Morningstar - Q4 2021 - 67

Nygren runs Oakmark OAKMX and Oakmark
Select OAKLX, which have thrived as value
has rebounded over the past 10 months. Lynch
heads Morgan Stanley's Counterpoint
Global team, and his fleet of growth-leaning
strategies excelled in 2020, with some gaining over
100% for the year. Both are stock-pickers
who focus on company fundamentals, but their
tolerance levels for heightened valuations
lead to very different portfolios.
Their panel took place the morning after a spirited
debate between Research Affiliates founder
Rob Arnott and CEO of ARK Investment
Management Cathie Wood, who sparred over
Tesla TSLA and found little common ground. It was
fun, and it made headlines-you can read
it for yourself after this conversation. ( " Bubble
or Boom? " Page 72.)
Lynch and Nygren picked up on many of the same
themes but often arrived at a more nuanced
middle ground. Value and growth adherents alike
will find food for thought in the discussion.
Their conversation has been edited for length
and clarity.
Katie Reichart: To start with the concept of disruptive
change, how can you determine whether
something is a fad or a long-term secular change?
Dennis Lynch: Persistence comes to mind.
You want to wait some period of time before you
get conviction in a trend. But most of our
analysis is focused on the company itself and why
it might benefit or why it has a moat or a
competitive advantage, as opposed to the trend
itself. It's good to talk about themes or tailwinds,
but if there's not a company that's going
to be able to fully take advantage of that, then it's
not worth exploring.
Reichart: Bill, you're not necessarily looking to
invest in disruptors, but obviously disruption can affect
your holdings. What's your take?
Bill Nygren: I've been doing this long enough that
I remember when newspapers were viewed
as about the safest business that there could be.
So, the idea that disruption is something
new is a little bit off. Disruption has been going on
throughout the American economy since the
economy started. To try and differentiate between
Negative cash flow doesn't really scare us,
even as a value investor.
Bill Nygren
fads and what might be long-lasting tailwinds,
I would say to look at the benefits for the
customer. If a product is clearly superior, and the
customer benefits from it, it's much more
likely that it can be persistent.
Reichart: Dennis, what type of data do you need to see
to confirm that something is going to be disruptive?
Lynch: Unit economics are important. Can
the company be profitable? Beyond that, what is
the ecosystem of advantages and disadvantages?
Who's winning and not winning? And is
there a net gain to the entire ecosystem? A lot of
these approaches start off not necessarily
as robust as the current solutions or offerings in
a given area. But slowly but surely, through
the iterative nature of the investment those
companies are making, they creep up and create
problems for the larger companies that are
entrenched in how they're thinking, both culturally
and from a process standpoint.
Reichart: Dennis, you run strategies across
the market-cap spectrum and invest in some private
companies. When you see a company that seems
disruptive, but it's early stage, how certain do you need
to be to make that initial investment?
Lynch: It's an advantage to be able to look
across different parts of the market. The industry
runs the risk of being segregated and compartmentalized:
If you're a large-cap growth manager
and you're not aware of the earlier-stage
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Morningstar - Q4 2021

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