Oakmark Select Fund: Third Quarter 2019

September 30, 2019

Oakmark Select Fund – Investor Class
Average Annual Total Returns 09/30/19
Since Inception 11/01/96 11.17%
10-year 10.19%
5-year 2.74%
1-year -10.34%
3-month -3.42%

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 was down 3.4% for the quarter, trailing the S&P 500 Index’s 1.7% return.  For the fiscal year ending September 30, 2019, the Oakmark Select Fund decreased by 10.3%, compared to a 4.3% gain for the S&P 500 Index.  As shareholders of the Fund and as stewards of your capital, we remain frustrated by how much our portfolio and the value style have recently underperformed the S&P. However, we are encouraged that the Fund owns a portfolio of securities that trades at a substantial discount to our estimate of its intrinsic value.  We expect that when “value” starts to matter more to market participants, the Oakmark Select Fund should strongly benefit.

We saw evidence that gave us confidence in this belief as a result of the market’s performance from August 28 to September 16.  During this period, market leadership abruptly shifted from “momentum” to “value.”  The Russell 1000 Value index increased 6.9%, while the S&P 500 index rose by just 4.6% over the same period.  The Oakmark Select Fund, meanwhile, rose by 9.5% during those same 14 trading days.

We’ve written many times over the past few years about how traditional GAAP-based value metrics, such as P/E and price-to-book ratios, fail to properly capture the underlying value of companies that have substantial R&D budgets, high cash balances, and non-earning assets.  Some investors have questioned whether we at Oakmark have fallen prey to “style drift” and have moved away from “classic” value investing.  To the contrary, as the Fund’s performance during this quarter’s brief value renaissance demonstrates, we continue to use the same investment process and philosophy that have generated strong Fund performance over longer time frames.  We buy businesses at large discounts to what we believe they are worth, regardless of whether GAAP metrics properly present a company’s true value.

The most significant contributors to performance during the quarter were Alphabet (+13%) and Ally Financial (+8%).  For the full fiscal year, the most significant performers were Ally (+28%) and CBRE (+20%).  The most significant detractors during the quarter were Concho Resources (-31%) and Netflix (-27%).  For the full fiscal year, the largest detractors were Weatherford (-98%) and Apache (-52%).  With the exception of Weatherford, which was sold out of the portfolio last quarter, all of these companies remain holdings in the Fund, and all continue to sell at a significant discount to our estimates of their intrinsic value.

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

The securities mentioned above comprise the following percentages of the Oakmark Fund’s total net assets as of 09/30/19: Ally Financial 7.8%, Alphabet Cl C 10.7%, Apache 3.0%, CBRE Group Cl A 8.9%, Concho Resources 2.6%, Netflix 3.5% 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.

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.

The price to earnings ratio (“P/E”) compares a company’s current share price to its per-share earnings.  It may also be known as the “price multiple” or “earnings multiple”, and gives a general indication of how expensive or cheap a stock is.  Investors should not base investment decisions on any single attribute or characteristic data point.

The Price to Book Ratio is a stock’s capitalization divided by its book value.

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 09/30/2019 unless otherwise specified.

Bill Nygren portrait
William C. Nygren, CFA

Portfolio Manager

Tony Coniaris portrait
Tony Coniaris, CFA

Portfolio Manager