Oakmark Select Fund: Fourth Quarter 2017
December 31, 2017
The Oakmark Select Fund was up 4.1% for the quarter, trailing the S&P 500 Index’s 6.6% return. For all of calendar 2017, the Oakmark Select Fund increased by 15.7%, compared to a 21.8% gain for the S&P 500 Index.
During the quarter, we added two new positions to the Fund, Adient and Charter Communications. Adient is the world’s largest manufacturer of automotive seating and was spun out of Johnson Controls in late 2016. Johnson Controls had focused on its non-automotive industrial segments, somewhat neglecting the seating business, which gives Adient the opportunity now to become a classic spin-off turnaround. Despite Adient’s scale advantages, its operating margins are well below those of its closest peer, Lear Corp. We believe Adient’s management team, particularly CFO Jeff Stafeil (who was very successful in that role while at Visteon), will be able to improve those margins. The company has greater than 40% share in the growing Chinese market due to its numerous local joint ventures. We believe many analysts are using EV/EBITDA to value the company, which doesn’t properly value Adient’s significant joint venture income. We find Adient’s valuation very attractive, as it sells for a P/E ratio of less than eight on consensus 2019 earnings.
Charter gives us the opportunity to invest in what we believe is a strong business with exceptional management at an attractive price. U.S. cable companies are benefiting from strong demand for high-speed internet access. In many markets, Charter has the only fiber-rich network that can provide the high speeds that consumers demand. Chairman and CEO Tom Rutledge earned an excellent reputation for execution at Cablevision and with the legacy Charter business. Rutledge’s pay package is very well aligned with shareholders, providing large tranches of options that vest at progressively higher stock prices. Recently, Charter shares underperformed the market after speculation about a merger with Softbank did not pan out, enabling us to invest at a good price. Charter is valued at a discount to peer companies, trading for a mid-teen’s P/E multiple on 2019 earnings, adjusted for amortization.
During the quarter, we eliminated our position in JPMorgan Chase, which had been an excellent performer. We still believe the stock is reasonably priced and continue to hold the investment in more diversified products, but do not believe it meets the hurdle for inclusion in a concentrated portfolio.
Our largest contributors to performance in the quarter were CBRE Group, Ally Financial, and TE Connectivity. Our largest contributors for the calendar year were Fiat Chrysler, Alphabet, and CBRE Group. Our biggest detractors for both the quarter and the calendar year were General Electric, Apache, and Chesapeake Energy. Please see the link to our recent GuruFocus interview for further discussion of all three detractors and why we believe they remain attractive investments.
Thank you, our fellow shareholders, for your continued investment in our Fund.
William C. Nygren, CFA
Anthony P. Coniaris, CFA
Oakmark Select Fund – Investor Class
Average Annual Total Returns (12/31/17)
Since Inception (11/01/96) 12.95%
Gross Expense Ratio as of 09/30/16 was 1.05%
Net Expense Ratio as of 09/30/16 was 0.98%
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 12/31/17: Adient PLC 2.4%, Charter Communications Inc. 3.7%, Johnson Controls International PLC 0%, Lear Corporation 0%, Visteon Corp. 0%, Cablevision Systems Corp. 0%, JPMorgan Chase & Co. 0%, CBRE Group, Inc., Class A 7.3%, Ally Financial, Inc. 5.3%, TE Connectivity, Ltd. 6.8%, Fiat Chrysler Automobiles N.V. 6.9%, Alphabet Inc., Class C 9.0%, General Electric Co. 3.9%, Apache Corp. 4.0% and Chesapeake Energy Corp. 2.5%. 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.
The net expense ratio reflects a contractual advisory fee waiver agreement through January 28, 2018. Harris Associates has agreed to continue the advisory fee waiver agreement though January 28, 2019.
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 EV/EBITDA ratio is a comparison of Enterprise Value and Earnings Before the deduction of payments for Interest, Taxes, Depreciation and Amortization which is a measure of operating income.
The Price-Earnings Ratio (“P/E”) is the most common measure of the expensiveness of a stock.
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 12/31/2017 unless otherwise specified.