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As value investors, our understanding of value evolves as the investing environment changes. Although the current term structure of interest rates is far from ideal, it is our charge to succeed for our shareholders in all circumstances, including this abnormal interest rate environment.
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Oakmark has never solely used statistical factors to define value. Instead, we have always done extensive due diligence on each company to estimate intrinsic value. Our analysis has always tried to account for the value of both physical and intangible assets.
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.
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.
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 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.
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 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.
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.
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
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.
Before investing in any Oakmark Fund, you should carefully consider the Fund's investment objectives, risks, management fees and other expenses. This and other important information is contained in a Fund's prospectus and summary prospectus. Please read the prospectus and summary prospectus carefully before investing. For more information, please call 1-800-OAKMARK (625-6275).
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Date of first use: January 24, 2013.