Oakmark Select Fund: First Quarter 2015
March 31, 2015
For the quarter, the Oakmark Select Fund declined 1%, compared to a 1% gain in the S&P 500 Index. The negative impact of our energy holdings coupled with our relatively large position in financials overwhelmed what otherwise was strong stock selection across our consumer discretionary and technology investments. While we are disappointed with the outcome, we have been through periods like this before and remain steadfast in our commitment to the same investment process that has delivered success since the Fund’s inception.
Chesapeake Energy (-27%), Bank of America (-14%) and Intel (-13%) detracted the most from our performance. Chesapeake issued disappointing cash flow guidance for 2015 due primarily to legacy contracts, signed under the prior management regime, to market oil and gas. While the result is disappointing, we believe that the impact from these contracts is both manageable and temporary. Aside from this issue, the business’s underlying performance has been as good, or better, than we expected on relevant metrics like production growth and operating costs. The company also announced a substantial share repurchase authorization to take advantage of the large disconnect between the share price and intrinsic value. So, we remain confident that Chesapeake’s new management team can right the ship operationally and greatly improve capital allocation. Although this quarter’s stock performance might indicate otherwise, Bank of America continues to march toward our estimate of normalized earnings power, despite headwinds from low interest rates, while improving the quality of its balance sheet. For these reasons, we remain confident in Bank of America and all of our large bank holdings.
Amazon (+20%), TE Connectivity (14%) and CBRE Group (13%) contributed the most to performance. In the short time we have owned it, Amazon has grown its share of retail sales considerably, as we expected. A surprisingly profitable fourth quarter gave investors a glimpse of what margins could be should management decide to more aggressively pull back on their ambitious growth investments. As long as Amazon continues to grow its online retail moat, we welcome either outcome.
During the quarter we added one new position (General Electric) and eliminated another (FedEx) from the Fund. We have always admired General Electric’s (GE) collection of businesses, but we have questioned management’s focus on returns when making capital allocation decisions. However, the appointment of a new CFO in mid-2013 ushered in significant changes. Since then, GE has, in our view, acquired assets cheaply (Alstom) and sold assets at good prices (Synchrony and its appliances division). In 2015, the company plans to totally revamp its variable compensation plan for thousands of employees, emphasizing factors that drive return on invested capital, which should boost future results. We believe there is substantial opportunity to improve gross margins, and the stock trades for just under a market multiple on 2016 earnings and offers a generous dividend yield of 3.7%. Some investors may have a stale opinion of GE after the past 15 years of persistent underperformance, but we believe it’s a good investment at the current price.
We eliminated our position in FedEx due to price. Management’s renewed focus on costs and smart capital allocation was properly rewarded with a higher multiple, so we were able to redeploy those assets into more undervalued companies, such as GE.
Thank you for your continued investment in the Fund.
William C. Nygren, CFA
Anthony P. Coniaris, CFA
Average Annual Total Returns (03/31/15)
Expense Ratio as of 9/30/14 was 0.95%
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 03/31/15, Chesapeake Energy Corp. represented 4.0% Bank of America Corp. 5.0%, Intel Corp. 3.1%, Amazon, Inc. 5.3%, TE Connectivity, Ltd. 6.0%, CBRE Group, Inc. 5.4%, General Electric Co. 4.0%, and FedEx Corp. 0% of the Oakmark Select 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 Select 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.
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.