Report from Bill Nygren, Portfolio Manager
The accompanying chart of stock market indicies shows that during the three months ended April 30, the recent trend continued of very large stocks outperforming average-sized stocks. The Oakmark Select Fund was down 2.0% for the quarter. That compares poorly to the 2.4% gain in the S&P 500, but is consistent with losses realized in broader indices. For the six months since your Fund’s inception, its gain of 22.5% compares very favorably to all the indices. Again, I’d like to caution against focusing on short-term performance numbers. As the period of time gets shorter, the numbers become more random. Our goal is exceptional long-term performance. That “long term’’ will include “short terms’’ that are exceptional and “short terms’’ that are disappointing. Don’t get distracted by the short terms. As a well known political figure says, “Keep your eyes on the prize!’’
When you compare this quarter’s portfolio with last quarter’s, you’ll notice quite a change. Three stocks that previously accounted for 27% of the portfolio have been sold. You should now be asking, “Why is this Fund that preaches long-term value-investing experiencing such rapid turnover?’’
We buy stocks when they are selling at large discounts to our estimate of intrinsic value. When we buy a stock, we expect to hold it for several years. We set our sell targets based on intrinsic value and expect both value and our targets to move upward as time goes on. We sell stocks for two basic reasons. Our preferred reason to sell is when the stock price increases and we no longer feel the stock is inexpensive relative to its value. The less pleasant reason is when we make mistakes. If new information causes us to lower our estimate of intrinsic value, a stock that has gone down could also be fully valued and would also be sold.
The good news is that the portfolio changes last quarter in The Oakmark Select Fund were caused by successful stock performance. As you may recall, stock prices for two of our holdings, First USA and McDonnell Douglas, rose in response to takeover proposals. Despite thinking these acquisitions are good strategic moves, in my judgement, the acquirers’ stocks are not selling at as large a discount to intrinsic value as are the other stocks we own. Therefore, both stocks were sold.
Our third sale was SPX Corp. When SPX was purchased in November, it represented 4% of our portfolio. SPX quickly appreciated to a price where I was unwilling to purchase more shares. By March, SPX represented under 1% of the portfolio and it was sold for a gain of 65%. As you know, The Oakmark Select Fund is very concentrated. If a stock position is too small to be meaningful, and we are unwilling to add to it, it will be sold. Despite last quarter’s high turnover, you should be confident that we are consistently applying our long-term value philosophy.
On the buy side, US Industries is now your Fund’s largest holding. US Industries is a collection of US-based businesses that was spun off from Hanson PLC two years ago. One of its largest and best-known businesses is Jacuzzi. In February, US Industries Chairman and CEO, David Clarke, visited our office. In addition to those titles, David is also a large shareholder of this company. One of his comments captures what we mean by investing with owner-oriented managements. In discussing how he invests US Industries’ money, David said “Acquisitions need to be significantly more attractive than share repurchase or why would we even do it? I’d rather buy what we know best, our own stock.’’ In a world where many managers make acquisitions just to get bigger, it’s refreshing to hear David’s common-sense approach. You should take great comfort that when US Industries makes an acquisition, they expect it to lead to a higher share price.
Just as we look for “owner-oriented’’ managements, you should look for “owner-oriented’’ fund managers. I am both the portfolio manager and a shareholder of The Oakmark Select Fund. As with you, I will measure our long term success only by our share price. Thank you again for your support.
BILL NYGREN
Portfolio Manager
bnygren@oakmark.com
May 2, 1997
| 4/30/97 NAV $12.25 | Total Return* Through 4/30/97 |
|
|---|---|---|
| Total Return Last 3 mos. |
From Fund Inception 11/1/96 |
|
| THE OAKMARK SELECT FUND | -2.0% | 22.5% |
| Standard &Poor’s 500 w/inc Stock Index** | 2.4% | 14.7% |
| Standard & Poor’s MidCap 400 w/inc Index** | -2.6% | 6.9% |
| Value Line Composite Index** | -2.6% | 5.2% |
*Total return includes change in share prices and in each case, except for the Value Line Index, includes reinvestment of any dividends, interest and capital gain distributions.
**Each of the three indexes or averages is an unmanaged group of stocks whose composition is different from the Fund. The S&P 500 is a broad market-weighted average dominated by blue-chip stocks. The S&P 400 consists of 400 domestic stocks chosen for market size, liquidity, and industry group representation. The Value Line Index is an unweighted average of more than 1,000 stocks. Past performance is no guarantee of future performance.
THE OAKMARK SELECT FUND |
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Schedule of Investments—April 30, 1997 (Unaudited) |
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| Shares Held/ Principal Value |
Market Value | |||
|---|---|---|---|---|
| Common Stocks—93.6% | ||||
| Other Consumer Goods & Services—8.7% | ||||
| Polaroid Corporation | 206,000 | $ 9,991,000 | ||
| Brunswick Corporation | 255,900 | 7,229,175 | ||
| 17,220,175 | ||||
| Banks—4.7% | ||||
| People’s Bank of Bridgeport, Connecticut | 309,000 | $ 9,270,000 | ||
| Insurance—5.9% | ||||
| PartnerRe Ltd. | 348,000 | $ 11,701,500 | ||
| Broadcasting & Cable TV—13.1% | ||||
| TCI Satellite Entertainment, Inc., Class A (a) | 1,235,000 | $ 9,262,500 | ||
| Cablevision Systems Corporation (a) | 271,100 | 8,539,650 | ||
| U.S. West Media Group (a) | 469,000 | 8,090,250 | ||
| 25,892,400 | ||||
| TV Programming—15.4% | ||||
| Tele-Communications, Liberty Media, Class A (a) | 1,614,500 | $ 30,372,781 | ||
| Publishing—7.8% | ||||
| ACNielsen Corporation | 560,700 | $ 8,410,500 | ||
| Dun & Bradstreet Corporation | 287,000 | 7,067,375 | ||
| 15,477,875 | ||||
| Data Storage—3.9% | ||||
| Imation Corporation (a) | 327,000 | $ 7,725,375 | ||
| Building Materials & Construction—6.1% | ||||
| USG Corporation (a) | 351,000 | $ 12,021,750 | ||
| Oil & Natural Gas—7.0% | ||||
| Union Texas Petroleum Holdings, Inc. | 425,000 | $ 8,021,875 | ||
| Titan Exploration, Inc. (a) | 780,000 | 5,850,000 | ||
| 13,871,875 | ||||
| Other Industrial Goods & Services—4.9% | ||||
| Premark International, Inc. | 395,000 | $ 9,677,500 | ||
| Diversified Conglomerates—16.1% | ||||
| U.S. Industries, Inc. (a) | 880,200 | $ 31,797,225 | ||
| Total Common Stocks (Cost: $188,329,947) | 185,028,456 | |||
| Short-Term Investments—5.3% | ||||
| Commercial Paper—4.6% | ||||
| Ford Motor Credit Corp., 5.46% due 5/12/1997 | 2,000,000 | $ 2,000,000 | ||
| American Express Credit Corp., 5.49% due 5/1/1997 | 2,000,000 | 2,000,000 | ||
| General Electric Capital Corporation, 5.65% due 5/1/1997 | 5,000,000 | 5,000,000 | ||
| Total Commercial Paper (Cost: $9,000,000) | 9,000,000 | |||
| Repurchase Agreements—0.7% | ||||
| State Street Repurchase Agreement, 5.37% due5/1/1997 | 1,421,000 | $ 1,421,000 | ||
| Total Repurchase Agreements (Cost: $1,421,000) | 1,421,000 | |||
| Total Short-Term Investments (Cost: $10,421,000) | 10,421,000 | |||
| Total Investments (Cost $198,750,947)—98.9%(b) | $ 195,449,456 | |||
| Other assets in excess of other liabilities—1.1% | 2,153,232 | |||
| Total Net Assets | $197,602,688 ========== |
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Notes:
(a) Non-income producing security.
(b) At April 30, 1997, net unrealized depreciation of $3,301,491 for federal income tax purposes consisted of gross unrealized appreciation of $4,362,670 and gross unrealized depreciation of $7,664,161.
See accompanying notes to financial statements