Oakmark Fund: Third Quarter 2018
September 30, 2018
The Oakmark Fund increased 4.2% during the third quarter, which brings the increase to 11.8% for the fiscal year ended September 30th. These are good absolute returns, but Oakmark trailed the strong performance of the S&P 500, the Fund’s benchmark, which was up 7.7% for the third quarter and up 17.9% for the past 12 months. While we are disappointed to underperform the market during the third quarter and the fiscal year, we remind investors that while the Fund has outperformed the market over longer periods of time, we are not surprised to see numerous shorter periods of underperformance along the way. (See Bill Nygren’s third-quarter commentary for more on this subject.)
Our highest contributing securities for the fiscal year were Netflix and HCA Healthcare, which generated impressive total returns of 106% and 76%, respectively. Netflix continues to see strong subscriber and revenue growth and its profitability has improved, despite substantial investments in marketing and new content. Our largest individual detractors for the year were General Electric Company (GE), which was down 51%, and American Airlines Group, which was down 20%. As we’ve mentioned before, we were mistaken in our original assessment of GE’s business and we’ve been frustrated by how the business and the share price have performed. We believe that GE has some very good businesses (e.g., Aviation and Healthcare), strong new management is in place and the enterprise is valued at a discount to our estimate of intrinsic value.
The highest contributing sectors for the third quarter were health care and information technology, with HCA Healthcare Inc. and Apple Inc. leading the way as the Fund’s highest individual contributors. Our biggest detracting sectors for the quarter were consumer discretionary and energy. The Fund’s largest individual detractors for the quarter were GE and State Street Corporation. During the quarter, we initiated positions in DXC Technology Co. and Charles Schwab Corporation (see below), and we didn’t eliminate any positions.
DXC Technology Co. (DXC - $93.52)
DXC is a leading IT services company that was formed through the recent combination of Computer Sciences Corporation and Hewlett Packard Enterprise Services. The company has established a global footprint and a broad suite of technology offerings, which places it in a limited group of vendors that are able to serve the IT needs of large multinational corporations. We believe CEO Mike Lawrie is among the best turnaround managers at work today. He has a history of taking leadership of underperforming IT companies, then removing costs, divesting assets and re-directing investments into high-return opportunities—a formula that has driven tremendous gains in shareholder value over time. We expect Lawrie will continue to execute on this proven blueprint as he integrates the HP acquisition and we believe that he is uniquely suited to uncover substantial hidden profits in this $19B business. DXC currently trades at just 10x 2019 consensus earnings, a significant discount to the S&P 500 multiple of 17x, despite DXC profits being forecasted to grow at a rate faster than the market for the foreseeable future.
Charles Schwab Corporation (SCHW - $49.15)
Schwab is the largest discount brokerage firm in the United States with more than $3 trillion in client assets and 11 million active brokerage accounts. This size provides Schwab with meaningful scale advantages over its smaller competitors. As the largest discount brokerage firm, the company is able to offer lower prices and invest more in superior customer service and technology than its peers. Schwab management calls this its “no trade-offs” policy—i.e., investing to provide the best product at the lowest price, and these investments attract even more clients to Schwab’s platform. As a result, Schwab has been able to grow its client assets at a double-digit rate in recent years, and given that the company still has less than 15% market share, we believe such growth should continue for the foreseeable future. The company also meaningfully benefits from rising interest rates, as the higher rates allow Schwab to reinvest its bank deposits at higher yields. We believe the combination of client asset growth and rising interest rates should drive substantial asset growth at Schwab in the coming years, and on our estimates, the company is currently valued at a discount to the overall S&P 500 P/E multiple. We believe this represents a bargain price for a well above average business.
William C. Nygren, CFA
Kevin G. Grant, CFA
Oakmark Fund - Investor Class
Average Annual Total Returns (09/30/18)
Since Inception (08/05/91) 12.89%
Gross Expense Ratio as of 09/30/17 was 0.90%
Net Expense Ratio as of 09/30/17 was 0.86%
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 09/30/18: Netflix 2.2%, HCA HealthCare 2.5%, General Electric Company 1.5%, American Airlines Group 1.3%, Apple Inc. 2.9%, State Street Corporation 1.9%, DXC Technology Co. 1.1% and Charles Schwab Corporation 1.0%. 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 28, 2019.
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 Price-Earnings Ratio (“P/E”) is the most common measure of the expensiveness of a stock.
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 09/30/2018 unless otherwise specified.