. I
have a degree in computer science among other things, so I understand
technology well. It is just the valuation that concerns me with most of
them. When we find one, we gladly add it to the portfolio, but the
pickings are slim at the moment.
TWST: Have you found any new values in the banking sector, which has
certainly been hard hit?
Mr. Benson: We have maintained a strong position among bank and thrift
stocks. We certainly think we are close to the bottom in these stocks.
Maybe we passed the bottom in some of them. But, we have continued to
look for new financial names. When I compare new financial stock ideas
to the financial names we already own, I have not found a lot of
compelling swaps. I like what we own. There are certainly some other
very cheap ones out there, but in comparison to what we own, not cheap
enough to take into account the transaction costs that we would incur if
we were to make a switch.
TWST: What do you own?
Mr. Benson: On the financial side we own Golden State Bancorp (GSB) out
of California. We own People's Bank (PBCT) which is based in
Connecticut. We own MONY Group (MNY) among the insurance stocks.
Mr. Benson: A couple of things. First of all, in terms of investor
interest, it has picked up over the last two months or so. As a matter
of fact, we're starting to get much more interest on the institutional
side as investors rebalance portfolios because, of course, their growth
portfolios have done extremely well, and I think people want to, at
least cautiously, up their exposure to the value side so they're not
terribly overweighted on the growth side in case something happens with
that sector of the market. I'd say our strength is that we're one of the
few mutual fund groups left that is still truly using a value-based
approach. We haven't gone to closet indexing or become a growth investor
like some that have bought Amazon.com or something that doesn't fit the
criteria of a value investor. I would think one of our biggest strengths
is that Harris Associates, the investment advisor for the Oakmark Funds,
has been around for about 25 years. The first 23 of those were generally
very successful. The last year or two have been difficult, but we're not
going to change our stripes because we think investing is a long-term
pursuit, not a 20-minute or 30-minute adventure, and we continue to buy
what we think are companies that are trading at a significant discount
to their value. And over time, we remain firm in our belief that that
will accrue to the benefit of our shareholders.
TWST: What kind of mind-set would you hope a shareholder would bring?
Mr. Benson: Well, we would hope that people realize that in our
portfolio right now we have companies that are trading on average about
10 1/2 times earnings, not 400 times sales like some growth stocks.
Also, we don't have to give up a lot of growth because growth is a
component of value. Everything else being equal in the market, you would
like a faster-growing company at the same price as a slower-growing
company, and we expect on a weighted-average basis to have earnings
growth in our portfolio of just over 20% this year. So any time you can
buy a company at about half their growth rate in this case, a p/e of
around 10 and a growth rate of around 20 that has normally been a very
good time to enter the market. It's just been hard to prove it over the
last couple of quarters.
TWST: Is there anything else that you would add that would give a better
picture of your work or your thinking?
Mr. Benson: Well, again, what we tend to do and what I think has been
lost, especially on some newer investors, is that we focus on buying a
percentage interest in good companies. A lot of investors these days
seem to just be trading shares of stock, and that's a different mind-
set. What we want to do is get involved with companies that have strong
management, attractive products, good market positions, good balance
sheets that can grow and prosper over a period of time, the kind of
company that, if I could buy 100% of it personally, I would gladly pay
that price. As an individual investor, if you can't make that statement
about some of the Internet companies that are being bought at very rich
multiples of sales with negative cash flows, then why are you buying the
stock, because all that stock is a percentage of ownership in a company.
That seems to be lost on people at the moment. But it's amazing how that
concept comes back home to roost over time.
TWST: Thank you.
JAMES P. BENSON
Harris Associates LP
Two North LaSalle Street
Suite 500
Chicago, IL 60602-3790
(312) 621-0560
The Portfolio Manager's discussion of investments and investment
strategy represent the holdings of the Fund and views of the Portfolio
Manager and Harris Associates LP, the Fund's investment adviser, as of
3/28/00, and are subject to change without notice. |
