Oakmark Fund: First Quarter 2015
March 31, 2015
The Oakmark Fund declined 1% in the first quarter of 2015, and it lagged behind the 1% gain for the S&P 500. Falling oil prices and the strengthening U.S. dollar captured investor attention and brought heightened volatility to company earnings and stock prices during the first quarter. With interest rates near multi-year lows, however, we feel that equities remain the most attractive asset class. We remain confident in the Oakmark Fund’s long-term prospects, and our confidence is supported by the fact that a substantial portion of the recent underperformance has been driven by weakness in the financials sector, which is among the highest potential return sectors of the Fund.
The sectors that contributed the most to performance were consumer discretionary and healthcare, driven largely by Amazon and UnitedHealth Group, respectively. Amazon was up 20% after reporting stronger than expected revenue growth in the fourth quarter, and the company continues to invest heavily to support high-return future growth. UnitedHealth Group was up 17% due to strong fourth quarter results and continued momentum as concerns about healthcare reform wane. Our weakest sectors were financials and energy, and Bank of America and Chesapeake Energy were the worst performing securities. Despite the near-term weakness, we feel the financials and energy sectors remain undervalued, and the Oakmark Fund added to several positions in these sectors during the quarter.
We also initiated new positions in Caterpillar Inc. and Precision Castparts Corp., as discussed below. We eliminated the position in Walmart because its share price appreciated toward our estimate of intrinsic value. We also eliminated most of our position in Home Depot, which has performed well for several years and also reached our estimate of intrinsic value. We would like to commend Home Depot’s former CEO Frank Blake and the entire Home Depot management team for their strong focus on maximizing returns and growing per-share value. Consistent with the message delivered in Bill Nygren’s fourth quarter commentary, which discussed the Fund’s desire to minimize tax consequences of our sales, we have maintained a small position in Home Depot shares that we have owned for less than one year. The Fund also captured a loss on some Haliburton shares when initiating a position in Baker Hughes, which Haliburton announced it plans to acquire.
Caterpillar Inc. (CAT - $81)
Caterpillar is the world’s largest provider of construction equipment, diesel engines and industrial gas turbines. Caterpillar’s products earn high marks, as do the quality and scope of its dealer network, but the company has considerable exposure to the highly cyclical and currently depressed oil and gas and mining segments. With substantial pressure from weak energy spending and the negative impact of the strong U.S. dollar, Caterpillar’s 2015 earnings will likely be down considerably from 2014 and toward the bottom end of their cyclical range. We prefer to value cyclical businesses on their earnings potential throughout the cycle, and we think that Caterpillar’s mid-cycle earnings will be considerably higher than current levels. With the Caterpillar share price falling to multi-year lows, the business is now attractively valued at just 10x our forecast of mid-cycle earnings. When we combine this attractive valuation with a 3.4% dividend yield and a strong balance sheet, we find Caterpillar to be a compelling investment.
Precision Castparts Corp. (PCP - $212)
Precision Castparts Corp. (PCP) is a manufacturer of complex metal components and products, including castings, forgings, fasteners and aerostructures for aerospace, power generation and general industrial applications. Precision Castparts enjoys what we believe is an outstanding corporate culture and is led by a long-tenured CEO who is known for aggressively pursuing operating efficiencies. For many years, the company’s stock traded at a significant premium to other aerospace and industrial peers, but recent weakness has brought the share price to attractive levels relative to these industry groups and the S&P 500. We believe the current valuation of less than 15x earnings is overly punitive, considering PCP’s organic growth prospects and the company’s ability to add value through acquisitions. PCP is providing more components on key new airplanes, which should allow the company to outgrow its end markets. In addition, management projects $4 billion-$6 billion of acquisition opportunities over the next couple of years with return characteristics similar to its existing business. Finally, the company’s unique technical and process capabilities, coupled with its efficiently run operations, should allow it to continue to generate above-average margins. We are pleased to have the opportunity to add shares of what we consider a best-in-class company at a price that implies it is only average.
William C. Nygren, CFA
Kevin G. Grant, CFA
Average Annual Total Returns (03/31/15)
Expense Ratio as of 9/30/14 was 0.87%
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.
As of 03/31/15 Amazon, Inc. represented 2.5%, UnitedHealth Group, Inc. 1.9%, Bank of America Corp. 3.0%, Chesapeake Energy Corp. 0.9%, Caterpillar, Inc. 1.2%, Precision Castparts Corp. 1.2%, Wal-Mart Stores, Inc. 0%, Home Depot, Inc. 0.4%, Haliburton Co. 1.1%, and Baker Hughes, Inc. 0.4% of the Oakmark Fund's total net assets. Portfolio holdings are subject to change without notice and are not intended as recommendations of individual stocks.
Click here to access the full list of holdings for The Oakmark Fund as of the most recent quarter-end.
The S&P 500 Total Return Index is a market capitalization-weighted index of 500 large-capitalization stocks commonly used to represent the U.S. equity market. All returns reflect reinvested dividends and capital gains distributions. 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.