Commentary

Oakmark Fund: Fourth Quarter 2011

December 31, 2011

Oakmark Fund - Investor Class
Average Annual Total Returns 12/31/11
Since Inception 08/05/91 11.94%
10-year 4.15%
5-year 1.44%
1-year 1.82%
3-month 11.04%

Gross Expense Ratio as of 09/30/10 was 1.11%

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 Fund gained 11% during the past quarter. Though that was an exceptional absolute return, it was caused entirely by a very strong stock market, as the S&P 500 finished up 12%. For the calendar year, the Fund and the S&P 500 both returned 2%. Neither the relative nor the absolute return appears very noteworthy. However, 2011 was an unusually difficult year. As The Wall Street Journal reported in late December, over 75% of professional managers did not outperform the S&P, and Oakmark’s market-matching performance placed it in the 20th percentile of Morningstar’s large-blend universe. So, at least we made fewer mistakes than many others did.

During the quarter, the Fund owned five stocks that increased by over 25% (Disney, Fortune Home and Security, Google, Home Depot and State Street) and only four that were negative (Bank of America, Baxter, EnCana and Oracle). Any quarter with stats like that is bound to show a good return. None of the stock prices increased enough to reach our sell targets, and none of the decliners exhibited the poor business performance that would cause us to sell. In fact, we added to our Bank of America position. If ever there was a stock that portfolio managers wanted to avoid seeing on year-end reports, Bank of America was that stock. Yet, looking at business value rather than stock performance led us to a very different conclusion.

We eliminated two holdings that increased close to their sell targets, Beam (the spirits division of Fortune Brands) and Bristol Myers-Squibb, and we added one that was significantly below our buy target, Delphi Automotive.

Delphi Automotive (DLPH – $22)
Delphi is a global leader in auto-parts manufacturing. Like its former parent company, GM, Delphi had a labor force that had accumulated such large post-retirement benefits that there was no value left for the owners of the business. Those liabilities forced Delphi into a 2005 bankruptcy filing. Through the bankruptcy process, Delphi was able to exit product lines where it had no competitive advantage, and it was able to give back to GM all of its UAW workers and their related post-retirement liabilities. The company returned to the public market via an IPO in November. Normally IPOs trading just below their offering price don’t strike us as values because the sellers tend to cherry-pick their timing. In Delphi’s case, however, we believe the timing of the IPO had less to do with valuation than it did with its owners’ need for liquidity. Delphi is expected to report EPS of about $3 for the year just ended. We expect that number to grow to about $4 over a couple of years due to emerging-market growth and a cyclical recovery in developed markets. We consider seven times trailing earnings and just over five times our estimate of 2013 earnings to be a bargain price for this industry leader.

As of 12/31/11, The Walt Disney Co. represented 1.5%, Fortune Brands Home & Security, Inc. 0.4%, Google Inc., Class A 1.3%, The Home Depot, Inc. 2.1%, State Street Corp. 1.4%, Bank of America Corp. 1.1%, Baxter International, Inc. 1.1%, Encana Corp. 1.3%, Oracle Corp. 2.1%, Bristol-Myers Squibb Co. 0%, Delphi Automotive 0.3%, and General Motors Company 0% of the Oakmark Fund’s total net assets. Portfolio holdings are subject to change without notice and are not intended as recommendations of individual stocks.

The S&P 500 Index is a broad market-weighted average of U.S. blue-chip companies. This index is unmanaged and investors cannot actually make investments in this index.

Cheng, Jonathan. “Stocks Hit 5-Month High in Year-End Rebound.” Wall Street Journal, December 24, 2011.

Morningstar is an independent monitor of mutual fund performance. Morningstar rankings reflect the total return percentile rank within each fund’s specified Morningstar Category. The highest (or most favorable) percentile rank is 1 and the lowest (or least favorable) percentile rank is 100. Rankings are subject to change and are for the share class indicated. The Oakmark Fund ranked #369 out of 1,821, #102 out of 1,718, #155 out of 1,613, and #166 out of 1,230 funds in the large blend category for one, five, and ten years, and since inception, respectively, as of 12/31/11.

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

The discussion of the Funds’ investments and investment strategy (including current investment themes, the portfolio managers’ research and investment process, and portfolio characteristics) represents the Funds’ investments and the views of the portfolio managers and Harris Associates L.P., the Funds’ investment adviser, at the time of this letter, and are subject to change without notice.

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

Portfolio Manager

Kevin Grant- Portfolio Manager- Headshot
Kevin Grant, CFA

Portfolio Manager