Oakmark Select Fund: Third Quarter 2021

The Oakmark Select Fund was up 3.4% for the quarter, ahead of the S&P 500 Index’s 0.6% return. For the fiscal year ending September 30, 2021, the Oakmark Select Fund increased by 64.0%, compared to a 30.0% gain for the S&P 500 Index. After five years of pervasive value underperformance, the past 11 months (essentially since the first vaccine was approved) have been wonderful for investors who adhere to our value style of investing.

The most significant contributors to performance during the quarter were Alphabet (+9%) and CBRE Group (+14%). The same two stocks were also our largest contributors for the full fiscal year, up 82% and 107%, respectively. The Fund still maintains sizable positions in both companies because they continue to sell at discounts to our estimates of their intrinsic values, despite their strong stock price performance. (Note that CBRE’s quarter-end weighting is larger than our actual economic interest in the position. We’ve chosen to sell calls against it rather than reduce the position by selling stock directly, as the price of the calls implies CBRE is a more volatile company than we believe it to be.)

The most significant detractors from performance during the quarter were Lear (-10%) and Constellation Brands (-10%). For the full year, the sole detractor was Allison Transmission (-10%). All of these companies remain holdings in the Fund and all continue to sell at significant discounts to our estimates of their intrinsic values.

We didn’t add or remove any companies from the portfolio this quarter.

Many times, when clients notice positions such as Netflix, Facebook, and Alphabet in our portfolio, they question whether we remain true “value” investors. We believe our performance over the trailing 12 months demonstrates that we are. There were 252 trading days over that period. Seventy two of those days were strong value days, in which the Russell 1000 Value Index outperformed its growth counterpart by 0.50% or more. On those days, the Select Fund cumulatively outperformed the S&P 500 Index by 66% and outperformed the Russell 1000 Value Index by 16%. Given that the Fund’s total 12-month outperformance versus the S&P 500 Index was 34%, you can see that more than all of it was driven by the 29% of trading days in which value stocks did particularly well.

Every company—large or small, public or private—is worth the present value of its future cash flows. Any company selling at a substantial discount to our estimate of that value is, in our minds, a “value” stock, regardless of how expensive it might look according to traditional GAAP accounting metrics. Our estimate of the intrinsic value of a share of Netflix, for example, is well in excess of the current stock price, despite the fact that the stock sells at more than 45 times consensus 2022 EPS estimates (which we believe doesn’t factor in Netflix’s future pricing power).

GAAP accounting does a poor job of capturing the underlying economics of R&D-heavy businesses. Even still, a large portion of our portfolio holdings do look quite inexpensive on traditional metrics. We own 13 stocks that sell for less than a 14 P/E on 2022 consensus estimates, well below the market multiple of 19x. Seven of those companies are trading at single-digit P/E ratios. Rest assured, we at Oakmark are value investors, through and through.

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 09/30/21: Allison Transmission 2.6%, Alphabet Cl A 9.6%, CBRE C@90 12/17/21 -0.4%, CBRE Group Cl A 8.2%, Constellation Brands Cl A 3.5%, Facebook Cl A 4.9%, Humana 3.3%, Lear 3.3%, and Netflix 5.3%. 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 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.

EPS refers to Earnings Per Share and is calculated by dividing total earnings by the number of shares outstanding.

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.

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.

A call option conveys the right, but not the obligation, to buy an asset at an agreed-upon price (“strike price”) within a specific time period. The buyer of a call option risks losing the amount paid for the option if the price of the asset does not exceed the strike price. The seller of a call option risks losing an amount equal to the asset’s price less the amount received from the sale of the call. Call options can reduce the risk of owning stocks, but it can limit returns. There can be no guarantee that the use of options will increase the Fund’s return or income. In addition, there may be an imperfect correlation between the movement in prices of options and the securities underlying them and there may at times not be a liquid secondary market for various options.

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 09/30/2021 unless otherwise specified.