Oakmark Select Fund: Second Quarter 2019

June 30, 2019

Oakmark Select Fund – Investor Class
Average Annual Total Returns 06/30/19
Since Inception 11/01/96 11.47%
10-year 12.65%
5-year 3.55%
1-year -6.90%
3-month 4.53%

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 returned 4.5% for the quarter, modestly ahead of the S&P 500 Index’s 4.3% return. Year to date, the Fund has returned 18.6% again, just ahead of the S&P 500’s 18.5% return. 

The most significant contributors to performance during the second quarter were Anadarko Petroleum (+55%), TE Connectivity (+19%) and American International Group (+24%). We are pleased to report that Anadarko has agreed to be acquired by Occidental Petroleum for a substantial premium. Buying businesses at a significant discount to their intrinsic value has always been a hallmark of our process at Oakmark. It’s gratifying, then, when an acquirer endorses our opinion of a holding’s value and supports our long-held belief that the stock market can be quite inefficient at times.

The most significant detractors to performance were Regeneron Pharmaceuticals (-23%), Weatherford (-93%) and Alphabet (-8%). Health care stocks fell out of favor as political rhetoric picked up during the quarter. Yet Regeneron’s fundamental business continues to perform quite well, so we took advantage of its weak stock price to substantially add to our position during the quarter. Weatherford, one of the world’s largest oil and natural gas service companies, announced an unfavorable refinancing during the quarter that significantly diluted equity holders. We are always disappointed when we get a stock as wrong as we were on Weatherford. We are already examining what went wrong with our initial analysis and how we could have detected our misjudgment earlier. We always undergo this kind of review with our mistakes, believing that better understanding them will make us less likely to repeat them in the future.

More broadly, it is important to note that we view our energy investments as a package. Some companies in that package, like Weatherford, represent a higher risk/higher return proposition, due to both their financial and operating leverage. We mitigate that risk by maintaining a higher portfolio weighting in less risky energy investments. This approach succeeded during the past quarter when another of the Fund’s energy holdings, Anadarko, agreed to be acquired and subsequently boosted our Fund’s NAV enough to offset the loss created by Weatherford. 

Alphabet was impacted by modestly slower revenue growth reported in the first quarter and increasing political and regulatory pressure.  We have long incorporated slowing revenue growth in our valuation as Alphabet matures and we use an artificially high discount rate relative to Google’s franchise and balance sheet strength to account for political, regulatory and technological risks. Alphabet remains our largest and highest conviction holding. To be clear, this does not mean we believe Alphabet is going to outperform each and every quarter or year going forward, but rather that we believe it is highly likely that Alphabet will materially outperform the broader market, cumulatively, over many years. 

For reasons already discussed, we sold both Anadarko and Weatherford during the quarter, and we purchased one new holding, Concho Resources. We believe Concho is one of the highest quality oil and gas producers in the U.S., with an enormous acreage position in the most attractive parts of the Permian Basin. This large inventory of future drilling locations can allow the company to invest at high returns for years to come. We think the market is currently valuing this strategically attractive set of assets at a discount to recent private market transactions and below Permian peers on a per acre basis, despite the company’s superior economics and high-quality management team, which has a long history of creating value for shareholders through both efficient operations and savvy capital allocation. We believe shareholders can once again be rewarded as Concho develops and monetizes its acreage footprint.

The securities mentioned above comprise the following percentages of the Oakmark Select Fund’s total net assets as of 06/30/19: Alphabet 9.2%, AIG 4.5%, Anadarko Petroleum 0%, Concho Resources 3.2%, Occidental Petroleum 0%, Regeneron Pharmaceuticals 4.2%, TE Connectivity 5.3% and Weatherford 0%. 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.

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 06/30/2019 unless otherwise specified.

Bill Nygren portrait
William C. Nygren, CFA

Portfolio Manager

Tony Coniaris portrait
Tony Coniaris, CFA

Portfolio Manager