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Although we cannot explain why markets behaved so differently in 2017 and 2018, we can recall that valuation compression like that experienced in 2018 generally precedes strong returns.
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The past year proved to be difficult and volatile for equity investors. But did this downward price movement accurately reflect a change in the fundamentals of the Fund’s investments? We think not.
Our job is to seek value wherever we can find it in both the equity and fixed income markets. To do that, however, we must recognize that value itself is always evolving and we must also evolve to keep up.
We think that the Global Fund portfolio is unusually attractive today and we have been adding to our personal Fund holdings. We have continued to shift assets from the U.S. allocation to international to take advantage of the exceptional opportunities available abroad.
For investors in mutual funds, the question of “fit” is of paramount importance. Investors make the best decisions when they have invested with funds whose style and philosophy mesh well with their own character and needs. Perhaps the most useful advice we can give fund investors is that they should often check to see if they understand their funds and, if so, consider whether they still fit.
Our investment process applies a private equity approach to public markets. Like private equity, we value businesses based on their intrinsic value, buy at a substantial discount and sell when they are fully valued. Unlike private equity, we mark our portfolio companies according to current public stock prices.
Our type of value investing requires only that human nature stays constant (i.e., not perfectly rational), such that price and value diverge and converge periodically.
Rather than target a particular country (or industry) weight, we focus our efforts on populating the Fund with our best ideas, while also seeking appropriate diversification.
As 2017 began, many investors greeted the new year with apprehension. However, the stock market’s ability to defeat expectations is legendary, and 2017 deserves its entry in the book of surprises.
While it may not feel like it every quarter or year, we are building what we believe is a truly conservative global portfolio of our best ideas, one company at a time, to maximize returns over a multi-year period.
The Equity and Income Fund has always been invested with the objective to produce absolute rates of return that make it possible for its owners to meet their financial goals
We were fairly active this quarter, initiating positions in four equities, one of which is the Fund’s first holding ever to be domiciled in India.
Although the June quarter superficially appeared to extend trends that emerged after the presidential election, a more careful examination shows material changes in the landscape.
Why do we think that a value-based, all-capitalization global fund is worth of your consideration? Value investing is a discipline that has stood the test of time.
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.
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.
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.
Although many prognosticators warned that political trends in 2016 would be problematic for securities markets, the stock markets have proven to be quite resilient.
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.
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.
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.
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.
While the world was fretting about a potential U.S. recession earlier this year, we added four economically sensitive businesses to the portfolio.
As interest rates normalize, spreads between financial industry liabilities and assets will widen, and profitability should materially increase.
Perhaps the defining event of the quarter (in financial terms) was the Federal Reserve’s decision to increase short-term interest rates.
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.
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 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.
In the previous decade the concept of “active share” developed in an attempt to explain when active managers are able to beat passive alternatives.
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.
Though we do not love the current investing landscape, the possibility of identifying attractive new opportunities remains.
In the first quarter, European equities in particular benefited from the European Central Bank’s initiation of a larger than expected quantitative easing program.
Perhaps the most striking economic event in the quarter was the major decline in the price of oil.
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.
Active management does not always mean high turnover.
We initiated positions in a French bank and a Swiss luxury goods company during the quarter.
Last year we wrote that investors should “embrace volatility,” but we admit that it is difficult to identify volatility to embrace today.
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.
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%.
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.
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.
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.
“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.
The September quarter produced strong equity outcomes across most world markets.
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.
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).
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.
As was the case one year ago, the March quarter witnessed a strong rally in world stock markets, with very few countries experiencing losses.
For more historic commentaries, available in the Oakmark Quarterly Reports, click here.
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Investing in value stocks presents the risk that value stocks may fall out of favor with investors and underperform growth stocks during given periods.
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Date of first use: January 24, 2013.