Oakmark Fund: Fourth Quarter 2021

The Oakmark Fund generated a 4.7% return during the fourth quarter, underperforming the S&P 500 Index’s return of 11.0% over the same period. For the calendar year, the Oakmark Fund returned 34.2%, outperforming the S&P 500 Index’s return of 28.7%. As discussed below, we continue to find new investment opportunities with attractive risk-adjusted return potential.

APA Corporation and Charles Schwab were the best individual contributors for the quarter, and the largest detractors were Citigroup and Capital One Financial. Our strongest contributing sectors for the quarter were energy and financials, and our lowest contributing sectors were communication services and industrials. For the calendar year, our best individual contributors were Alphabet (Class A) and Gartner while our biggest detractors were T-Mobile U.S. and Fiserv. We continue to hold each of these investments since their business fundamentals are tracking well against our expectations and their stocks continue to trade at discounts to our estimates of their intrinsic values.

As always, there are several risks to be mindful of as we enter the new year. The persistence of the global pandemic continues to negatively impact global labor pools and disrupt supply chains, leading to some of the highest inflation we’ve witnessed in a generation. Monetary policy appears poised to tighten as a result. So, while the continued economic recovery is unlikely to be linear, our long-term time horizon and bottom-up investment process afford us the ability to look past the near-term macro volatility and focus on what each business could earn several years from now under normal economic conditions.

We initiated three new positions during the fourth quarter: BorgWarner, Take-Two Interactive and Willis Towers Watson. There were no eliminations during the period.

We had the opportunity to purchase BorgWarner for a high single-digit multiple of our estimate of normal earnings due to elevated cyclical concerns and uncertainty about the longer term impact of powertrain electrification on the business. Currently, the company’s earnings are depressed due to semiconductor supply constraints that are impacting the entire industry. We expect these constraints to prove transitory, and we’re confident that component shortages will be resolved in the coming years. Furthermore, we believe that OEMs are likely to rely heavily on third-party suppliers, like BorgWarner, to leverage R&D expenses to enhance innovation and speed-to-market in an electrified world. For decades, we’ve been impressed with how BorgWarner management has successfully acquired and scaled fuel efficiency technologies for internal combustion engines. We see strong parallels and underappreciated potential in the acquisitions the company has made over the past 5+ years in key electric vehicle technologies. We believe the company is well-positioned to manufacture and integrate new propulsion systems and components to meet customer demands.

Take-Two Interactive is one of the largest and most successful video game publishers in the U.S. Each year, people spend more of their leisure time playing video games, and with the increasing shifts to digital platforms, online multiplayer modes and in-game purchases, the video game publishing business has improved dramatically. These favorable trends, combined with strong execution under CEO Strauss Zelnick, have allowed the company to grow EPS by over 20% per year for the past decade. Recently, Take-Two embarked on an ambitious growth plan that has doubled the number of new games under development. Considering its successful track record of producing blockbuster games, we believe these investments are likely to pay off. But, in the near-term, these investments have the effect of reducing reported earnings. Adjusting for its promising investments and the cash on its balance sheet, we were able to purchase Take-Two at less than 14x our estimate of normalized earnings. Many other leading media companies trade at premiums to this multiple. We view this discount as an attractive opportunity to invest in an advantaged company, led by a management team that operates with an owner’s mindset.

Willis Towers Watson is a global leader in advisory and risk broking services. We invested in the company in the wake of its cancelled business combination with Aon. Under the leadership of a new CEO and a reconstituted board of directors, we believe Willis has an opportunity to create significant shareholder value. Specifically, management sees a path toward mid-single-digit or greater organic revenue growth, several hundred basis points of operating margin improvement, and higher free cash flow conversion over the next few years. In addition, the company is in the process of repurchasing several billion dollars of stock. The company also has a new COO, a new CFO and a new head of transformation in place to oversee its operational initiatives, including common global platforms, “right-shoring” of operations, real estate rationalization and technology modernization. If the turnaround is successful, Willis should warrant a meaningfully higher multiple that is more in line with other leading peers.

We thank you, our fellow shareholders, for your investment and continued support of the Oakmark Fund.

The securities mentioned above comprise the following preliminary percentages of the Oakmark Fund’s total net assets as of 12/31/21: Alphabet Cl A 3.5%, Aon 0%, APA Corp 1.9%, BorgWarner 1.0%, Capital One Financial 2.9%, Charles Schwab 2.8%, Citigroup 2.5%, Fiserv 2.2%, Gartner 2.5%, Take-Two Interactive 1.0%, T-Mobile US 1.3% and Willis Towers Watson 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 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.

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

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 12/31/2021 unless otherwise specified.