Commentary

Oakmark Select Fund: First Quarter 2020

March 31, 2020

Oakmark Select Fund – Investor Class
Average Annual Total Returns 03/31/20
Since Inception 11/01/96 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 1.07%
Net Expense Ratio as of 09/30/19 was 1.00%

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 Select Fund was down 33% for the quarter, trailing the S&P 500 Index’s negative 20% return, in a quarter in which the Russell 1000 Value Index underperformed the Russell 1000 Growth Index by 13%. As Bill Nygren pointed out in his quarterly commentary, what started out as a relatively benign quarter turned terrible from late February onwards.

Our top contributor in the quarter and over the past six months was Regeneron Pharmaceuticals. The company is at the forefront of developing potential coronavirus treatments. The relative attractiveness of Regeneron stock has diminished substantially given its strong outperformance, but we still believe the company is selling at a discount to our estimate of its intrinsic value. Our largest detractor for the quarter was CBRE Group, which declined as the company’s leasing and capital markets segments are directly exposed to the current cessation of economic activity. We still find CBRE an attractive investment. The company’s outsourcing segment is less cyclical than other parts of its business and should be a durable source of cash flows during the downturn. CBRE has low net debt and significant liquidity. Rather than fighting for survival, its management team will likely be acting opportunistically to add per share value through this downturn. Our largest detractor for the past six months was Ally Financial as economic slowdown fears and falling interest rates pushed the company and our other financial stocks lower.

As you would expect during a period of rapidly changing prices and an evolving fundamental landscape, our trading has been much more active than usual. We took advantage of the extreme market volatility by adding four new positions: Booking Holdings, Constellation Brands, EOG Resources, and Facebook. We also initiated the sales of three others: American Airlines, Fiat Chrysler, and Concho Resources. We believe that by making these trades, we’ve increased the aggregate undervaluation at which the Fund trades relative to our estimate of value and improved the tax position of the Fund, all while upgrading the median balance sheet and business quality of the portfolio.

Booking Holdings is a global leader in the online travel industry. The company’s share price has come under pressure due to concerns about the coronavirus’ impact on global travel demand. While the company’s near-term results will be significantly impacted by current travel restrictions implemented throughout the world, we believe the company’s strong balance sheet and flexible cost structure will enable it to successfully navigate the steep decline in near-term demand and likely emerge even stronger once conditions improve. We expect demand for leisure travel to eventually fully recover, and on our forward earnings estimates in a more normal leisure travel market, Booking trades at a meaningful discount to the S&P 500 Index, despite its superior growth outlook, strong competitive advantages, and high returns on incremental capital.

Constellation Brands is the largest imported beer company in the U.S. and one of the country’s leading wine producers. Over the past five years, the company’s beer segment, which includes brands, such as Corona, Modelo, and Pacifico, grew its revenue at an impressive 11% CAGR during a period in which industry volumes remained relatively flat. Constellation trades at a meaningful discount to other consumer packaged goods companies, which are experiencing slow to no growth. We are grateful for the opportunity to invest in an above-average business at a below-average price.

EOG Resources is the largest independent onshore oil producer in the U.S. Although there are many inexpensive companies in the energy space, few, in our view, can match EOG’s combination of balance sheet strength, management ability, and diversified asset base. It is a conservatively run company with minimal leverage and efficient operations, which is highly likely to make it through this tough period unscathed. EOG is trading at a larger discount than peers to our estimate of the value of its current asset base, and it has a management team with a long history of creating shareholder value through opportunistic portfolio actions in times like these.

Facebook controls the world’s most dominant social networking platforms, Facebook and Instagram. The company’s unprecedented global reach and ad-targeting capabilities have made Facebook and Instagram some of the most sought after and effective advertising platforms ever created. Although the company will not be immune to the near-term disruption caused by the coronavirus, we believe the long-term outlook for its digital advertising remains as bright as ever. Facebook is trading at a discount to the S&P 500 Index on our two-year forward estimates, even though those estimates include no contribution from valuable assets, like WhatsApp and Messenger (among others), which Facebook has yet to monetize. We believe this is an attractive valuation for a company that is projected to grow its revenue in the double digits for the foreseeable future, and we believe that Facebook’s operating margin potential is substantially higher than what the company is likely to report in the coming years.

Thank you, our fellow shareholders, for your continued investment in our Fund.

The securities mentioned above comprise the following preliminary percentages of the Oakmark Select Fund’s total net assets as of 03/31/20: Ally Financial 4.6%, American Airlines 0%, Booking Holdings 3.9%, CBRE 7.9%, Concho Resources 0.7%, Constellation Brands 4.1%, EOG Resources 1.9%, Facebook 4.4%, Fiat-Chrysler 0% and Regeneron 5.7%. 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 Select Fund as of the most recent quarter-end.

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

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 Russell 1000® Value Index measures the performance of the large-cap value segment of the U.S. equity universe. It includes those Russell 1000® companies with lower price-to-book ratios and lower expected growth values. This index is unmanaged and investors cannot invest directly in this index.

Russell 1000® Growth Index is an unmanaged index that measures the performance of the large-cap growth segment of the U.S. equity universe. It includes those Russell 1000® companies with higher price-to-book ratios and higher forecasted growth values. This index is unmanaged and investors cannot invest directly in this index.

Compound annual growth rate (CAGR) is the rate of return that would be required for an investment to grow from its beginning balance to its ending balance, assuming the profits were reinvested at the end of each year of the investment’s lifespan.

Because the Oakmark Select Fund is non-diversified, the performance of each holding will have a greater impact on the Fund’s total return, and may make the Fund’s returns more volatile than a more diversified fund.

The stocks of medium-sized companies tend to be more volatile than those of large companies and have underperformed the stocks of small and large companies during some periods.

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

Tony Coniaris- Portfolio Manager- Headshot
Tony Coniaris, CFA

Portfolio Manager

Win Murray- Portfolio Manager- Headshot
Win Murray

Portfolio Manager