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Oakmark Equity & Income

Balanced funds provide a little bit of both stocks and bonds

Anyone who has ever ridden a bicycle knows how important balance is. And to some investors, balanced funds are the only way to go.

If you're in the market for a balanced fund, which invests into both stocks and bonds, one name that pops up as a top performer over the past three years is the value managed Oakmark Equity and Income fund, (1-800-625-6275).

Clyde McGregor has been that fund's portfolio manager since its inception in 1995. Throughout his tenure, as the size of the fund has grown so have the number of holdings. In 1995, for instance, there were around 23 stocks in the fund; today there are about 46. That's in line with the fund's parameters of keeping between 50-65 percent invested in stocks at any one time.As for bonds, it's his practice to keep at least 25 percent invested in Treasuries.

"This is a fund that will look at anything on the stock side from the occasional micro-cap to the very large-cap, " explains McGregor. "And on the bond side will own everything from Treasuries to unrated issues."

Here's more about the Oakmark Equity and Income Fund (OAKBX) from McGregor:

Q: Where do you stock picking strengths lie?

McGregor: More in the mid-cap area than the large-cap arena. So, as the fund has grown I've tended to increase the size of the holding list rather than move up on the capitalization scale. Time will tell whether that's right or not, but that's where I think my strengths lie.

Q: Tell me about the fund's bond holdings.

McGregor: Right now, 27 percent are in Treasuries, and half of that in TIPS (Treasury notes that are inflation indexed). We tend to keep our durations pretty short in the fixed-income side and now they are probably shorter than normal because we are leery of the potential for rates to go higher. So for us that means our duration (of the bond's held in the fund) is closer to three rather than four years.

We also had a much higher yield percentage in the past when the fund was smaller. And, one sad outgrowth of the growth of the fund is that we can't find anywhere near the high-yield vehicles that meet our standards to populate the fund.

Q: Why not?

McGregor: We could have as much as 10 percent in high yield bonds but we are very very very picky in what we own in the high yield sector. So, when the fund was a 60 million dollar fund, finding four or six million worth of high-yield was easy. Today, finding $100 million worth of high yield is impossible for our standards.

Q: What about some of your stock holdings.

McGregor: Let me give you an idea that's reasonably controversial, reasonably well-known and that is still moderately immature. And that's CVS, the drug store chain. CVS was a $60 stock a year and a half ago and something I was paying zero attention to whatsoever (at that price).

Then CVS reported two or three bad quarters and the stock went from 60 to 23. We started looking at it, saw that it was a convenience store that has a pharmacy attached and even though it had had disappointing sales growth last year, it was still growing at four percent. Which wasn't bad from our perspective.

We checked them out, bought the stock at about 23 and it's 34 today.

So we're not trying to do anything profound around here, we're just trying to take advantage of the occasional fat pitches that the market feeds us and CVS is as good an example as any.

Q: Anything misunderstood about the fund?

McGregor: One thing is that we do have the word "income" in our name and with interest rates as low as they are--- and dividend yields as low---we haven't produced the kind of income levels that I would have ever imagined when I started the fund in 1995. And as a result, at this point it means that the fund is more likely to produce yields in the two's or three's, before fees.

Q: Any feeling about the length of the cycle of value investing?

McGregor: We had probably as long a cycle favoring growth as we've ever had. Can it be as long favoring value? Ultimately, I don't know . But I don't think we're in the ninth inning. We might be more likely to be half the way through rather than most of the way through.


Dian Vujovich is a nationally syndicated mutual fund columnist, author of a number of books including Straight Talk About Mutual Funds (McGraw-Hill), and publisher of this web site.

To read more articles, please visit the column archive.

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