Oakmark Select Fund: Third Quarter 2014
September 30, 2014
For the quarter, the Oakmark Select Fund gained less than 1%, compared to 1% for the S&P 500. This brings the Fund’s fiscal year ended September 30 return to 25%, compared to 20% for the S&P 500. As we’ve said in recent letters, our investors should not expect this degree of absolute and relative performance every year; but we trust that you appreciate the performance as much as we do, as fellow investors in the Fund.
The favorable fiscal-year results were due to strong stock selection and in particular the acquisition of several of our holdings. The five largest contributors to the fiscal-year results were Forest Laboratories (up 113%), TRW (42%), DIRECTV (38%), Intel (57%), and FedEx (42%). Three of the top five contributors (Forest Labs, TRW and DIRECTV) were acquired, the most recent of which was TRW – our largest holding going into this quarter. It goes without saying that we welcome takeover activity in any of our holdings. Please see Bill’s commentary where this topic is discussed in greater depth.
It is unusual to discuss the top five detractors for the fiscal year, since only two holdings had a negative absolute impact on the portfolio and only one still remains a holding. Cenovus Energy (-1%) was eliminated as discussed last quarter, and Actavis (+2%) had a negative impact given we had a small short position as a hedge against our shares in Forest Labs that were short-term, as discussed in the March 2014 letter. The other three detractors were Fidelity National Financial (+1% and a spin-off from FNF that was subsequently sold), Kennametal (+2% and sold), and Franklin Resources (+3%).
During the fiscal year, we added seven new positions to the Fund (Apache, CBRE Group, Franklin Resources, Google, Fidelity National, Citigroup and Amazon) and sold seven core holdings (Newfield Exploration, Forest Labs, Texas Instruments, Kennametal, DIRECTV, Comcast and Cenovus Energy). Admittedly, this is an above-average level of portfolio activity. You may recall that in last year’s fiscal year-end letter we discussed the slightly below-average turnover in the portfolio as something that we were neither proud nor ashamed of. Well, the same applies to the above average turnover this year. Portfolio activity is simply a fall-out of our investment process. A good portion of the turnover this year was due to several holdings being acquired at substantial premiums to our cost basis. Unfortunately, this high quality problem has an associated cost – capital gains taxes. Please understand that the combination of limited losses in the portfolio and increased turnover – again, much of which was determined by favorable corporate actions – will reduce our ability to limit capital gain distributions this year. At Oakmark, we are always working to maximize total returns after tax, but often this requires the discipline of selling yesterday’s “winners” to buy tomorrow’s.
Thank you for your continued investment in the Fund.
William C. Nygren, CFA
Anthony P. Coniaris, CFA
Average Annual Total Returns (09/30/14)
Expense Ratio as of 9/30/13 was 1.01%
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 09/30/14, Forest Laboratories, Inc. represented 0%, TRW Automotive Holdings Corp. 4.2%, DIRECTV 0%, Intel Corp. 3.6%, FedEx Corp. 3.7%, Cenovus Energy, Inc. 0%, Actavis PLC 0%, Fidelity National Financial, Inc. 3.5%, Kennametal, Inc. 0%, Franklin Resources, Inc. 3.6%, Apache Corp. 6.5%, CBRE Group, Inc. 4.2%, Google, Inc., Class A 5.0%, Citigroup, Inc. 5.0%, Amazon, Inc. 5.0%, Newfield Exploration Co. 0%, Texas Instruments, Inc. 0%, and Comcast Corp. 0% of the Oakmark Select Fund's total net assets. Portfolio holdings are subject to change without notice and are not intended as recommendations of individual stocks.
Click here to 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 market capitalization-weighted index of 500 large-capitalization stocks commonly used to represent the U.S. equity market. All returns reflect reinvested dividends and capital gains distributions. 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.
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.