Rarely does a fund manager call attention to his fund's "dreadful" results. But that's just what Oakmark Select Fund chief Bill Nygren did in a special letter to shareholders dated Aug. 16. In it he explains why the $6 billion large-cap value fund is struggling amid the mortgage-market mess. "Performance since the end of the second quarter has been dreadful," he writes. "Not only has the market declined significantly, but our fund has fared meaningfully worse." Personal Finance Editor Lauren Young spoke to Nygren about the recent events that prompted his unusual missive.Why was a special letter necessary?We had just mailed our second-quarter shareholder reports. Performance through the second quarter was good. But the market and our performance changed so dramatically in the first half of the third quarter, we needed to respond. We think we understand what the market is concerned about in the sectors that have hurt our portfolio, so I wanted to let investors know why we still have conviction in the investments we own.You used the word "dreadful" to describe how the fund did. That's pretty harsh. Did you play around with other adjectives?Unfortunately, "dreadful" is an appropriate word. The fund is down about 9.1% in the past three months, and we are in the bottom percentile for peer-group performance for the past one-year, three-year, and five-year periods. A lot of times our industry is guilty of trying to spin things in a way that makes results sound better than they actually are. We chose to go in the other direction.Are investors bailing out of the fund?We've seen a steady dripping of assets for several years, but investors are not running for the exits. I get e-mails from shareholders asking if I am taking advantage of the market weakness to buy more of existing holdings. What most people don't realize is that we are basically fully invested at all times, so there's no extra cash to buy more stocks right now.A primary reason the fund is down so much is because Washington Mutual (WM
) is your largest holding. Why do you still believe in the company?The concern the market has is about its mortgage holdings. But the real attraction of Washington Mutual has very little to do with mortgages. We like its growing strength as a retail bank. When you look at the size of losses it could incur from mortgages, it's not enough to offset all of the value being added on the deposit side of the balance sheet. If you value Washington Mutual with the same kind of premium other banks get for deposits, you get a number that's substantially higher than the current stock price of $37. It's probably worth $50 or $60 per share.What else has hurt performance?We've seen credit weakness in holdings like JPMorgan Chase (JPM
) as well as retail softness at Home Depot (HD
) and Liberty Media (LINTA
). These are growing, well-managed businesses. We are prepared to wait until the market recognizes their value.