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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.
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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
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.
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.
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.
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.
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.
While the world was fretting about a potential U.S. recession earlier this year, we added four economically sensitive businesses to the portfolio.
Perhaps the defining event of the quarter (in financial terms) was the Federal Reserve’s decision to increase short-term interest rates.
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.
In the previous decade the concept of “active share” developed in an attempt to explain when active managers are able to beat passive alternatives.
Though we do not love the current investing landscape, the possibility of identifying attractive new opportunities remains.
Perhaps the most striking economic event in the quarter was the major decline in the price of oil.
Active management does not always mean high turnover.
Last year we wrote that investors should “embrace volatility,” but we admit that it is difficult to identify volatility to embrace today.
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%.
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.
“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.
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.
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.
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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.