Oakmark Select Fund: Second Quarter 2018
June 30, 2018
For the quarter, the Oakmark Select Fund declined 0.4%, compared to a 3.4% increase in the S&P 500 Index, the Fund’s benchmark. Year to date, the Fund declined 4.3%, compared to a 2.7% increase for the S&P 500.
Most of this quarter’s underperformance was driven by our consumer discretionary holdings, although the reasons for the decline of individual companies within that sector varied. The largest detractors were American Airlines (-27%), MGM Resorts (-17%) and Adient (-18%). American Airlines shares were hurt by rising oil prices, which we believe will only have a temporary impact on profits as the airline industry adjusts its prices and capacity throughout the rest of this year. During the quarter, MGM modestly lowered its annual profit forecast due to financial issues that we believe are temporary and somewhat immaterial, related to the renovation of the Monte Carlo Resort and a slow resumption of occupancy at the Mandalay Bay Resort, following the tragic shooting. Adient’s fundamentals continue to be damaged by a non-core segment, its seating structures business, but its board is acting with appropriate urgency. On the positive side, the largest contributors to performance were Chesapeake Energy (+72%), Apache (+22%) and Weatherford (+46%). Whereas higher oil prices negatively impacted American Airlines, it was a distinct positive for our energy holdings.
We eliminated the final portion of our Harley-Davidson position for reasons discussed in last quarter’s letter. We initiated a new position in Regeneron Pharmaceuticals--a biotech company with industry-leading research and development (R&D) productivity and a proven management team. The company is led by its founder Len Schleifer who maintains a culture focused on internal development of novel drugs. Schleifer also holds a significant equity stake in the company. Over the past decade, Regeneron has received approval for six drugs, all of which were developed in-house. Furthermore, Regeneron has a reputation for responsible drug pricing. Recent approvals of some of its new drugs provide a strong path for long-term growth. Meanwhile, its largest drug, Eylea, has additional opportunities for growth and retains patent protection through 2027. Regeneron spends significantly more on R&D than its peers, and, due to several recent drug launches, Regeneron’s selling, general and administrative (SG&A) spending is relatively high, too. We believe Regeneron’s R&D spending provides a great return on investment, and we expect launch costs to normalize over time. Although the company’s consensus P/E multiple appears high, if its R&D and SG&A costs are adjusted to average levels, Regeneron would trade at a low-teens P/E. We believe this is a compelling valuation for a growing business with a strong management team that is aligned with its shareholders.
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 (06/30/18)
Since Inception (11/01/96) 12.40%
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 06/30/18: American Airlines Group, Inc. 3.0%, MGM Resorts International 3.6%, Adient PLC 3.4%, Chesapeake Energy Corp. 3.9%, Apache Corp. 4.7%, Weatherford International PLC 3.1%, Harley-Davidson, Inc. 0% and Regeneron Pharmaceuticals, Inc. 3.4%. 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.
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 06/30/2018 unless otherwise specified.