Oakmark Fund: Third Quarter 2015
September 30, 2015
The Oakmark Fund declined 8% during the past quarter, bringing the decline to 5% for the fiscal year ended September 30. The S&P 500 declined 6% for the quarter and declined 1% for the fiscal year. Market volatility increased dramatically during the third quarter, driven by global economic softness, interest rate uncertainty and commodity weakness. We are certainly not pleased with near-term underperformance, but we remain confident that our focus on business value and our extended investment time horizon will position the Fund for favorable results over longer periods of time. We typically view heightened volatility as an opportunity to buy undervalued companies at attractive prices.
For the quarter and the fiscal year, energy and financials were our weakest sectors. We think these are among the most attractive areas in the market, and over one-third of the Fund’s equities are invested in these two sectors. Our best performing sectors for the quarter were consumer staples and health care. The best performing sectors for the year were consumer discretionary and information technology. For the fiscal year, our best performing securities were Amazon and UnitedHealth Group, and the worst performers were Chesapeake Energy and Apache. We added two new names to the portfolio during the quarter (see below). We eliminated positions in Baker Hughes Incorporated, Glencore PLC, Las Vegas Sands Corp. and Precision Castparts Corp. We sold Precision Castparts following Berkshire Hathaway’s acquisition offer. The other sales were part of our ongoing tax-trading strategy, and in these instances, we elected to invest funds elsewhere after we had completed the front-end tax-trade sales.
Anadarko Petroleum Corp. (APC - $60)
Anadarko Petroleum is a large oil and gas exploration and production company with operations in the United States and abroad. We believe the company has an excellent track record of discovering and developing profitable oil and gas reserves, and management has a reputation for being best-in-class operators. Anadarko has been able to consistently increase its proved reserves at costs that are well below industry averages, adding value in the process. Most importantly, management seeks to maximize per-share asset value with its capital allocation decisions and has shunned the “growth at all costs” mentality prevalent at many peers. This approach has encouraged low-cost development and intelligent asset monetization, which we believe is creating significant value. Like many oil and gas stocks, however, Anadarko shares have been affected by falling oil and gas prices, driving them down from a high of $110 last year to a low of $59 last quarter. We believe this substantially undervalues Anadarko’s asset base. After adjusting for the company’s stakes in public midstream equities and in large non-producing oil and gas assets, which are not needed to support future production growth, we believe Anadarko is attractively valued on multiples of earnings and cash flow. In our view, this is a best-in-class company that is trading at a discount to lower quality peers in an already depressed industry, making Anadarko an attractive addition to our portfolio.
Cummins Inc. (CMI - $109)
The Oakmark Fund previously held shares in Cummins from the third quarter of 2012 through the second quarter of 2014. Cummins is the world’s largest non-affiliated engine manufacturer, and it has a strong global distribution network. North America remains its largest market, but faster growing emerging markets account for almost one-third of the company’s revenues. Cummins is also a leader in emissions control technology, which should lead to favorable revenue growth as more countries mandate tougher emissions standards. Global economic weakness has hurt the company’s results, but we are encouraged by management’s ability to innovate, cut costs and allocate capital wisely. The share price has fallen considerably from when we eliminated the position in the second quarter of 2014 when the business was valued at over 15x 2014 earnings, and we believe the business is now attractively valued at a below-average multiple of 11x expected 2015 earnings.
William C. Nygren, CFA
Kevin G. Grant, CFA
Average Annual Total Returns (09/30/15)
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 09/30/15, Amazon.com, Inc. represented 1.8%, UnitedHealth Group, Inc. 1.8%, Chesapeake Energy Corp. 0.5%, Apache Corp. 1.9%, Baker Hughes, Inc. 0%, Glencore PLC 0%, Las Vegas Sands Corp. 0%, Precision Castparts Corp. 0%, Berkshire Hathaway, Inc. 0%, Anadarko Petroleum Corp. 1.0%, and Cummins Inc. 1.2% 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.