Commentary

Oakmark Fund: First Quarter 2020

March 31, 2020

Oakmark Fund - Investor Class
Average Annual Total Returns 03/31/20
Since Inception 08/05/91 10.95%
10-year 7.78%
5-year 1.33%
1-year -21.69%
3-month -30.42%

Gross Expense Ratio as of 09/30/19 was 0.92%
Net Expense Ratio as of 09/30/19 was 0.88%

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.

Market volatility spiked during the first quarter of 2020 due to the considerable economic and social impact from the coronavirus. The Oakmark Fund declined 30% during the quarter, trailing the 20% decline for the S&P 500. Significant market volatility pushed share prices well below our estimates of intrinsic value and, therefore, we believe our portfolio is more attractively valued today than it was before the downturn. This has given us the opportunity to rebalance the portfolio toward companies with higher risk-adjusted returns, largely by trimming shares of our holdings that withstood the downturn relatively well. In one example of this value-enhancing rebalancing, we trimmed our position in Regeneron Pharmaceuticals, up 30% for the quarter, and added to our position in American International Group (AIG), which is down over 50%. With Regeneron moving up and AIG moving down, our estimate of AIG’s long-term expected return is four times higher than Regeneron’s.

As value investors, we always view heightened volatility as an opportunity to upgrade the portfolio, whether through rebalancing existing holdings, as with Regeneron and AIG, or by adding attractive new names to the portfolio when valuations become compelling. During the quarter, we added four new holdings to the portfolio (see below) and we eliminated our position in American Airlines because of uncertainty about its near-term cash flows and its likely need for restrictive government assistance. Sectors that detracted the least from our first-quarter returns were consumer staples and health care and our largest detractors were financials and consumer discretionary. Regeneron and Netflix were our best individual contributors for the quarter and the past six months, which seems fitting since both turned out to be well-positioned for a medical/quarantine crisis. Ally Financial and Citigroup were our worst contributors for the quarter, while Ally and Apache were our worst contributors for the past six months. Apache was impacted by declining oil prices, while Citigroup and Ally were impacted by falling interest rates.

Before we discuss our new holdings, I wanted to send a big thank you to the whole Harris Associates team! Unprecedented times have been met with an unprecedented effort and positive attitude by our amazing people. In this new work-from-home environment, our teams are working with focused diligence and communicating well internally and externally.

American Express Company (AXP – $90)
American Express has improved its cardholder value proposition in recent years by making significant investments in merchant acceptance, cardholder rewards and services, and small business payment tools. These efforts have accelerated both new card issuance and cardholder spending, and management has committed to reinvesting a portion of these incremental profits into further improvements in the company’s value proposition. We believe this virtuous cycle of growth and reinvestment will allow American Express to continue growing its business at a high single-digit pace in the coming years while investing enough to protect the business from competitive threats. The organic growth that we expect, combined with potential share repurchases, should result in double-digit EPS growth in a typical year, while the company’s high returns and low credit risk should result in peer-leading results during the inevitable downturns. Management is making the right investments for the long term while also returning excess capital to shareholders. The shares are currently trading at just 11x last year’s EPS, which we believe is too cheap for this caliber of business.

Match Group, Inc. (MTCH – $67)
Match Group operates a portfolio of the world’s leading online dating brands. The company’s flagship brand, Tinder, is the top dating platform in the world and holds a wide lead over its next largest competitors—several of which are also owned by Match. Because online dating is a network-effect business where each user makes the platform more valuable for others, we believe a market leader like Tinder has significant scale advantages. We believe this puts Tinder in an excellent position to address the more than 50% of singles in the U.S. and Europe who still haven’t tried online dating. We also believe Tinder’s monetization potential is underappreciated as its “freemium” model means the vast majority of users currently pay nothing for the service. With over 60% of its users active six days per week, the opportunity to increase adoption of paid features is substantial. Match is growing revenue in the high teens and the company has minimal capital requirements and operating margins that are already above 30%. We don’t believe Match’s current valuation reflects the company’s combination of exceptional economics and long-term prospects.

Pinterest, Inc. Class A (PINS – $15)
Pinterest is an online discovery tool with a large and growing user base who visit the site to find ideas and inspiration for their personal tastes, interests and hobbies. We believe it is also an attractively valued investment opportunity as it has recently fallen to $14 per share from its high of $36 per share, which it hit last summer. Unlike many consumer internet companies, users and advertisers are fundamentally aligned on the site. Pinterest provides its users with information that they are actually looking for as opposed to trying to distract them from a newsfeed or chats with friends. The company also gives advertisers access to an audience of people with high commercial intent along with the ability to integrate ads in a natural way. Although Pinterest has more than 300 million active users from around the world each month, the company is in the early days of monetizing its platform. We believe that its shares are currently trading at a material discount to the company’s intrinsic value when benchmarking revenue and margin potential against its more mature internet competitors.

Workday, Inc. Class A (WDAY – $140)
Workday is the global leader in cloud-based software for human resources and finance departments at large enterprises. Around the world, businesses are embracing cloud computing to reduce costs and improve performance. When large companies transition their HR and finance applications to the cloud, they overwhelmingly choose Workday. Indeed, the company’s HR software boasts over 70% market share of cloud deployments in the Fortune 500. As the global software market steadily transitions to cloud, we believe Workday will have a clear path to significant revenue growth. Despite the company’s dominant competitive position and trajectory for sustained long-term growth, the stock trades at a lower multiple of revenue than other software companies that don’t share Workday’s competitive advantages. We view today’s discount as an opportunity to invest in one of the world’s most innovative companies at a reasonable price.

The securities mentioned above comprise the following preliminary percentages of the Oakmark Fund’s total net assets as of 03/31/20: Ally Financial 2.2%, American Airlines 0%, American Express 1.7%, American Intl Group 1.8%, Apache 0.4%, Citigroup 3.1%, Match Group Cl A 1.0%, Netflix 3.4%, Pinterest Cl A 0.3%, Regeneron Pharmaceuticals 2.2% and Workday Cl A 1.1%. 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.

The net expense ratio reflects a contractual advisory fee waiver agreement through January 27, 2021.

EPS refers to Earnings Per Share and is calculated by dividing total earnings by the number of shares outstanding.

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 Oakmark Fund’s portfolio tends 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 Fund’s 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 Fund’s volatility.

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.

All information provided is as of 03/31/2020 unless otherwise specified.

Bill Nygren- Portfolio Manager- Headshot
William C. Nygren, CFA

Portfolio Manager

Kevin Grant- Portfolio Manager- Headshot
Kevin Grant, CFA

Portfolio Manager