Oakmark Fund: Fourth Quarter 2015
December 31, 2015
The Oakmark Fund returned 5% during the fourth quarter of 2015, bringing the calendar year to a loss of 4%. These results lagged behind the S&P 500, which was up 7% for the fourth quarter and up 1% for the calendar year. We are disappointed with the Fund’s full-year results, which were hurt by significant declines in energy-related shares and relative underperformance from financials. As portfolio managers and large shareholders of the Fund, we’re not satisfied with losses, but we remain confident in our time-tested philosophy, investment process and our research team. As we have said in the past, our analysts look for three characteristics in every investment: (1) businesses selling at a discount to fair value, (2) businesses that produce sustainable value growth over time and (3) management teams that think and act like value-maximizing owners. We typically buy businesses that are trading at a significant discount to our estimate of a company’s intrinsic value and sell when the price approaches intrinsic value. With recent underperformance in several of our sectors, the valuation of the Oakmark Fund portfolio is attractively positioned toward the “buy” end of the range.
Our biggest contributing sectors for the fourth quarter were information technology and financials, with General Electric and Amazon being the best individual contributors. Our worst contributing sectors for the quarter were energy and healthcare, and our worst individual securities were Anadarko and Cummins. For the calendar year, the highest contributing securities were Amazon and Alphabet (formerly known as Google), and the worst contributing securities were Chesapeake and Qualcomm. Chesapeake was affected by another 30% drop in crude oil prices in 2015, to what we feel is an unsustainable level, and Qualcomm was pressured by foreign disputes in their highly profitable wireless royalty business.
During the quarter, we added a new position in Ally Financial (see below), and we eliminated positions in Accenture, Amazon and Omnicom Group. Amazon has been a great holding for the Fund, and with the share price more than doubling in 2015, we believe the business is now fairly valued. With minimal reported earnings and a very high P/E ratio, Amazon may have looked like an unusual purchase for a value-based fund when we initiated a position in April 2014. We looked past reported earnings, which were tempered by large investments for future growth, and found that the scale and core earnings power of Amazon’s business were quite impressive and under-appreciated. Omnicom Group has also been a strong performer for the Fund. We have held Omnicom since late 2008, and we eliminated the position in the fourth quarter as the share price approached our estimate of fair value.
Ally Financial (ALLY - $18.79)
Ally was founded nearly a century ago as General Motors Acceptance Corporation. Its purpose then was to provide financing to GM dealers and retail customers. Today, Ally’s business is largely the same except that it is no longer owned by GM and now serves dealers and customers of many other automobile manufacturers, such as Ford, Chrysler and Toyota. Since Ally’s initial public offering in spring 2014, its shares have fallen over 20% while the S&P 500 has returned over 15%. Over this period, some investors have grown concerned that the business is at a cyclical peak, as U.S. auto sales are near record levels and credit losses are below long-term averages; as a result, some believe Ally’s earnings have nowhere to go but down. We believe cyclical pressures will be offset by continued internal improvements, such as funding cost reductions (as “legacy” liabilities are replaced with lower cost borrowings) and improving their capital structure. With Ally’s stock trading at just 80% of tangible book value, we believe Ally is a compelling addition to the Oakmark Fund.
William C. Nygren, CFA
Kevin G. Grant, CFA
Average Annual Total Returns (12/31/15)
Expense Ratio as of 9/30/15 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 holdings mentioned above comprise the following percentages of the Oakmark Fund’s total net assets as of 12/31/15: General Electric Co. 2.8%, Amazon.com, Inc. 0%, Anadarko Petroleum Corp. 1.4%, Cummins Inc. 1.5%, Alphabet Inc., Class A 1.0%, Alphabet Inc., Class C 2.3%, Chesapeake Energy Corp. 0.3%, QUALCOMM, Inc. 1.4%, Ally Financial Inc. 1.1%, Accenture PLC 0%, Omnicom Group, Inc. 0%, General Motors Company 1.6%, Ford Motor Company 0%, Fiat Chrysler Automobiles N.V. 1.3%, and Toyota Motor Corporation 0%. 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.