Oakmark Select Fund: First Quarter 2018
March 31, 2018
For the quarter, the Oakmark Select Fund declined 3.9%, compared to a 0.8% decline in the S&P 500 Index. We are not satisfied with either the absolute or relative return. Long-time fund holders (ourselves included) understand that a relatively concentrated portfolio like Oakmark Select is capable of volatile quarterly results as we focus on maximizing returns over a multi-year, not multi-month, timeframe. We remain steadfast in that mission, weak quarter notwithstanding.
Roughly three-quarters of this quarter’s underperformance was driven by our energy sector holdings, which declined between 8% and 45%, despite relatively strong oil supply and demand fundamentals as reflected by a 7% increase in West Texas Intermediate (WTI) oil prices during the first quarter. The largest individual performance detractors were Weatherford (-45%), Adient (-22%) and General Electric (-21%). Investors are more concerned with Weatherford’s balance sheet than we (or its new and capable management team) are, which is in part due to a delay in asset sales. With Adient, we believe the market significantly overreacted to disappointing results in a less valuable, non-core segment of its business, so we added to our holdings during the quarter. General Electric announced a large legacy insurance reserve charge as part of new CEO John Flannery’s continued efforts to clean up more than a decade of mismanagement at the company. The largest contributors to performance were Fiat Chrysler (+15%), Mastercard (+16%) and CBRE Group (+9%).
We completed the sale of FNF Group during the quarter due to price. FNF Group has been a very profitable investment for the Fund thanks in part to a terrific management team, led by longtime chairman Bill Foley, that is constantly looking to maximize and highlight per share value through smart capital allocation and corporate actions. We sold almost all of our position in Harley-Davidson during the quarter. Our Harley-Davidson thesis required continued strong growth internationally and improved U.S. sales as the number of used bikes, which date back to peak year deliveries more than 10 years ago, become less attractive substitutes for new bike sales. The company’s international and U.S. sales have lagged behind our expectations, and after reassessing Harley-Davidson’s per share value, we found a better alternative for the portfolio, American Airlines.
American Airlines was discussed last quarter in the Oakmark Fund letter. The reasons to own are the same, so we’ve left the write up unchanged (see below). The market volatility this quarter provided a particularly attractive buying opportunity for the Oakmark Select Fund.
American Airlines Group, Inc. (AAL)
Although the airlines have always provided a useful consumer service, we feel they have historically been unattractive long-term investment candidates. In the past, the major U.S. airlines lacked pricing power and faced problems related to poor corporate cultures. However, after years of consolidation capped by the merger of US Airways and American Airlines in 2013, the industry has become more mature and disciplined. The three major hub-and-spoke carriers each have strengths in their respective hubs, and their management teams are making wiser decisions about capacity additions and capital allocation. American Airlines’ CEO Doug Parker sees substantial opportunity to grow value as the company completes the US Airways merger integration. He is improving the company’s culture and restoring credibility with employees. Parker believes that American Airlines has around $5 billion of pretax earnings power, which is up 50% from our 2017 estimate, and he has bought back 37% of the company’s shares since the merger closed. With the stock selling for a single-digit multiple of normal earnings power, we believe American Airlines is an attractive investment.
Thank you, our fellow shareholders, for your continued investment in the Oakmark Select Fund.
William C. Nygren, CFA
Anthony P. Coniaris, CFA
Oakmark Select Fund – Investor Class
Average Annual Total Returns (03/31/18)
Since Inception (11/01/96) 12.58%
Gross Expense Ratio as of 09/30/17 was 1.03%
Net Expense Ratio as of 09/30/17 was 0.96%
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 Select Fund’s total net assets as of 03/31/17: Weatherford International PLC 2.1%, Adient PLC 4.1%, General Electric Co. 2.3%, Fiat Chrysler Automobiles N.V. 6.6%, Mastercard, Inc., Class A 5.0%, CBRE Group, Inc., Class A 8.1%, FNF Group 0%, Harley-Davidson, Inc. 0.02%, and American Airlines Group, Inc. 4.1%. Portfolio holdings are subject to change without notice and are not intended as recommendations of individual stocks.
American Airlines Group, Inc. comprised 2.1% of the Oakmark Fund’s total net assets as of 03/31/17. 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 Select Fund as of the most recent quarter-end.
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.
Because the Oakmark Select Fund is non-diversified, the performance of each holding will have a greater impact on the Fund's total return, and may make the Fund's returns more volatile than a more diversified fund.
Oakmark Select Fund: The stocks of medium-sized companies tend to be more volatile than those of large companies and have underperformed the stocks of small and large companies during some periods.
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 03/31/2018 unless otherwise specified.