Insights

A Perspective on Investing During the Coronavirus Crisis

June 2, 2020

Two months of working from home is behind us, and I hope everyone has adjusted to a new rhythm. My transit commute has been reduced to a walk up or down the stairs. Going up is a date with my laptop, coming down is a workout in the basement.

My wife, a clinical psychologist, is now doing tele therapy from home. We are each dealing with our own varieties of crisis right now, mental and financial. Although I thought we had vastly different jobs, we’ve come to realize our professions have some key overlaps. Both of us are helping our clients deal with fear—through adaptive and maladaptive responses– so they can have better outcomes.

During our thousandth quarantine walk with our little lapdog, my wife explained his peculiar behavior of sprawling on the sidewalk playing “dead” when another dog approached. His stress response, much like our own, is instinctual and a self-protective reaction for survival. Each animal has three choices when confronted with a threat: 1) fight; 2) flight; or 3) freeze. Weighing in at a whopping 12 pounds, our dog is a “freezer” since he will lose if he tries to fight or flee from his perceived threat. Although his response may appear weak, my wife clarified that it’s quite genius and effective.

Financially speaking, we have seen some of our clients instinctively act to self-protect and overcontrol their investments to mitigate the threat of great economic stress created by the coronavirus. The “fight” response has led some to lash out, calling for portfolio managers to take immediate action, perhaps so they can feel like something is being done. Why hold onto the stocks that have underperformed? Why not own less cyclical companies and avoid European ones all together? The tone and tenor of our shareholders’ response is an understandable mix of fear and anger, desiring action to guard against the economic perils caused by this virus.

Alternatively, their “flight” response has led some to pull out of their funds and go to cash. More than $300 billion has been pulled from active and passive equity mutual funds year to date and the savings rate shot up from 8% to 13% in March, hitting its highest level since 19811.

However, overreacting in the face of this downturn doesn’t mean investors’ portfolios may be any safer. In fact, they could end up worse off, which is why “freeze” might be the best course of action. A review of our Oakmark Funds reveals that it has been costly for our clients to trade at the wrong time. Missing out on the top 10 days of returns in the market reduces returns by nearly 3% annually since inception. It’s even more consequential when looking at missing out on the top 30 returning days where returns would be cut in half. Taking action today to make ourselves feel better could lead to missing out on having exposure to the eventual recovery. I think that’s partially why the latest bull market was coined the most hated in history. I believe investors sold and never rebalanced back to their optimal asset allocation.

Oakmark performance table as of 03/31/2020

*OAKMX inception 08/05/1991, OAKLX inception 11/01/1996, OAKBX inception 11/01/1995, OAKGX inception 08/04/1999, OAKWX inception 10/02/2006, OAKIX inception 09/30/1992, OAKEX inception 11/01/1995

Throughout our firm’s 40-year history, our investment team has experienced market declines of more than 10% on average every 12-18 months, 15% every two years, and 20% or more every 3½ years. Around 9/11, we were able to pick up Carnival Cruise Lines as the market shunned travel-related stocks. We ultimately held it for three years until we believed it became more appropriately priced. Likewise, today we are able to own global leaders in leisure, including Hilton, Booking Holdings and Ryanair, at a fraction of our estimates of their value. This volatility is the norm, not the exception. It’s important to avoid making rash decisions based on emotion or instinct when share price volatility picks up.

At Oakmark, we remain laser focused on measuring the difference between what we think the business is worth and its current share price. This empowers us to act when others are fleeing the markets. Through experience, we know that business values are far less volatile than stock prices. And, if you are patient enough, share price ultimately converges with business value. Spikes in volatility provide the raw material for active managers to exploit.

As a long-term investor, you won’t see us making wholesale changes to the names in our portfolios–but this shouldn’t be mistaken for inactivity. Research activity has been frenetic as we fine-tune estimates to existing holdings and hunt for companies that were “thrown out with the bathwater.” Our conversations with management teams continue unabated, just over video rather than in person. And new idea activity is on pace to double the typical level.

Our portfolio managers are trimming our winners and intentionally adding to the companies whose businesses are performing as expected but the stocks have underperformed to try to benefit from the new reality. At the market lows, we identified many companies that met our stringent investment standards and that were trading at below 40 cents on the dollar. As we pick up these so-called bargains, even if their share prices were volatile in 2020, we think it actually de-risks our portfolio. By keeping the portfolio fresh and forward facing, we believe we are setting the stage for performance over the next five years. “Freezing” or, as we prefer to say, “staying the course” is the most adaptive thing we can do.

1Natixis Investment Managers. (2020). U.S. Mutual Fund & ETF Industry Marketplace and Peer Analysis.
La Monica, Paul R. (2020). Americans are hoarding cash: Savings rate hit its highest level since 1981. Retrieved from: https://www.cnn.com/2020/04/30/investing/savings-rate-federal-reserve/index.html

Average Annual Total Returns (as of 03/31/2020):

Fund3 Month1 Year3 Year5 Year10 YearInception
OAKMX-30.42%-21.69%-3.55%1.33%7.78%10.95%
S&P 500 Total Return-19.60%-6.98%5.10%6.73%10.53%9.08%

Gross Expense Ratio (as of 09/30/2019): 0.92%
Net Expense Ratio (as of 09/30/2019): 0.88%
Fund Inception:  08/05/1991

Fund3 Month1 Year3 Year5 Year10 YearInception
OAKLX-32.53%-24.08%-10.08%-3.41%5.68%9.58%
S&P 500 Total Return-19.60%-6.98%5.10%6.73%10.53%7.73%

Gross Expense Ratio (as of 09/30/2019): 1.07%
Net Expense Ratio (as of 09/30/2019): 1.00%
Fund Inception:  11/01/1996

Fund3 Month1 Year3 Year5 Year10 YearInception
OAKBX-22.03%-14.48%-2.14%0.48%4.65%8.67%
Lipper Balanced Fund Index-12.84%-4.05%2.82%3.50%6.25%6.33%

Gross Expense Ratio (as of 09/30/2019): 0.91%
Net Expense Ratio (as of 09/30/2019): 0.81%
Fund Inception:  11/01/1995

Fund3 Month1 Year3 Year5 Year10 YearInception
OAKGX-34.87%-25.02%-6.86%-3.16%3.37%7.56%
MSCI World Index (Net)-21.05%-10.39%1.92%3.25%6.57%3.94%

Gross Expense Ratio (as of 09/30/2019): 1.23%
Net Expense Ratio (as of 09/30/2019): 1.17%
Fund Inception:  08/04/1999

Fund3 Month1 Year3 Year5 Year10 YearInception
OAKWX-30.66%-20.15%-6.70%-1.24%4.87%4.84%
MSCI World Index (Net)-21.05%-10.39%1.92%3.25%6.57%4.34%

Gross Expense Ratio (as of 09/30/2019): 1.25%
Net Expense Ratio (as of 09/30/2019): 1.18%
Fund Inception:  10/02/2006

Fund3 Month1 Year3 Year5 Year10 YearInception
OAKIX-38.12%-29.51%-11.30%-5.74%1.70%7.42%
MSCI World ex U.S. Index (Net) -23.26%-14.89%-2.07%-0.76%2.43%5.00%

Gross Expense Ratio (as of 09/30/2019): 1.03%
Net Expense Ratio (as of 09/30/2019): 0.98%
Fund Inception:  09/30/1992

Fund3 Month1 Year3 Year5 Year10 YearInception
OAKEX-38.29%-27.97%-10.61%-5.15%1.20%6.84%
MSCI World ex U.S. Small Cap Index (Net)-28.39%-19.04%-3.60%0.39%3.95%n/a

Gross Expense Ratio (as of 09/30/2019): 1.39%
Net Expense Ratio (as of 09/30/2019): 1.38%
Fund Inception:  11/01/1995

The net expense ratio reflects a contractual advisory fee waiver agreement through January 27, 2021 with the exception of the Oakmark International Small Cap Fund.

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 most recent month-end performance data, view it here.

The holdings mentioned comprise the following percentages of the Fund’s total net assets as of 03/31/2020:

SecurityOakmark FundOakmark Select FundOakmark Equity and Income FundOakmark Global FundOakmark Global Select FundOakmark International FundOakmark International Small Cap Fund
Booking Holdings2.5%3.9%0.7%1.1%3.3%0%0%
Carnival Cruise Lines0%0%0%0%0%0%0%
Hilton Worldwide1.7%2.4%0%0%0%0%0%
Ryanair0%0%0%2.9%0%2.5%0%

Portfolio holdings are subject to change without notice and are not intended as recommendations of individual stocks.

Access the full list of holdings for the Oakmark Fund as of the most recent quarter-end.
Access the full list of holdings for the Oakmark Select Fund as of the most recent quarter-end.
Access the full list of holdings for the Oakmark Equity and Income Fund as of the most recent quarter-end.
Access the full list of holdings for the Oakmark Global Fund as of the most recent quarter-end.
Access the full list of holdings for the Oakmark Global Select Fund as of the most recent quarter-end.
Access the full list of holdings for the Oakmark International Fund as of the most recent quarter-end.
Access the full list of holdings for the Oakmark International Small Cap Fund as of the most recent quarter-end.

The S&P 500 Total Return Index is a float-adjusted, capitalization-weighted index of 500 U.S. large-capitalization stocks representing all major industries. It is a widely recognized index of broad, U.S. equity market performance. Returns reflect the reinvestment of dividends. This index is unmanaged and investors cannot invest directly in this index.

The Lipper Balanced Fund Index measures the equal-weighted performance of the 30 largest U.S. balanced funds as defined by Lipper. This index is unmanaged and investors cannot invest directly in this index.

The MSCI World Index (Net) is a free float-adjusted, market capitalization-weighted index that is designed to measure the global equity market performance of developed markets. The index covers approximately 85% of the free float-adjusted market capitalization in each country. This benchmark calculates reinvested dividends net of withholding taxes. This index is unmanaged and investors cannot invest directly in this index.

The MSCI World ex U.S. Index (Net) is a free float-adjusted, market capitalization-weighted index that is designed to measure international developed market equity performance, excluding the U.S. The index covers approximately 85% of the free float-adjusted market capitalization in each country. This benchmark calculates reinvested dividends net of withholding taxes. This index is unmanaged and investors cannot invest directly in this index.

The MSCI World ex U.S. Small Cap Index (Net) is designed to measure performance of small-cap stocks across 22 of 23 Developed Markets (excluding the United States). The index covers approximately 14% of the free float-adjusted market capitalization in each country. This benchmark calculates reinvested dividends net of withholding taxes. This index is unmanaged and investors cannot invest directly in this index.

The Oakmark, Oakmark Equity and Income, Oakmark Global, Oakmark International and Oakmark International Small Cap Funds’ portfolios tend to be invested in a relatively small number of stocks. As a result, the appreciation or depreciation of any one security held by the Fund will have a greater impact on the Funds’ net asset value than it would if the Fund invested in a larger number of securities. Although that strategy has the potential to generate attractive returns over time, it also increases the Funds’ volatility.

Because the Oakmark Select Fund and Oakmark Global Select Fund are 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.

Oakmark Select Fund: The stocks of medium-sized companies tend to be more volatile than those of large companies and have underperformed the stocks of small and large companies during some periods.

The Oakmark Equity and Income Fund invests in medium- and lower-quality debt securities that have higher yield potential but present greater investment and credit risk than higher-quality securities. These risks may result in greater share price volatility. An economic downturn could severely disrupt the market in medium or lower grade debt securities and adversely affect the value of outstanding bonds and the ability of the issuers to repay principal and interest.

Oakmark Equity and Income Fund: The stocks of medium-sized companies tend to be more volatile than those of large companies and have underperformed the stocks of small and large companies during some periods.

The stocks of smaller companies often involve more risk than the stocks of larger companies. Stocks of small companies tend to be more volatile and have a smaller public market than stocks of larger companies. Small companies may have a shorter history of operations than larger companies, may not have as great an ability to raise additional capital and may have a less diversified product line, making them more susceptible to market pressure.

Investing in value stocks presents the risk that value stocks may fall out of favor with investors and underperform growth stocks during given periods.

Investing in foreign securities presents risks that in some ways may be greater than U.S. investments. Those risks include: currency fluctuation; different regulation, accounting standards, trading practices and levels of available information; generally higher transaction costs; and political risks.

The information, data, analyses, and opinions presented herein (including current investment themes, the portfolio managers’ research and investment process, and portfolio characteristics) are for informational purposes only and represent the investments and views of the portfolio managers and Harris Associates L.P. as of the date written and are subject to change and may change based on market and other conditions and without notice. This content is not a recommendation of or an offer to buy or sell a security and is not warranted to be correct, complete or accurate.

Certain comments herein are based on current expectations and are considered “forward-looking statements”. These forward looking statements reflect assumptions and analyses made by the portfolio managers and Harris Associates L.P. based on their experience and perception of historical trends, current conditions, expected future developments, and other factors they believe are relevant. Actual future results are subject to a number of investment and other risks and may prove to be different from expectations. Readers are cautioned not to place undue reliance on the forward-looking statements.

Daniel A. Nicholas, CFA
Client Portfolio Manager