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I often get asked the question, “What do you think makes a good investment analyst?” Outside of the criteria used by many investment firms, we at Oakmark look for three unique characteristics in all hires.
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Although we are never sure what exactly will cause the gap between price and value to narrow, we are generally confident that it will occur over time.
During the quarter, we added three new positions to the portfolio.
We build portfolios in the same manner we would manage our personal capital: We seek to maximize after-tax returns over a multi-year time horizon by concentrating our investments in the most undervalued businesses, managed by capable and properly motivated management teams.
The Fund’s top contributor for the quarter was a Swiss luxury goods company, while the largest detractor was a U.S.-based global oil and gas exploration company.
A Swiss mining and commodity trading company was the largest contributor to the Fund’s quarterly performance, while a Sweden-based global fashion designer and retailer was the largest detractor.
A U.K.-based global workplace provider was the Fund’s top contributor in the quarter, while a New Zealand-based pay-television provider was the largest detractor.
While there were no new names added to the portfolio this quarter, we increased our positions in our existing holdings that we felt were still trading at a substantial discount to fair value.
Since the founding of our flagship Oakmark Fund 25 years ago, we have striven to stand out from competitors by focusing on being the type of mutual fund that we ourselves would want to be invested in.
As value investors, our key task is to focus on the fundamental drivers of long-term cash flows and see through the haze generated by market pundits, who are overly influenced by geopolitical events such as referendums and other elections.
As managers of the Equity and Income Fund, we believe that our investors should focus on developing a portfolio that is right for them and their financial needs.
We are very pleased that recent performance showed a substantial reversal from the results reported to you a year ago following the fourth quarter of 2015.
Although many prognosticators warned that political trends in 2016 would be problematic for securities markets, the stock markets have proven to be quite resilient.
The largest contributor to the Fund performance this quarter was a U.S. bank, while a French food-products corporation was the Fund’s largest detractor.
The Fund’s top contributor for the quarter was a Swiss mining and commodity trading company, while the largest detractor was a Mexican media company.
An Australian manufacturer of mining explosives, fertilizers and industrial chemicals was the Fund’s top contributor in the quarter, while a U.K.-based investment management group was the largest detractor.
During the quarter we added one new position to the Fund: a financial services company.
We believe that our personal investments in the Oakmark Funds align our interests with those of our shareholders, and reflect our shared connection to your long-term financial goals.
With October upon us and many Chicagoans’ minds fixated on the Cubs’ post-season play, I couldn’t help but consider how short the average investor’s time frame has become—effectively investing for just the World Series rather than the longer regular season.
Simply put, we continue as before, knowing that over time price and value will come together often enough to be the basis of an effective investing strategy.
This quarter marks the 25th anniversary of the Oakmark Fund, and we are proud of our long-term results and pleased to mark the occasion with an all-time high adjusted NAV at quarter end.
Given the stock market’s seasonal tendency to decline in the quarter, investors expected the period to be challenging. But as is so often the case, the market surprised, this time to the upside.
The top contributor to the Fund’s quarterly performance was a worldwide leader in cement and other building materials, while a global producer of industrial, aviation and medical goods was the Fund’s largest detractor.
A Swiss mining and commodity trading company was the largest contributor to the Fund’s quarterly performance, while a U.K.-based commercial and retail bank was the largest detractor.
A Finnish company that specializes in the manufacturing and servicing of cranes and other lifting equipment was the Fund’s top contributor in the quarter, while a U.K.-based global workplace provider was the largest detractor.
In the third quarter, we added a large casino operator to the portfolio.
We are pleased to announce that the Oakmark Funds have initiated the registration process with the Securities and Exchange Commission to add two new share classes to our lineup: an Advisor share class and an Institutional share class.
We at Oakmark are confident in the advantages of active management, and believe that if you are a middleman who can be replicated by a computer algorithm, in asset management or elsewhere, you’re in trouble.
We continue to believe that strong investment performance requires discipline and patience, and that the opportunities are quite positive for long-term investment success.
We will continue to monitor changes in our estimates of value closely, but we are comforted that, for the most part, business fundamentals are evolving as we expected and that valuations are compelling.
At Oakmark, we evaluate businesses by summing the present value of their future cash flows, which we believe will only be minimally affected by U.K.’s recent vote to leave the EU.
We continue to do our best to optimize the returns of the Fund by purchasing undervalued companies that are growing their intrinsic value over time and that are managed by individuals who think and act like long-term owners of the business.
The Fund’s top contributor for the quarter was a U.S.-based global oil and gas exploration company, while the largest detractor was a Swiss financial services group.
A U.K.-based international equipment rental company was the Fund’s top contributor this quarter, while a Swiss financial services group was the largest detractor to performance.
A French company that designs, develops and manufactures batteries for industrial use was the Fund’s largest contributor in the quarter, while a British property services group was the largest detractor for the period.
During the quarter we added two new positions to the Fund: a business-oriented social networking service and a well-known motorcycle manufacturer.
During the quarter, I had the opportunity to answer some questions for The Motley Fool. What follows is an excerpted version of that Q&A.
While the world was fretting about a potential U.S. recession earlier this year, we added four economically sensitive businesses to the portfolio.
We remain focused on assessing the long-term underlying value of businesses, which we believe are much less volatile than stock prices.
As interest rates normalize, spreads between financial industry liabilities and assets will widen, and profitability should materially increase.
The largest contributor to Fund performance this quarter was a U.S. software company, while a Swiss financial services company was the largest detractor to performance.
The Fund’s top contributor was a Swiss mining and commodity trading company, while the largest detractor was a Swiss financial services company.
An Australian health care services company was the Fund’s top contributor in the quarter, while a Swiss bank holding company was the largest detractor.
We remain confident in our financial holdings and the same process that has delivered success since the Fund’s inception.
We believe that our Funds are positioned to continue delivering on their dual long-term goals of growing investor capital and performing better than index funds.
As they have little to do with company-specific intrinsic value, we think it is a mistake to react to all macro and geopolitical events when making investment decisions.
Perhaps the defining event of the quarter (in financial terms) was the Federal Reserve’s decision to increase short-term interest rates.
As portfolio managers and large shareholders of the Fund, we’re not satisfied with losses, but we remain confident in our time-tested philosophy, investment process and research team.
Although most developed markets closed out the year with modest or negative returns (when expressed in U.S. dollars), considerable volatility occurred beneath the surface of the market averages. This has availed us plentiful opportunities to reorient the portfolio.
The top contributor to the Fund’s quarterly performance was a leading Internet search engine, while a Swiss financial services company was the Fund’s largest detractor.
A China-based Internet search engine was the Fund’s top contributor this quarter, while an Italian fashion and luxury goods brand was the largest detractor to performance.
A Japanese drugstore chain was among the top contributing stocks for the quarter, while a South Korean banking, securities and financial services provider was one of the largest detractors.
While the Fund’s full-year performance wasn’t as strong as we would’ve liked, it’s worth noting that our pre-tax and after-tax returns were very similar, despite realizing large gains throughout the year.
Experience tells us that in weak performance periods like last year, good opportunities often arise and that our patience is typically rewarded.
When we invest in undervalued businesses run by CEOs with good win-loss records, we believe the foundation is put in place for long-term success.
In times of market volatility and stress, we believe investors would be well served simply to tune out the market and adhere to their long-term investment plans.
We remain confident that our focus on business value and our extended investment time horizon will position the Fund for favorable results over longer periods of time.
We expect the Fund’s holdings to continue to generate free cash flow, invest in their businesses, pay dividends and repurchase stock, and, in general, grow their intrinsic value per share.
The Fund’s top contributor for the quarter was a U.S. technology company, while the largest detractor was a U.S.-based oil and gas exploration and production company.
The Fund’s largest contributor was a French aerospace and defense company, while the largest detractor was one of the world’s largest mining and commodity trading companies.
The world’s largest listed wine company was the Fund’s top contributor in the quarter, while a Finnish provider of technology and equipment for the metals and mining industries was the largest detractor.
We have been through difficult periods before and remain thoroughly committed to the same investment process that has delivered success since the Fund’s inception.
During the quarter I had the opportunity to answer some questions from readers of GuruFocus. What follows is an excerpted version of that Q&A.
We seize opportunities at times like these to purchase quality businesses at lower prices. This is the essence of value investing.
In the previous decade the concept of “active share” developed in an attempt to explain when active managers are able to beat passive alternatives.
We continue to feel that financial securities are among the most attractive segments in the market.
In managing funds in the Oakmark group, we insist on buying companies at a meaningful discount to our intrinsic value of the business – regardless of the volatility in the security’s price.
The largest contributor to Fund performance this quarter was a U.S. technology company, while a South Korean electronics company was the largest detractor to performance.
A U.K. bank was the Fund’s top contributor this quarter, while a South Korean electronics company was the largest detractor to performance.
A Swiss bank was the Fund’s largest contributor in the quarter, and a Nordic IT infrastructure company was the largest detractor for the period.
During the quarter we added an agricultural company and an automobile manufacturer to the Fund.
We don’t see any reason that the investing environment we face today is materially different than what we’ve faced throughout our history.
Though we do not love the current investing landscape, the possibility of identifying attractive new opportunities remains.
We feel the financials and energy sectors remain undervalued, and the Oakmark Fund added to several positions in these sectors during the quarter.
In the first quarter, European equities in particular benefited from the European Central Bank’s initiation of a larger than expected quantitative easing program.
The top contributor to the Fund’s quarterly performance was a U.S.-based online retailer, while a bank in the U.S. was the Fund’s largest detractor.
An Italian bank was the Fund’s top contributor for the quarter, while a Swiss luxury goods company was the largest detractor.
A U.K.-based professional recruitment firm was the Fund’s top contributor in the quarter, while a Hong Kong-based developer and owner of casinos and resorts was the largest detractor.
We remain steadfast in our commitment to the same investment process that has delivered success since the Fund’s inception.
Unlike much of the mutual fund industry, Oakmark is focused on maximizing after-tax return.
We believe that the proposed changes in China should eventually be positive for the Chinese economy and the region.
Perhaps the most striking economic event in the quarter was the major decline in the price of oil.
As we have written in the past, we believe the financial and information technology sectors are among the most attractive, and investments in these areas represent over half of the Fund’s equity holdings.
When we analyze a company as a potential investment, its home base is relevant primarily for us to understand the laws and accounting conventions under which it must operate.
The top contributor for the quarter was a U.S.-based technology company, and the largest detractor was a U.S.-based oil and gas exploration and production company.
A German vehicle manufacturer was the Fund’s top contributor this quarter, while a Japanese vehicle manufacturer was the Fund’s largest detractor.
A Swiss travel services company was the Fund’s top contributor this quarter, while a South Korean financial holding company was the largest detractor.
As the price of many energy-related equities has fallen, their attractiveness has increased.
We believe that managers who have tied their wealth directly to their company’s stock show that their interests are aligned with their investors.
I’d like to take the opportunity to discuss how we at Oakmark analyze acquisition proposals.
Active management does not always mean high turnover.
The information technology and financial services sectors are still among the most attractive sectors of the market.
We initiated positions in a French bank and a Swiss luxury goods company during the quarter.
A semiconductor manufacturer was the Fund’s top contributor in the quarter, while the largest detractor from the quarterly return was a manufacturer of agricultural and construction equipment.
A retail and commercial bank was the Fund’s top contributor this quarter, while the largest detractor was a manufacturer of agricultural and construction equipment.
The top contributor for the quarter was an engineering and technology consulting company, while a geological engineering company was the largest detractor.
It goes without saying that we generally welcome takeover activity in any of our holdings.
Each year we give shareholders an indication of the level of income and capital gains that we believe will be distributed at the end of the year.
To us, buying great businesses at average prices is just as much value investing as is buying average businesses at great prices.
There seem to be some positive reforms in Japan worth commenting on.
Last year we wrote that investors should “embrace volatility,” but we admit that it is difficult to identify volatility to embrace today.
Our great team of research analysts continues to find attractively valued companies to add to the portfolio. Over the past two quarters, we have added seven new companies to the Fund.
Last quarter we began our report comparing the dichotomy between the macro environment and the performance of the equity markets. For better or worse, the same can be written once again for the June quarter.
The Fund’s largest contributor this quarter was a U.S. technology company, and the largest detractor was a U.S. financial services firm.
The top contributor for the quarter was a Swiss luxury goods company, and a Swiss-based financial services company was the Fund’s largest detractor.
The top contributing stock for the quarter was an Australian-based vineyard operator and winemaker, and the largest detractor was a U.K. property company.
We continue to believe that universal banks are significantly undervalued relative to their normalized earnings power.
Overall, we believe equities remain attractive as an asset class, especially in comparison to other alternatives.
At Oakmark, our professionals learn quickly that the team is more important than the individual.
After spending much of 2013 with an equity weighting near the Fund’s prospectus maximum of 75%, we have moved the equity allocation down to 65%.
Stocks certainly aren’t as cheap as they were a year ago, but we are still finding attractive companies to add to the portfolio.
Given our value investing philosophy, it should come as no surprise that we reduced the weight of U.S. holdings in the portfolio during the previous quarter.
A U.S. financial services company was the top contributor for the quarter, and a Japanese brokerage company was the largest detractor.
An Italian retail and commercial bank was the largest contributor for the quarter, while the largest detractor was a Japanese automobile manufacturer.
Holdings in Japan contributed most to the Fund’s quarterly return, while Swiss and Australian names were the largest detractors.
At Oakmark, active management means more than just stock selection – it also involves maximizing after-tax returns and managing risk in special situations.
Over the years the traders at Harris Associates have worked diligently to navigate a technologically advanced landscape of broker algorithms, liquidity sources and evolving market structure.
Our message is the same as it almost always is – don’t let current events keep you from following your long-term financial plan.
Despite the strong past performance of global equities, we believe there is still value in global equity markets.
With interest rates at record lows last winter and stocks attractively priced, we increased the equity allocation toward the maximum allowed 75% level, which we maintained for most of 2013. Fortunately, this asset allocation proved to be rewarding.
Our portfolio has been heavily invested in financial services, economically sensitive industrials and information technology.
We like to remind our shareholders that as managers and investors in the Fund, our motivation is to invest in the most attractive equity securities wherever they may be found, and not to mirror an index’s allocations.
Japan’s second-largest broker was the largest contributor for the year, and the largest detractor was a Japan-based consumer imaging company.
The largest contributor for the year was Japan’s second-largest broker, and the largest detractor was a provider of explosives for the mining industry.
A U.K. property company was the largest contributor for the year, while one of the large detractors for the year was a seismic company.
Looking ahead, we continue to see attractively priced investment opportunities in financials, large cap technology, automotive cyclicals, and the energy sector.
We believe that investing beside our shareholders shows good stewardship and reflects that our interests are aligned.
During the quarter I had the opportunity to answer some questions from readers of GuruFocus. Following is an excerpt of that Q&A.
“Sell in May and go away” is a well-known phrase in the investing community. It derives from empirical observations that the summer months are often difficult for the stock market.
We still found the financials and information technology sectors to be attractively valued for the quarter just ended.
The September quarter produced strong equity outcomes across most world markets.
Once again, a Japanese brokerage and a global auto manufactuer led the quarter’s contributors. The top detractor was a Canadian-based oil company.
Japan’s second-largest broker was the top contributor to the fund's performance over the past 12 months and the largest detractor was an Australian mining-services company.
The top-performing stock for the one-year period and a strong contributor for the recent quarter was one of the U.K.’s largest residential estate agency and property appraisal companies.
Our strong fiscal-year results were primarily due to stock selection and our relatively large weighting in more economically sensitive sectors such as consumer discretionary and financials.
A little over a month ago – May 21, to be exact – the stock market was on track for another great quarter....
During the lazy days of summer, one may contemplate investing from the perspective of a regatta.
Security returns were quite disparate across countries, economic sectors and asset types in the June quarter. After a strong start, security prices became erratic after comments from Federal Reserve Chair Ben Bernanke suggested an eventual reduction (a.k.a. tapering) in Fed asset purchases.
Our portfolio has been heavily invested in financial services, technology and economically sensitive stocks. Those sectors performed well in the quarter, and not surprisingly, our best performers were companies in those industries.
The June quarter was a fascinating period for investors in global equities. Several countries’ stock markets entered corrections (i.e., declines in excess of 10%), and Japan’s energetic bull market quickly became a bear market (down 20% from the peak).
A Japanese brokerage and a global auto manufactuer led the quarter’s contributors while a Japan-based professional and consumer solutions company was the top detractor.
One of the dominant retail banks in the U.K., was the top contributor to performance for the quarter and an Australian mining services company was the largest detractor.
The top contributing stocks for the quarter were a Swiss freight forwarding company and an Israeli firm that designs, develops, manufactures, markets and services automated optical inspection systems and imaging solutions.
Our portfolio has been heavily invested in financial services, technology and economically sensitive stocks. Those sectors performed well in the quarter...
Corporations are generating more cash than they can reinvest, so dividends, buybacks and acquisitions are on the rise.
Our team continued to work to shift the Fund’s fixed-income allocation in a yield-enhancing direction while remaining cognizant of risk. This is incredibly difficult in a world where many investors chase income.
Despite strong market gains in the first quarter of 2013, we believe stocks remain moderately undervalued relative to their own history and extremely undervalued versus bonds.
As was the case one year ago, the March quarter witnessed a strong rally in world stock markets, with very few countries experiencing losses.
A U.S. computer maker and a Japanese brokerage led the quarter’s contributors, while a Swiss freight company and a Canadian oil producer were top detractors.
Continued talk of economic reform from Japan’s new government has led to a weakening of the yen and a market rally, while Italy’s election results call into question whether it will continue on the austerity path.
While international stocks have been performing well, this hasn’t hindered our ability to find new attractive investment candidates.
In this past quarter, stocks of stable businesses with high dividends tended to be better performers. This trend does not appear to be supported by stock valuations, but rather by investors searching for income who found these stocks to be cheaper than bonds.
The long-term success of Oakmark's investment culture depends on training the next generation of leaders
The enduring lesson of 2012:
Macro shocks create market opportunities for patient investors.
Kristi Rowsell recaps the latest quarter's events and offers her thoughts on the benefits of an asset allocation plan.
Bill answers questions about the role of macro for bottom-up investors, future financial regulation and market volatility
David offers his thoughts on why the Oakmark International Fund has been so successful over its 20 years of existence
Being a big fan of Jack Schwager’s Wizard series of investment books, I eagerly read his newest book, Hedge Fund Market Wizards, and was not disappointed.
Volatility - tough to stomach, but good for your financial health! The second quarter was dominated by volatility brought on by macro fears largely surrounding Europe and the eurozone economic situation, but slower growth in the U.S. and the emerging markets also weighed in on people’s fears. For a change, events in Japan received almost no attention!
2012 is off to a great start for stock market investors. The S&P 500 was up 13% for the quarter. In just one quarter the S&P 500 returned more than a seven-year U.S. government bond would have returned over its entire lifetime.
Something crazy happened the morning of December 13. When I turned on CNBC, the S&P futures were exactly unchanged from their December 12 close. Dead flat. Zero movement. In a normal year, no change would be common or even expected. But in 2011, especially during the second half of the year, days frequently started with stock prices at very different levels from where they were just hours earlier. It became the norm for pre-market prices to be up or down 1% or 2%. Late in the year, S&P 500 volatility exceeded 30%, more than three times the volatility levels of five years ago.
While both the Oakmark International and International Small Cap Funds had acceptable investment performance in the fourth quarter of 2011, the full year was not good for global equities or for our two Funds, as natural disasters (first in Japan, later in Thailand) and Europe’s sovereign debt crisis took their toll. The short-term challenges cannot be denied, but I remain extremely confident about the medium and long-term future.
When I studied stock market history in college, I used to think that it would have been so easy to be an investor in the 1950s. The math behind dividend discount models hadn’t yet been widely accepted, and most investors thought that, because equities were riskier than bonds, they needed to have higher yields. Of course, we have learned that equities require a higher expected return than bonds, but that expected growth is a very large component of that return. When equities yield less than bonds, they still usually have the higher expected returns. If only we could again have the opportunity they had in the ’50s! Be careful what you wish for.
As I write to you, volatility and uncertainty in the market are drawing comparisons to what occurred in 2008-2009. Many pundits and observers are tripping over themselves to come up with the most fearful scenario. With this negative noise level steadily rising, it is understandable the global stocks, including some held in our Funds, are experiencing a period of weakness. Over the last three months alone, international stocks are down almost 20%, and for the year they are down by almost 10%. The U.S. equity market, down less than 9% year to date, is actually one of the better-performing markets.
Every week seems to bring a new story about how much money is flowing into mutual funds. If we stopped after the headlines, we might wrongly conclude that mutual fund investors are once again positive about the stock market. And, because mutual fund inflows have historically been a contrary indicator, this trend might worry investors.
During the quarter the market experienced continued instability, despite falling energy prices and Japan slowly beginning to recover from the March earthquake and tsunami disasters. These were two of the three major areas of concern that existed at the beginning of the quarter. Of course, the dominant factor still plaguing global financial markets is the situation in Greece.
I enjoy reading books about successful organizations. I like to see how their methods overlap with ours and the companies we have investments in. I also like seeing what they do differently than we do to get ideas for how we can improve. While we have learned some things from studying other successful investment firms, I find we learn more from comparisons to non-investment companies. And given my non-work interests, I especially enjoy the comparisons to successful sports organizations.
The new year brought a degree of optimism as a result of strong economic growth in the emerging markets, as well as recovery in the developed world.
For more historic commentaries, available in the Oakmark Quarterly Reports, click here.
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Date of first use: January 24, 2013.