A Patient and Active Approach
August 20, 2015
Recent data reveals that the majority of active funds do not outperform their respective indexes, which has spurred large inflows into passive investments. But a look beneath the data’s surface reveals a more complex landscape. Research conducted by Russ Wermers and Tong Yao concludes that stocks owned heavily by index funds exhibit more long-term pricing anomalies: active funds enhance, while index funds reduce, the informational efficiency of stock prices1. As active investors, we think this shift to passive investments creates excellent buying opportunities.
*Antti Petajisto, “Active Share and Mutual Fund Performance,” Published by CFA Institute, Financial Analysts Journal. Volume 69, Number 4. 2013. http://www.petajisto.net/research.html
We do not think all active funds are created equally. Analyzing active funds as a whole fails to recognize the huge variety of processes and skill levels in the space. Michael Mauboussin proposes the concept of untangling skill versus luck to identify the most successful long-term investors. Mauboussin believes that active share, tracking error, and an investors’ process—broken down into analytical, behavioral and organizational segments—are better indicators of future successes than past performance2.
We believe that the analytical, behavioral and organizational portions of our process at Harris Associates are the keys to our success. Analytically, our generalist research analysts take a private equity approach to valuing businesses. We seek to buy businesses trading at a discount to their true business value and build focused portfolios from our highest-conviction ideas. Behaviorally, we aim to capitalize on the mistakes many investors make based on human nature. Where impatience and emotions lead many to make rash decisions, we believe that our patient, disciplined approach allows us to remain rational throughout our process. Organizationally, our interests are aligned with those of our clients; we manage the capacity of our funds to help ensure that our nimble investment process is never compromised.
Our active and patient approach to investing leads all of our funds to have high active share, which measures the percentage of an equity portfolio that differs from its benchmark. While it is true that the average mutual fund underperforms net of fees, studies show that on average, funds with high active share and long-term investment horizons did outperform their respective indices net of fees3.
*Short Duration is a holding period of less than 7 months; Long Duration is a holding period of more than 24 months.
No matter what investment landscape we find ourselves in, Harris Associates has an unwavering commitment to our active and patient approach. In our opinion, it’s the best way for us to protect and grow our investors’ capital over the long term.
1Russ Wermers and Tong Yao. “Active vs Passive Investing and the Efficiency of Individual Stock Prices.” February 2010
2Mauboussin, Michael. “The Success Equation: Untangling Skill and Luck in Business, Sports, and Investing.” pg. 168 Harvard Business Review Press, 2012.
3Martijn Cremers & Ankur Pareek “Patient Capital Outperformance: The Investment Skill of High Active Share Managers Who Trade Infrequently.” September 2014.
|Oakmark Fund (vs. S&P 500)
|Oakmark Select Fund (vs. S&P 500)
|Oakmark Global Fund (vs. MSCI World)
|Oakmark Global Select Fund (vs. MSCI World)
|Oakmark International Fund (vs. MSCI World ex U.S.)
|Oakmark International Small Cap Fund (vs. MSCI World ex U.S. Small Cap)
Active Share as of December 31, 2016
Definition: Active Share measures the percentage of an equity portfolio that differs from its benchmark. An Active Share level of 50% is the theoretical minimum that a pure active manager would have; anything below that is essentially a combination of an active fund and an index fund.
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.
The MSCI World Index (Net) is a free float-adjusted market capitalization weighted index that is designed to measure the global developed equity market performance. This benchmark calculates reinvested dividends net of withholding taxes using Luxembourg tax rates. This index is unmanaged and investors cannot invest directly in this index. Benchmark returns are not covered by the report of the independent verifiers.
The MSCI World ex U.S. Index (Net) is a free float-adjusted market capitalization index that is designed to measure international developed market equity performance, excluding the U.S. This benchmark calculates reinvested dividends net of withholding taxes using Luxembourg tax rates. This index is unmanaged and investors cannot invest directly in this index. Benchmark returns are not covered by the report of the independent verifiers.
The MSCI World ex U.S. Small Cap Index (Net) is a free float-adjusted market capitalization index that is designed to measure global developed market equity performance, excluding the U.S. The MSCI Small Cap Indices target 40% of the eligible Small Cap universe within each industry group, within each country. MSCI defines the Small Cap universe as all listed securities that have a market capitalization in the range of USD200-1,500 million. This benchmark calculates reinvested dividends net of withholding taxes using Luxembourg tax rates. This index is unmanaged and investors cannot invest directly in this index.
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 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.
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.
The benchmark-beating results of high Active Share managers are an average of the group. Not all managers with high Active Share portfolios will beat their benchmarks.