Oakmark Fund - Investor Class
Average Annual Total Returns 09/30/13
Since Inception 08/05/91 12.96%
10-year 8.79%
5-year 13.66%
1-year 26.75%
3-month 6.60%
Gross Expense Ratio as of 09/30/12 was 1.03%
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 increased 7% during the past quarter, which brings the gain to 27% for the fiscal year ended September 30. The S&P 500 gained 5% in the quarter and gained 19% for the fiscal year. While we are thrilled with these strong results, we remind shareholders that our style doesn’t typically lead to such dramatic outperformance in periods of broad market gains.
Looking back at the fiscal year, we outperformed a very strong 19% return for the S&P 500 with leading performance from the financials and information technology sectors. We still find these two sectors to be attractively valued, and they currently represent a combined 47% of our portfolio. For the fiscal year, 26 of the Oakmark Fund’s holdings gained over 30%, and only Apple declined by more than 20%. Despite Apple’s poor full fiscal year performance, it was one of the Fund’s top two performers for the third quarter, gaining 21%. After a period of skepticism surrounding the company’s ability to create compelling new products, Apple is once again experiencing strong demand for its recently introduced iPhones. We remain pleased that the company is allocating more of their $145B cash balance to share repurchases and dividends. Throughout the market, even as equity valuations have increased, we are still finding attractive opportunities in businesses with strong balance sheets, high free cash flow, and a management committed to return a substantial portion of excess capital to shareholders through dividends and share repurchases.
During the quarter, we eliminated positions in Boeing and Northrop Grumman as both approached our sell targets. We started new positions in Nestle and Qualcomm, which are described briefly below:
Nestle S.A. (NSRGY – $70)
Nestle is a global leader in packaged foods with $100 billion of revenue and operations in over 70 countries. The company has more than 25 brands with sales over $1 billion, with leading market share in most of their product categories. With broad exposure to high-growth emerging markets, Nestle has enjoyed strong and consistent revenue growth. Like many of our holdings, Nestle generates more cash than they need to run the business, so the company has used a significant portion of its excess cash to repurchase shares and pay dividends. Over the past four years, Nestle has reduced their share count by over 10%. We think this is a high quality, stable business that deserves to sell at a premium, so we initiated a position when Nestle was priced at a discount to other global consumer products companies due to concerns about Europe.
Qualcomm Inc. (QCOM – $67)
Qualcomm is the global leader in wireless technology licensing and mobile device chipsets. Qualcomm has dominant market share in both businesses, and it uses the strong recurring cash flow from its licensing business to reinvest in its chipset business. The company owns intellectual property that defines many of the standards used for 3G and 4G wireless communication, which allows it to collect royalties from handset providers that license these ubiquitous standards. Qualcomm’s licensing business accounts for only a third of the company’s revenue, and it is often underappreciated. However, its licensing business has unusually high profitability and represents close to two-thirds of Qualcomm’s profits. The majority of the world’s mobile handset users are still using older 2G technology, which is not a focus area for Qualcomm, so when these customers upgrade to 3G and 4G, Qualcomm should be well positioned to enjoy robust incremental revenue. The company is also the leading provider of chipsets, which function as the brains for wireless devices. Qualcomm’s industry-leading product breadth and peer-leading R&D investment should drive the company’s chipset growth. We expect Qualcomm to earn over $4.50 per share in a couple of years, and after adjusting for $20/share of cash, this high-quality business is priced at a forward P/E of just 11x.
As of 9/30/13, Apple, Inc. represented 1.7%, The Boeing Co. 0%, Northrop Grumman Corp. 0%, Nestle SA 1.1%, and Qualcomm, Inc. 1.3% 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 Price-Earnings Ratio (“P/E”) is the most common measure of the expensiveness of a stock.
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.
