Oakmark Select Fund - Investor Class
Average Annual Total Returns 06/30/13
Since Inception 11/01/96 12.79%
10-year 6.99%
5-year 12.76%
1-year 27.38%
3-month 6.46%
Gross Expense Ratio as of 09/30/12 was 1.05%
Past performance is no guarantee of future results. The performance data quoted represents past performance. Current performance may be lower or higher than the performance data quoted. The investment return and principal value vary so that an investor’s shares when redeemed may be worth more or less than the original cost. To obtain the most recent month-end performance data, view it here.
The Oakmark Select Fund increased by 6% last quarter, compared to 3% for the S&P 500. That brings the Fund’s calendar year-to-date gain to 14% and its fiscal year-to-date gain to 21%, compared to gains of 14% and 13%, respectively, for the S&P 500. Our portfolio has been heavily invested in financial services, technology and economically sensitive stocks. Those sectors performed well in the quarter, and not surprisingly, our five best performers, each increasing by more than 10%, were companies in those industries: AIG, Capital One, Intel, JP Morgan, and TRW.
Our three worst performers each declined between 5% and 10%: Cenovus, Dell and portfolio newcomer, Oracle. In April, the outside investor that we believed knew Dell best, Blackstone Group, withdrew its plan to restructure the company, so we sold our stock. We maintained our positions in Oracle and Cenovus because we believe that their fundamental values remain intact.
During the quarter we also sold the rest of our shares in Discovery Holdings. As we previously said, Discovery is a great business and is very well managed. But after many years of contributing positively to our Fund, Discovery is now widely viewed in this light, and its share price reflects that. We used proceeds from those sales to increase our stakes in current holdings and also to fund a new position in Oracle.
If someone told you that they bought stock in software giant Oracle 13 years ago, and since then, sales quadrupled and EPS were up 7-fold, you might assume they’d made a very good investment. But they didn’t. Oracle stock sold at such a high price that the stock fell by more than one-third even though the business performed exceptionally well. At Oakmark we have always said that price is the most overlooked risk factor – a high price can turn a safe business into a risky investment, and a low price can make a risky business a safe investment.
Today, selling at 11 times expected cash earnings, Oracle is priced like a below–average business. Investors have become frustrated with Oracle’s slowing growth in new license sales. We believe that Oracle’s best business is maintenance, which accounts for the majority of its profits. Switching costs are high, and even modest levels of new licenses lead to a growing stream of maintenance income. Management handling excess capital wisely is especially important in maturing businesses. Oracle is returning most of its earnings to shareholders. It just doubled its dividend to somewhat below 2%, and more importantly, it has reduced its outstanding shares by 5% in the past year. We believe Oracle is a better-than-average business, with better-than-average capital allocation, now priced to be a much better-than-average investment.
As of 6/30/13, American International Group, Inc. represented 5.7%, Capital One Financial Corp. 5.8%, JPMorgan Chase & Co. 5.3%, Intel Corp. 4.2%, TRW Automotive Holdings Corp. 8.0%, Oracle Corp. 4.1%, Cenovus Energy, Inc. 3.4%, Discovery Communications, Inc. Class C 0%, and Dell, Inc. 0% of the Oakmark Select Fund’s total net assets. Portfolio holdings are subject to change without notice and are not intended as recommendations of individual stocks.
For a full list of The Oakmark Select Fund’s holdings as of 6/30/13, click here.
The S&P 500 Total Return Index is a market capitalization-weighted index of 500 large-capitalization stocks commonly used to represent the U.S. equity market. All returns reflect reinvested dividends and capital gains distributions. This index is unmanaged and investors cannot invest directly in this index.
EPS refers to Earnings Per Share and is calculated by dividing total earnings by the number of shares outstanding.
Investing in value stocks presents the risk that value stocks may fall out of favor with investors and underperform growth stocks during given periods.
Because the Oakmark Select Fund is non-diversified, the performance of each holding will have a greater impact on the Fund’s total return, and may make the Fund’s returns more volatile than a more diversified fund.
The discussion of the Fund’s investments and investment strategy (including current investment themes, the portfolio managers’ research and investment process, and portfolio characteristics) represents the Fund’s investments and the views of the portfolio managers and Harris Associates L.P., the Fund’s investment adviser, at the time of this letter, and are subject to change without notice.
