Commentary

Oakmark Select Fund: Third Quarter 2020

September 30, 2020

Oakmark Select Fund – Investor Class
Average Annual Total Returns 09/30/20
Since Inception 11/01/96 10.57%
10-year 8.54%
5-year 3.67%
1-year -2.45%
3-month 5.24%

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 up 5.2% for the quarter, trailing the S&P 500 Index’s 8.9% return. For the fiscal year ending September 30, 2020, the Oakmark Select Fund decreased by 2.5%, compared to a 15.2% gain for the S&P 500 Index. As has been well-documented, this past year has continued a particularly difficult period for value managers; the Russell 1000 Value Index declined by 5.0% over the same 12-month period. We expect no capital gain distribution this year.

The most significant contributors to performance during the quarter were Ally Financial (+28%) and Charter Communications (+22%). For the full fiscal year, the most significant performers were Regeneron Pharmaceuticals (+102%) and Netflix (+87%). We continue to hold all four investments. Ally, Charter, and Netflix have large weights in the Fund, still selling at sizable discounts to our estimates of their intrinsic values despite their strong stock performance, while Regeneron is now a smaller position as its gap to value has narrowed more materially.

The most significant detractors from performance during the quarter were EOG Resources (-29%) and Citigroup (-15%). For the full year, the largest detractors were Citigroup (-35%) and Apache (-63%). All of these companies remain holdings in the Fund, and all continue to sell at a significant discount to our estimate of fair value.

Citigroup was our largest detractor for the period due to Covid-19-related concerns that have hurt the entire financial sector, as well as a handful of Citigroup-specific headlines that amplified near-term uncertainty. We believe that investors’ short-term focus can cause them to miss the bigger picture. The company has remained profitable throughout the Covid-19 crisis to date. It continues to operate with significant excess capital relative to regulatory minimums, even as it has added more than $10.5B to credit reserves year to date. We believe the company is proving its resilience during a real-life stress test. Yet, despite this positive early evidence, Citigroup currently trades at only 60% of tangible book value and slightly over 5x 2019 earnings per share. Given that we think the company’s normalized earnings power is greater than what it achieved in 2019, we find these valuation metrics especially attractive. As we move beyond the pandemic, we think investors’ focus will shift to the underlying quality of the business and they will value the resilience Citigroup demonstrated during this crisis.

We bought one new position in the Fund this quarter, HCA Healthcare. HCA has been a longstanding holding in more diversified Oakmark portfolios, including the Oakmark Fund and the Oakmark Equity and Income Fund. We were happy to take advantage of the pandemic-driven stock price volatility to add it to the Select Fund during the quarter. HCA is the largest operator of for-profit hospitals and related health care services in the U.S. The company benefits from scale and size advantages, an attractive geographic footprint in higher growth markets, best-in-class management and governance, and an equity-friendly approach to capital allocation. Although the Covid-19 pandemic created disruptions across the hospital sector, we believe HCA’s fundamentals have held up remarkably well. Management believes the company will be in an even stronger position coming out of the crisis than it was coming into it and that demand for health care services will be robust for years to come. As the economy normalizes, we expect HCA to resume growing its operating income in the mid-single digits. At less than 10x normal earnings, the shares are selling well below our estimate of intrinsic value.

We eliminated our position in Qurate Retail during the quarter. The company is still selling at a discount to our estimate of its intrinsic value; however, that discount has narrowed as its stock price benefitted from the increase in online shopping during the quarantine. As such, we don’t believe the stock is attractive enough to merit holding in a concentrated portfolio.

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

The securities mentioned above comprise the following percentages of the Oakmark Select Fund’s total net assets as of 09/30/20: Ally Financial 6.3%, Apache 1.5%, Charter Communications Cl A 7.1%, Citigroup 4.9%, EOG Resources 2.2%, HCA Healthcare 2.8%, Netflix 5.1%, Qurate Retail 0% and Regeneron Pharmaceuticals 2.0%. 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, 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.

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 09/30/2020 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