Oakmark Fund: First Quarter 2019
March 31, 2019
After a very difficult 2018 for the Oakmark Fund and the S&P 500, the market shrugged off many of the uncertainties surrounding interest rates, a trade war and slowing global growth during the first quarter of 2019. For the first quarter, the Oakmark Fund was up 13%, which trailed the S&P 500’s 14% gain. Despite this near-term bounce back, we continue to believe that our portfolio of stocks remains attractively valued, following a period in 2018 in which stock prices underperformed business fundamentals. As always, our investment process focuses on long-term business value and is not influenced by short-term volatility in share prices.
During the quarter, we added two new names to the portfolio (see below) and we eliminated positions in Aon, Bristol-Myers Squibb, Diageo, Flex Ltd. and Unilever. We generally sell stocks when they appreciate toward our estimate of intrinsic value or when new information proves our investment thesis to be incorrect. This quarter, we had some of each. Diageo outperformed the S&P 500 in 2018 and year to date in 2019, and we sold our position when the share price approached our estimate of intrinsic value. Aon and Unilever were also sold as they approached our estimate of intrinsic value. We sold Flex after the company announced disappointing progress in its consumer electronics segment and the termination of its partnership with Nike. These developments lowered our estimate of intrinsic value, making the stock’s return potential less competitive with the rest of the portfolio and other potential additions. Bristol-Myers was sold after the company announced an acquisition that we believe was sub-optimal, signaling a reduction in the value of their core business.
Our best contributing sectors during the first quarter were financials and information technology, which were the two largest sectors in our portfolio. General Electric and Netflix were our best individual contributors for the quarter with total returns of 39% and 33%, respectively. After a long period of disappointing results at General Electric, we were pleased to see the new management team take steps to improve the company’s balance sheet and remove additional layers of uncertainty. Our lowest contributing sectors for the quarter were health care and consumer staples, and our worst contributing individual securities were CVS Health and Qurate Retail with returns of -17% and -18%, respectively.
Constellation Brands, Inc. (STZ - $175.33)
Constellation Brands is the top imported beer company in the U.S. and one of the world’s leading wine producers. We believe that the company’s valuation is compelling due to its robust long-term growth outlook of its strong brands within both beer and wine. Over the past five years, Constellation’s beer segment — which includes brands such as Corona, Modelo and Pacifico, among others — has grown its sales volume and revenue at a 10% and 12% CAGR, respectively. The company was able to accomplish this impressive growth during a period when industry volume growth remained relatively flat. Despite a market-leading medium-term growth outlook that calls for high single-digit revenue growth within its beer segment and low-to-mid single-digit growth within its wine and spirits portfolio, Constellation trades at a meaningful discount to other consumer packaged goods companies that are experiencing slow to no growth. In addition to its portfolio of brands within beer, wine and spirits, the company has established a strategic partnership and large ownership stake in the world’s largest publicly traded cannabis company, Canopy Growth Group. We believe this partnership positions Constellation to potentially become one of the bigger beneficiaries in a category that some project could exceed $200 billion in global demand over the next 10 to 15 years. On our one-year forward earnings estimate, Constellation trades in line with the earnings multiple for the overall market without giving the company any value for its significant stake in Canopy. We believe this presents an opportunity to invest in an above-average business at just an average price.
S&P Global, Inc. (SPGI - $210.55)
S&P Global is a collection of businesses that provides ratings and benchmarks that are essential to financial markets around the world. Bonds that are issued with an S&P rating pay meaningfully less in interest per year, which generates savings for debt issuers far in excess of the cost of the rating. Also, ETFs and mutual funds tied to S&P Global’s indexes, especially the S&P 500, are gaining market share in the fast-growing passive investing market. And S&P Global’s data and analytics services provide unique insights that help customers make critical decisions across their businesses. Each of S&P Global’s segments share the common characteristic of providing value for customers that is much greater than the prices they charge. As a result, S&P Global is able to raise prices and generate above-average earnings growth. Indeed, over the past five years, S&P Global has grown its earnings per share by over 20% annually, while returning over 100% of free cash flow to shareholders. We believe S&P Global is an exceptional company with a long runway for growth, trading at a price that is below our estimate of intrinsic value.
William C. Nygren, CFA
Kevin G. Grant, CFA
Oakmark Fund - Investor Class
Average Annual Total Returns (03/31/19)
Since Inception (08/05/91) 12.36%
Gross Expense Ratio as of 09/30/18 was 0.89%
Net Expense Ratio as of 09/30/18 was 0.85%
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. To obtain the most recent month-end performance data, view it here.
The securities mentioned above comprise the following percentages of the Oakmark Fund’s total net assets as of 03/31/19: Aon 0%, Bristol-Myers Squibb 0%, Canopy Growth Group 0%, Constellation Brands Cl A 1.3%, CVS Health 1.8%, Diageo ADR 0%, Flex Ltd. 0%, General Electric 1.2%, Netflix 3.2%, Nike 0%, Qurate Retail Cl A 1.1%, S&P Global 1.0% and Unilever 0%. Portfolio holdings are subject to change without notice and are not intended as recommendations of individual stocks.
Access the full list of holdings for the Oakmark Fund as of the most recent quarter-end.
The net expense ratio reflects a contractual advisory fee waiver agreement through January 27, 2020.
Compound annual growth rate (CAGR) is the rate of return that would be required for an investment to grow from its beginning balance to its ending balance, assuming the profits were reinvested at the end of each year of the investment’s lifespan.
The S&P 500 Total Return Index is a float-adjusted, capitalization-weighted index of 500 U.S. large-capitalization stocks representing all major industries. It is a widely recognized index of broad, U.S. equity market performance. Returns reflect the reinvestment of dividends. This index is unmanaged and investors cannot invest directly in this index.
The Oakmark Fund’s portfolio tends to be invested in a relatively small number of stocks. As a result, the appreciation or depreciation of any one security held by the Fund will have a greater impact on the Fund’s net asset value than it would if the Fund invested in a larger number of securities. Although that strategy has the potential to generate attractive returns over time, it also increases the Fund’s volatility.
The discussion of the Fund’s investments and investment strategy (including current investment themes, the portfolio managers' research and investment process, and portfolio characteristics) represents the Fund’s investments and the views of the portfolio managers and Harris Associates L.P., the Fund’s investment adviser, at the time of this letter, and are subject to change without notice.
All information provided is as of 03/31/2019 unless otherwise specified.