Kristi Rowsell - March 31, 2014
Dear Fellow Shareholders,
The markets provided modest positive returns to shareholders during the first quarter of 2014. It is nice to see that investors reacted with relative calm to geopolitical events this quarter, showing a notable resiliency compared to recent years. The U.S. economy is growing moderately, as are corporate earnings, and unemployment levels are slowly continuing to fall. Communications from our new Federal Reserve Chairman reflect a commitment to keeping interest rates low while executing a gentle retreat in quantitative easing. Investors appear more confident that equities are the best asset class for delivering long-term returns.
High Frequency Trading Debate
Michael Lewis published a book last week called Flash Boys that is attracting much media attention to high-frequency trading (“HFT”) in the stock markets. It is fascinating to see the spotlight return to this topic. One will recall that the Securities and Exchange Commission spent considerable time researching whether and how the “flash crash” of 2010 was affected by HFT. Computer-based trading and technology failures severely hurt Knight Capital and, separately, the Facebook IPO in the summer of 2012, prompting another discussion of how to manage the vulnerabilities introduced by the speed and capacity of computerized trading. Now, Michael Lewis describes how fast data feeds and special exchange order types have enabled HFT computers to execute trades in microseconds and get ahead of other market participants. The debates between certain exchange participants and Mr. Lewis are becoming highly charged but, indeed, informative. We think it is good that discussions about these issues are putting the spotlight on market health and functionality.
Over the years the traders at Harris Associates have worked diligently to navigate a technologically advanced landscape of broker algorithms, liquidity sources and evolving market structure. The tools they have cultivated assist us in accessing the additional liquidity in electronic markets without revealing too much about the nature of our trades. We think the customizations we’ve implemented, including using price limits and minimum fill quantities, as well as accessing dark pools and block trading venues, have helped reduce our exposure to predatory HFT strategies. We regularly review broker algorithms, order routing data and venue performance so that we can constantly adjust and improve how our orders are handled. Although we can never be perfectly insulated from HFT exposure, our practices appear to help. We believe our trading costs compare favorably to other investment managers. In fact, in December 2013, Institutional Investor’s Transaction Cost Analysis survey1 ranked Harris Associates sixth overall in the Elkins/McSherry universe of asset management firms for exhibiting trading costs below market averages.
We welcome the chance for market participants to gain a better understanding and to have access to more transparency regarding trading behavior. However, let’s remember two important elements of context – one applicable to all investors and one especially to Oakmark shareholders. All investors have benefited from the narrower spreads and enormous drop in commissions that markets have seen over the past decade. Trading commissions that once cost seven to ten cents per share – or more – can now be as low as fractions of a penny. The proliferation of algorithmic trading models and dozens of alternative trading venues has made trade execution hugely competitive, delivering benefits to all who own stocks. For shareholders in The Oakmark Funds, note that we are not actively trading in and out of stocks in your portfolios. Our portfolio turnover is relatively low, implying that we typically hold securities for years at a time. Further, our interest in a company’s stock is not driven by trading dynamics. We look for stocks trading at a substantial discount to our estimate of intrinsic value. Our focus on identifying a stock’s true economic value and our willingness to patiently own it until that value is realized means that the penny-perfect purchase or sale price does not contribute meaningfully to the total return of the stock for our shareholders. We do, however, eagerly follow all developments in the trading arena, such as broker behavior and technological tools. This is part of good stewardship of shareholder assets. But in our view, market phenomena such as HFT are unlikely to contribute to or detract meaningfully from our success.
Lipper Awards for 2014
In March, Lipper awarded The Oakmark Funds the “Best Equity Large Fund Group” for 2014. We are pleased to be recognized for our achievements amongst the competitive landscape represented by our peers. Also, The Oakmark Global Fund was recognized by Lipper for excellence in its category for the ten-year period.
We are grateful to receive industry accolades and are even more thankful for your continued trust in The Oakmark Funds. Please email us with your questions and comments at ContactOakmark@Oakmark.com.
President of The Oakmark Funds
President of Harris Associates L.P.
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 performance of the Oakmark International Small Cap Fund does not reflect the 2% redemption fee imposed on shares redeemed within 90 days of purchase. To obtain the most recent month-end performance data, view it here.
1Ben Baris, Institutional Investor December 2013 / January 2014. “Transaction Cost Analysis, Shaving Pennies Amid the Boom”. The Transaction Cost Analysis survey conducted by Elkins/McSherry compared investment firms’ trading costs relative to the volume-weighted average price, based on a universe of approximately 1,400 managers.
The Oakmark Family of Funds was named Lipper’s Best Equity Large Fund Group, an award designed to recognize fund families with strong track records across all of their funds. Oakmark was ranked best out of 46 eligible fund groups due to the performance of all seven of its underlying funds. Each fund group must have at least three funds in Lipper's general U.S.-stock category, one world (global and international), one mixed-asset/balanced (stocks and bonds), two taxable bond and one tax-exempt bond fund. Eligibility requires that the fund group have at least five U.S. fund portfolios and each have at least 36 months of performance history ending at November of the evaluation year. Lipper’s Large Fund Group classification is comprised of fund managers with assets under management of $50.7 billion or more as of 11/30/13.
The Oakmark Global Fund won an award in Lipper’s Global Multi-Cap Core Funds category for the 10-year period. The Oakmark Global Fund, managed by Clyde McGregor and Rob Taylor, follows Harris Associates’ value-oriented process to find opportunities across the globe. The fund was recognized for its consistent, risk-adjusted performance over the long term.
The Lipper Fund Awards are presented annually by Lipper, a mutual fund rating and research firm, to honor funds that it believes have excelled in providing superior performance relative to peers around the world. The awards are part of the broader Thomson Reuters Awards for Excellence program. More information about the Lipper Fund Awards is available at http://excellence.thomsonreuters.com/award/lipper.
The above information should not be considered tax advice. Please consult your tax advisor for detailed information applicable to your unique situation.
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.