Oakmark Select Fund: Fourth Quarter 2018

December 31, 2018

Oakmark Select Fund – Investor Class
Average Annual Total Returns 12/31/18
Since Inception 11/01/96 10.89%
10-year 12.58%
5-year 2.21%
1-year -24.88%
3-month -21.73%

Gross Expense Ratio as of 09/30/18 was 1.04%
Net Expense Ratio as of 09/30/18 was 0.97%

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 declined 21.7% in the fourth quarter, while the S&P 500 Index declined 13.5%.  As fellow shareholders in the Fund and stewards of your capital, we are disappointed in these results.  As we wrote last quarter, the market has broadly rejected investments in pro-cyclical companies, regardless of their underlying fundamentals or their relative cheapness.  We remain committed to the same investment process that has generated our strong long-term returns.  Furthermore, the drop in stock prices during the fourth quarter enabled us to add four companies to the portfolio (Anadarko, Hilton, Lear, and Netflix) – all of which are well regarded in their respective industries for the quality of their management teams and assets.

Our energy sector holdings accounted for more than half of the Fund’s underperformance during the quarter, as oil prices fell roughly 37% from $75 to $47.  Increased concern about the outlook for the economy, as opposed to actual fundamental weakness, negatively impacted the prices of our financial, consumer discretionary, and industrial sector holdings.  The largest detractors in the quarter were Weatherford (-79%), Adient (-56%), and Apache (-44%).  The largest contributors (smallest detractors) were Hilton Worldwide (+1%), Netflix (-2%), and Lear (-2%).

We want to provide a few words on portfolio positioning as detailed in Bill Nygren’s commentary for the Oakmark Fund.  In general, the Select Fund’s positioning is similar to that of the Oakmark Fund, with larger weights in our highest conviction areas – this is not surprising given the concentrated nature of the Select Fund.  For example, about one-seventh of the Oakmark Fund’s portfolio is invested in companies that are more undervalued than their GAAP earnings would indicate. In contrast, the Select Fund has roughly one-fifth of its portfolio invested in companies that fit this criterion (such as Alphabet, Netflix, and Regeneron).  Both funds have about one-quarter of their portfolios invested in the financial sector, but Select’s weighting is concentrated in fewer names.  Just over 30% of Select’s portfolio is invested in cyclical stocks (industrial, consumer discretionary, and energy) versus about 25% of the Oakmark Fund’s.  Like the Oakmark Fund, the Select Fund is also underweight less cyclical and currently more popular sectors like health care. The Select Fund doesn’t own any consumer staples (vs. a small weighting in Oakmark), utilities (none in Oakmark), or telecom companies (none in Oakmark).

As stock prices fell in the fourth quarter, companies with less debt became cheaper on an enterprise value basis.  We used the extreme volatility in both the energy and auto industries to add new positions in Anadarko Petroleum and Lear, and we eliminated our ownership of Chesapeake Energy and Adient.  In both cases, we retained exposure to very undervalued industries and have done so through new investments in companies with stronger balance sheets, while capturing tax losses. Anadarko has a stronger balance sheet than Chesapeake Energy, was selling at a similar discount to enterprise value, and has a history of returning capital to shareholders.  Lear, Adient’s chief competitor, has a much stronger balance sheet and better mix of businesses than Adient.  In addition, Lear has the financial wherewithal to purchase significant amounts of its stock at current prices.  We believe Lear is cheaper on an enterprise value basis and that Adient’s significant equity upside is a function of its large debt load.

We purchased Netflix in the quarter because its share price fell roughly 40% from its July high.  We’ve owned Netflix in the Oakmark Fund for nearly 18 months and written extensively about our thesis.  Nothing at Netflix has fundamentally changed in our opinion.  The price merely fell to a level that justified owning it in a concentrated portfolio like Oakmark Select. 

We also started a position in Hilton Worldwide.  Our reasons to own the company are the same as when we first purchased Hilton in the Oakmark Fund in the second quarter of this year.  Additionally, the company’s valuation improved as its share price fell due to broad skepticism about cyclical businesses.   Our analysis of the company is based on through-cycle economics, which accounts for the cyclical gyrations of the business.

We also eliminated our position in Oracle to pursue these other attractive opportunities.

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

The securities mentioned above comprise the following percentages of the Oakmark Select Fund’s total net assets as of 12/31/18: Adient 0%, Anadarko 2.4%, Apache 3.2%, Chesapeake Energy 0%, Hilton Worldwide 2.0%, Lear 2.3%, Netflix 3.7%, Oracle 0%  and Weatherford 0.9%. 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, 2020.

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 above information should not be considered tax advice. Please consult your accountant, tax advisor or tax professional for detailed information applicable to your unique situation.

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.

Oakmark Select 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 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.

All information provided is as of 12/31/2018 unless otherwise specified.

Bill Nygren portrait
William C. Nygren, CFA

Portfolio Manager

Tony Coniaris portrait
Tony Coniaris, CFA

Portfolio Manager