Oakmark Fund - Investor Class
Average Annual Total Returns 06/30/15
Since Inception 08/05/91 12.97%
10-year 8.97%
5-year 17.43%
1-year 3.51%
3-month 0.27%
Gross Expense Ratio as of 09/30/14 was 0.87%
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 was up fractionally in the second quarter of 2015, closely matching a modest gain for the S&P 500. The Oakmark Fund was down fractionally for the full year and the S&P 500 was up 1%, when heightened volatility in the last week of the quarter, driven by European uncertainty, erased prior gains. While we are disappointed with these short-term results, we remain confident in the portfolio’s long-term return potential.
We continue to feel that financial securities are among the most attractive segments in the market, and we were pleased that our financial holdings represented the biggest contributing sector for the Fund during the second quarter. Six of the top ten contributors to Fund performance were financial securities, with Bank of America, up 11%, leading the group. Overall, Amazon, up 17%, was the top performer for the second quarter in a row. Energy was the worst performing sector, and TE Connectivity and Chesapeake Energy, which was down 21%, were the worst performing securities. Chesapeake is highly sensitive to changing commodity prices, which has led to a dramatic decline in profitability as oil prices have fallen. We remain confident that Chesapeake’s management team will take the necessary steps to improve per-share value by cutting costs and optimizing the company’s portfolio (for more detail, see the Oakmark Select Q2 commentary).
During the quarter we initiated positions in American Express and Fiat Chrysler Automobiles (see below). As discussed in last quarter’s commentary, we sold most of The Home Depot position during the first quarter when the shares reached our estimate of intrinsic value. We deferred the sale of the remainder of the position to the second quarter in order to avoid higher short-term tax treatment. We eliminated our position in Illinois Tool Works because it also approached our estimate of fair value.
American Express (AXP – $78)
American Express is a payments company with one of the best brands in the world. Despite strong earnings growth over the past few years, the strength of the franchise was called into question recently when revenue growth slowed. Skepticism increased in February when Costco announced it would not renew its co-brand partnership with American Express. We believe this will cause earnings growth to slow for two years while American Express invests in marketing efforts to replace Costco co-brand customers, but we believe the company’s financial fundamentals remain very healthy. Card member spending is growing 7% per year (f/x adjusted), ROE is well above its 25% target and robust capital levels are allowing management to increase share repurchases. Despite what we believe is favorable secular growth and superior economics, American Express is trading at a large discount to the market and its historical multiples. Our long-term view allows us to look past the short-term disappointment of the Costco announcement and see the potential lucrative long-term value of American Express’ global payment network and growing customer base.
Fiat Chrysler Automobiles (FCAU – $15)
Fiat Chrysler Automobiles (FCA) is a major auto manufacturer with eight global brands (Chrysler, Jeep, Ram, Dodge, Ferrari, Maserati, Fiat and Alfa Romeo), which formed as a result of a multi-stage merger of Fiat and Chrysler beginning in 2009. Despite recent headlines about its intent to promote industry consolidation, we believe FCA should come close to management’s goal of €4 per share of earnings by 2018 as a standalone business. We believe FCA is well positioned to improve its profitability and narrow the margin gap with its peers. Underpinning our thesis is a strong management team led by CEO Sergio Marchionne, who has an impressive twenty-year track record of creating wealth for shareholders. FCA is aggressively shifting its mix from low-margin, mass market brands (Chrysler, Dodge, Fiat) to higher-margin specialty segments (Jeep, Alfa Romeo, Ram, Maserati), a strategy that has brought more focus to the brands and allowed the group to consistently gain market share. In addition, we expect a host of operational issues that have temporarily depressed margins to subside. Meanwhile, shareholder-friendly capital allocation maneuvers, such as the upcoming spin-off of Ferrari and refinancing of legacy Chrysler debt, should help further unlock value.
As of 06/30/15, Bank of America Corp. represented 3.3%, Amazon.com, Inc. 2.2%, Chesapeake Energy Corp. 0.7%, American Express Co. 1.3%, Fiat Chrysler Automobiles N.V. 1.0%, The Home Depot, Inc. 0%, Illinois Tool Works, Inc. 0%, and Costco Wholesale Corp. 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.
Click here to 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 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.
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 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.
