Like most mutual fund managers, William C. Nygren was bracing for the worst the week of September 17, when the stock exchanges re-opened after a four-day hiatus following the terrorist attacks. Many stocks in the Oakmark Fund, the $3.48 billion fund he has co-managed since March 2000, were hammered in the market freefall. Holdings connected to the air travel and tourism industries, such as Starwood Hotels & Resorts Worldwide and Cendant Corp., lost more than one-third of their value within a few days.

As other investors frantically sold those stocks, Nygren added to his positions. "Travel will return to normal over the next three to five years," he says. "The only impact on these companies is that they won't generate as much cash flow as people thought they would in the short term. That matters a lot if you're only concerned with the next quarter or the next year. But my time frame goes out a lot longer than that."

Those thinking that such a declaration sounds like making lemonade out of some stocks that went sour-and have yet to gain back all the ground they lost since mid-September-might balance that view against a track record that has rewarded investors who, like Nygren, take a long-term view.

Nygren and Henry Berghoef have managed Oakmark Select, which closed to new investors in May, since its inception in 1996. Over the last three years, it has had an average annual return of 27.34%, compared with 2% for the S&P 500 Index. In the last year, it is up 35%, compared with a drop of 19% for the index.

Nygren's track record at Oakmark Fund, while shorter, is still noteworthy. In 2000, the year he took over, it rose 12%. So far this year, it is up 9%.

With Select closed, Oakmark Fund remains the only alternative for mutual fund investors who want Nygren's style of value management, which concentrates on out-of-favor growth stocks selling at a substantial discount to their business's intrinsic value. These days, he says, he has plenty of humbled growth companies from which to choose. In the last few weeks, he has established new positions in familiar names such as American Express, Fannie Mae, The Gap, Honeywell and advertising agency Interpublic Group.

Two years ago, investors would have been hard-pressed to find these stocks in a value fund because they were too expensive. With their long histories, strong growth and above-market multiples, they would have been more likely candidates for a large-cap growth portfolio.

Today, these same stocks are selling substantially below their highs, and Nygren sees them as good buys. "The market has punished these companies because of a difficult couple of quarters," he says. "We see an unusual opportunity now to purchase high-quality, large-capitalization companies at value prices."

Not long ago, Oakmark Fund could well have been described as a fund that had seen better days. In the early and mid-1990s, it dazzled investors with its stunning performance and ability to hold up well in down markets. Between its inception, in 1991, and 1995, its 33% annualized gain trounced the market. By April 1998, the fund had amassed $9.8 billion in assets, and Robert Sanborn, its manager from the beginning, had carved a reputation as one of the country's leading value-stock investors.

But in 1998 and 1999, the market's preference for growth stocks and severe price drops in a number of key holdings eroded returns, and Sanborn himself would eventually become a victim of the growth-stock mania of that era. During those two years, the fund lost 7% of its value at a time when the S&P 500 Index rose 50%. By the end of 1999, sagging performance and massive shareholder redemptions had brought the fund down to $3.5 billion in assets. By the time Nygren took over, it had been scaled back to $2 billion.

Soft demand for value stocks accounted for some of the problem, but not all of it. After all, Nygren's Oakmark Select owned many of the same stocks that the more diversified Oakmark Fund did. Yet it managed to post returns of 16.22% in 1998 and 14.5% in 1999.

But Sanborn's fund held several deep-value picks that were absent from Nygren's portfolio, which had more of a growth flavor. One of them, Philip Morris, had been a major Oakmark Fund holding since 1991. As the stock plunged because of tobacco litigation concerns, Sanborn declared that investors were overreacting to bad news, and he bought more of it. Although Philip Morris has enjoyed a sharp rebound that began last year, many investors could not fathom Sanborn's steadfast allegiance to the stock as it collapsed in the late 1990s.

And then there was the knotty issue of taxes. To meet massive shareholder redemptions, Sanborn had to sell millions of dollars in stocks, many of them long-term holdings, to raise cash. At one point, says Nygren, hedge funds were tracking the fund's redemption activity so they could short portfolio holdings they thought Sanborn would be selling.

Even though the performance of those stocks had been poor, many had appreciated in value since Sanborn had purchased them, so he had difficulty offsetting gains with losses to ease the tax bite for shareholders. As a result, Oakmark Fund made several large capital gains distributions to shareholders in 1999, at a time when it was falling in value.

When Nygren took over, he faced the challenge of stemming outflows in a fund that had lost nearly 80% of its assets since its 1998 peak, mainly from shareholder redemptions. He also took over a portfolio that had gone from a diversified fund of 40 to 50 stocks to one that had been slashed to 23 names to meet those redemptions.

To help diversify and reduce risk, he trimmed most of the fund's holdings, eliminated some positions altogether (including Philip Morris), then used the proceeds to buy more of his favorites, such as Toys "R" Us and credit card-processing company First Data Corp. Within weeks, the fund held 50 stocks. Because of tax-loss harvesting from the sales, there were no capital gains distributions in 2000, nor will there be any this year, says its manager. Although he is not making any promises for next year, Nygren says the fund has "substantial tax-loss carryforwards to shelter gains in 2002."

Value With A Growth Taste

Oakmark Fund has more growth characteristics than it did in its pre-Nygren days and has beefed up that side of its personality even more in recent weeks. "The best values out there are high-quality growth companies selling at below-market valuations," Nygren says. "They deserve to be selling at above-market multiples. Companies that grow earnings at above-average rates yet are priced below the market multiples combine the best elements of growth and value investing, and an increasing percentage of Oakmark Fund is invested in those kinds of stocks."

Over the last few weeks, Nygren has established new positions in a number of humbled companies, including financial services firm American Express. Because of the desirable demographics of its American Express Card unit and rapid growth in its financial advisory segment, the stock has normally sold at a much higher price-earnings ratio than its competitors. Its recent decline, much of it occurring after September 11, has brought the stock down to a price that is 12 times the firm's estimated 2003 earnings, compared with 17 times estimated earnings for the S&P 500 Index.

The Gap, another recent purchase, had been selling at 10 times estimated 2003 earnings. The stock peaked last year at $54 a share, but it fell in September of this year to $11 as sales growth fell below expectations. Nygren established the fund's position that month at $12 a share. With its CEO resuming control and making merchandising decisions that should appeal to a broader group of consumers, Nygren believes the company's sales will improve.

With a couple of exceptions, technology stocks haven't managed to attract his attention just yet. "We want to buy stocks when they are selling at 60% of a company's intrinsic value, and most tech stocks just aren't at that point yet," he says. "It used to be that if a big-company stock fell 80%, it was a great buying opportunity. But because the tech bubble got so big in the late 1990s, that just isn't the case anymore."