Commentary

Oakmark Fund: Second Quarter 2019

June 30, 2019

Oakmark Fund - Investor Class
Average Annual Total Returns 06/30/19
Since Inception 08/05/91 12.37%
10-year 14.42%
5-year 7.76%
1-year 0.39%
3-month 3.22%

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 Oakmark Fund increased 3.2% for the second quarter of 2019, which lagged slightly behind the 4.3% gain for the S&P 500, the Fund’s benchmark. The Fund benefited from Occidental Petroleum’s acquisition offer for Anadarko Petroleum and we sold our Anadarko holding following an increase of over 50% for the quarter. A significant decline in oil prices allowed us to replace Anadarko with three new exploration and production (E&P) companies. U.S.-focused E&Ps have meaningfully improved their capital efficiency profile through the oil downturn. We expect them to generate excess returns given their position at the low end of the global cost curve. All three of our new E&P holdings operate top-quality acreage in the premier U.S. onshore region (the Permian Basin), are led by returns-focused management teams and maintain strong balance sheets. We remind shareholders that energy holdings represent just 7% of the Fund, which is only slightly higher than the S&P 500 energy weighting of 5.2%, but our holdings have a higher level of operating leverage, which magnifies their impact on the Fund’s performance.

The Oakmark Fund’s best contributing sectors during the second quarter were information technology and financials, which are our two largest sectors. Our worst contributing sectors were health care and energy. The Fund’s best contributing individual securities were Anadarko (+55%) and American International Group (+24%) and the worst contributing securities were Regeneron Pharmaceuticals (-24%) and Chesapeake Energy (-36%). Regeneron’s stock price fell due to concerns around potential drug pricing regulation and new competition for their best-selling drug Eylea. We continue to believe Regeneron sets drug prices responsibly and we anticipate future growth from new drug launches and the company’s strong R&D pipeline. Regeneron is valued at an attractive low-teens P/E when adjusting R&D to peer averages and adjusting SG&A for product launch costs.

During the quarter, we added new positions in Concho Resources, Diamondback Energy and EOG Resources.

Concho Resources Inc. (CXO – $103.18)
Concho Resources, in our opinion, is one of the highest quality oil and gas producers in the U.S. and it maintains an enormous acreage position in the most attractive parts of the Permian Basin. This large inventory of future drilling locations should allow Concho to invest at high returns for years to come. The market is currently valuing this strategically attractive set of assets at a discount to recent private market transactions and below Permian peers on a per acre basis, despite the company’s superior economics and strong management team. Concho has a long history of creating value for shareholders through both efficient operations and savvy capital allocation. We expect shareholders can once again be rewarded as the company develops and monetizes its acreage footprint.

Diamondback Energy, Inc. (FANG – $108.97)
Diamondback Energy is an oil and gas producer with a high-quality acreage position located entirely in the Permian Basin. CEO Travis Stice and his management team have produced industry-leading returns by focusing on low-cost operations and best execution. We like the management team’s focus on per share value and we believe the market doesn’t appreciate Diamondback’s acreage quality and drilling inventory following the company’s acquisition of Energen. Diamondback is growing production 15% per year with a mid-single digit FCF yield and the business is valued at a significant discount to net asset value and historical per acre multiples.

EOG Resources, Inc. (EOG – $93.16)
EOG Resources launched the U.S. oil production renaissance by applying fracturing technology to oil basins across North America. Because of this first-mover advantage, the company has typically paid far less than competitors for similar acreage positions. We believe that EOG’s return-focused culture will continue to drive innovation and efficiency. The company expects that over 90% of the wells the company will drill over the next 10-12 years will generate economic returns at a $40 per barrel oil price. This low position on the cost curve makes EOG one of the lowest risk E&Ps, while the company’s continued innovation (experimental plays, enhanced oil recovery and drilling technology investment) provides upside that few competitors can match. 

The securities mentioned above comprise the following percentages of the Oakmark Fund’s total net assets as of 06/30/19: American International Group 2.3%, Anadarko Petroleum 0%, Chesapeake Energy 0.7%, Concho Resources 1.0%, Diamondback Energy 1.0%, EOG Resources 0.9%, Occidental 0% and Regeneron Pharmaceuticals 2.3%. 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.

The “price to earnings ratio” compares a company’s current share price to its per-share earnings.  May also be known as the “price multiple” or “earnings multiple”.  Investors should not base investment decisions on P/E alone, as the denominator (earnings) is based on an accounting measure that is susceptible to forms of manipulation.  The quality of a P/E ratio is only as good as the quality of the underlying earnings number. 

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 06/30/2019 unless otherwise specified.