Commentary

Oakmark Select Fund: First Quarter 2016

March 31, 2016

Oakmark Select Fund - Investor Class
Average Annual Total Returns 03/31/16
Since Inception 11/01/96 12.18%
10-year 6.46%
5-year 10.86%
1-year -8.04%
3-month -5.56%

Gross Expense Ratio as of 09/30/15 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.

For the quarter, the Oakmark Select Fund declined 6%, compared to a 1% gain in the S&P 500 Index.  Our financial sector holdings accounted for over 80% of the decline in the Fund this quarter.  While we are disappointed with this outcome, we remain confident in our financial holdings and the same process that has delivered success since the Fund’s inception.

The three largest detractors from performance were Bank of America (-19%), Citigroup (-19%) and American International Group (-12%).  Concerns about the economy and lower near-term expectations for interest rates have pressured financial stock prices broadly, and our holdings were not immune.  Importantly, our values already reflect normalized credit losses and relatively minor interest rate increases over the next two years.  While stresses in the energy and mining sectors will likely lead to some related credit losses for the banks, we believe the impact to value will prove de minimis as exposures are relatively small across our holdings.  Meanwhile, operational performance and capital allocation are tracking with our expectations.  Therefore, we view the lower share prices as merely increasing the discount to value at which these already cheap financials were trading, and we remain very confident in these holdings.  The management and directors of Bank of America, Citigroup and JP Morgan seem to agree as they personally bought an aggregate $31.5 million of their companies’ stock during the first quarter.

Our largest contributors to performance were Oracle (+12%), Apache (+11%) and General Electric (+3%).  Oracle has been managing its customers’ transition to the cloud largely as we have expected.  We believe Apache has the balance sheet and asset quality to survive this downturn in oil and gas prices, and we continue to like what the new management team is doing to preserve and grow per share value.  GE has been a welcome port in the recent market storm as it has benefitted from company-specific improvements in margins and capital allocation, and it has enjoyed well-deserved multiple expansion from its reduced dependence on earnings from GE Capital. 

While there were no new companies purchased in the quarter, recent volatility in the equity and fixed income markets allowed us to purchase securities within the capital structure of two existing holdings in a way that maintained upside to these undervalued companies and added downside protection, while also providing a tax benefit.  In the case of Chesapeake Energy, we purchased bonds at prices that offered similar upside to the equity, despite higher seniority in the capital structure, while capturing a tax loss on the sale of equity.  Similarly, we have increased our position in Fiat Chrysler mandatory convertible bonds at prices that preserved the upside of the equity with the added benefit of downside protection through a unique conversion feature, purchased at minimal additional cost, while capturing a tax loss as we sold a corresponding dollar amount of Fiat Chrysler equity.  In January, we also sold Ferrari shares upon distribution from Fiat Chrysler because the shares were near our estimate of intrinsic value. We used the proceeds to purchase a like dollar amount of Fiat Chrysler shares, which were selling at a much larger discount to our estimate of value. 

Thank you for your continued investment in the Fund.

The holdings mentioned above comprise the following percentages of the Oakmark Select Fund’s total net assets as of 03/31/16:  Bank of America Corp. 5.2%, Citigroup, Inc. 5.2%, American International Group, Inc. 6.1%, JPMorgan Chase & Co. 5.6%, Oracle Corp. 4.9%, Apache Corp. 4.8%, General Electric Co. 8.5%, Chesapeake Energy Corp. 0.5%, Chesapeake Energy Corp. Convertible Preferred 0.1%, Chesapeake Energy Corp. Corporate Bond, 144A, 8.00%, due 12/15/22 1.7%, Fiat Chrysler Automobiles N.V. 1.1%, Fiat Chrysler Automobiles N.V. Convertible Bond 7.785%, due 12/15/16, 3.0%, and Ferrari N.V. 0%.  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.


Bill Nygren portrait
William C. Nygren, CFA

Portfolio Manager

Tony Coniaris portrait
Tony Coniaris, CFA

Portfolio Manager