Oakmark Fund: First Quarter 2011
March 31, 201
The Oakmark Fund increased in value by 5% for the three months ended March 31, 2011. Though good as an absolute return, our return slightly trailed the S&P 500 gain of 6%.
The biggest reason we didn’t quite keep up with the S&P was the strength of the energy sector. During the quarter, the price of oil increased by 17% (West Texas) or 24% (North Sea Brent), depending on which measure one uses. Commodity businesses, understandably, tend to perform quite well when the commodity they sell experiences such a price spike. For the quarter, the average energy stock increased two to three times as much as the S&P did, and our portfolio wasn’t as heavily weighted in those stocks. We don’t believe this higher price of oil reflects a long-term market-clearing price and, for that reason, we value oil stocks using an assumption thatoil prices will fall. In our valuations, most oil companies are priced less attractively than other businesses are, and we are comfortable continuing to own just the few we have.
Returns of individual stocks in the portfolio followed the typical pattern for successful quarters—more winners than losers, and gains of greater magnitude than losses. The Fund had 18 double-digit gains and only two double-digit losses. The biggest losses were suffered by Cisco Systems (-15%) and Best Buy (-16%). Both reported disappointing operating results, and we are revisiting our long-term forecasts. In both cases, we believe that the stocks remain attractive.
On the positive side we had seven stocks that gained more than our largest loser lost: DirecTV (+17%), Viacom (+18%), Cenovus (+19%), EnCana (+19%), Capital One (+22%), Harley Davidson (+23%) and H&R Block (+42%). Block had been one of our weakest stocks in previous quarters, but snapped back nicely as early tax results exceeded expectations and lingering subprime mortgage losses remained trivial.
During the quarter, we neither added any new positions nor eliminated any positions that were owned at the end of 2010. However, we did receive one new security via corporate action: Huntington Ingalls Industries was spun off from Northrop Grumman. Our numbers showed Huntington trading at a substantial premium when comparing its total capitalization (including debt) to the pretax, pre-interest cash flow it generates. For that reason, we sold our shares in Huntington and used the proceeds to increase our Northrop position. In addition to Northrop, we also added substantially to our positions in Unilever, Aflac and FedEx.
Thank you for your continuing support.
William C. Nygren, CFA
Kevin G. Grant, CFA
Average Annual Total Returns (03/31/11)
Expense Ratio as of 9/30/10 was 1.11%
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.
As of 3/31/11, Cisco Systems, Inc. represented 1.2% of The Oakmark Fund's total net assets, Best Buy Co., Inc. 1.5%, DIRECTV, Class A 1.7%, Viacom, Inc.-Class B 2.1%, Cenovus Energy, Inc. 1.8%, EnCana Corp. 1.1%, Capital One Financial Corp. 2.1%, Harley-Davidson, Inc. 1.8%, H&R Block, Inc. 1.4%, Huntington Ingalls Industries, Inc. 0%, Northrop Grumman Corp. 1.9%, Unilever PLC – ADR 1.6%, Aflac, Inc. 1.5%, and FedEx Corp. 1.5%. Portfolio holdings are subject to change without notice and are not intended as recommendations of individual stocks.
The S&P 500 Index is a broad market-weighted average of U.S. blue-chip companies. This index is unmanaged and investors cannot actually make investments in this index.
The discussion of the Funds’ investments and investment strategy (including current investment themes, the portfolio managers' research and investment process, and portfolio characteristics) represents the Funds’ investments and the views of the portfolio managers and Harris Associates L.P., the Funds' investment adviser, at the time of this letter, and are subject to change without notice.