Commentary

Oakmark Select Fund: Fourth Quarter 2013

December 31, 2013

Oakmark Select Fund - Investor Class
Average Annual Total Returns 12/31/13
Since Inception 11/01/96 13.55%
10-year 7.70%
5-year 24.00%
1-year 36.52%
3-month 12.03%

Gross Expense Ratio as of 09/30/13 was 1.01%

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 Oakmark Select Fund increased 12% for the quarter, compared to 11% for the S&P 500 Index.  We’re extremely gratified to report that the Fund ended 2013 at a new all-time high NAV, meaning that as of 12/31/13, all current Select shareholders have unrealized profits in their holdings.

For all of calendar 2013, the Oakmark Select Fund returned 37% compared to 32% for the S&P 500.  Since the Fund’s inception 17 years ago, this is the fifth calendar year in which the S&P 500 has increased by at least 25%.  With the exception of 1998, this is our fourth time outperforming the S&P 500 in such an environment (the other instances were in 1997, 2003, and 2009).  Our confidence remains highest that your Fund will most consistently outperform a declining index, but it’s nice to see strong results in other environments as well.  Although we are quite pleased with this performance – and hope that you, our fellow shareholders, are pleased also – we caution that we do not expect to perform this well in most quarters or years.

Our best performers for the quarter were Forest Laboratories, up 40%, and FedEx, up 26%.  Both stocks benefited from management actions that improved profitability and that deployed excess capital into value-creating activities.  In both cases, our investment theses forecasted that the companies’ margins and capital allocation could be substantially improved, and we’re glad to see that their management teams delivered (and the market recognized) these opportunities for sustained value growth.  Our worst quarterly performers continue to be our energy names; Newfield Exploration and Cenovus Energy.  Although spot prices for oil and natural gas remained stable during the quarter, prices on the futures curve weakened and the stock prices followed suit.

But poor stock price performance is frequently decoupled from the actual long-term value of the underlying business, and as the price of many energy-related equities has fallen, we believe their attractiveness has increased.  As such, our one new position in the Fund this quarter is Apache, an energy exploration and production company.  We already believed the market was undervaluing Apache’s assets, as the stock price had fallen from $134 in 2011.  Once management demonstrated a willingness to divest assets and repurchase their undervalued stock, we established our stake.

Although we didn’t entirely eliminate any holdings during the quarter, we did sell the preponderance of our Texas Instruments position as the stock’s strong 2013 performance narrowed the gap between the market price and our estimate of value.  This selling activity provided us the capital for the Apache purchase.  The remaining Texas Instruments shares are being held due to tax considerations, and as such, we held 21 positions at the end of the calendar year, one more than our usual number.

Looking ahead to 2014, we continue to see attractively priced investment opportunities in financials, large cap technology, automotive cyclicals, and the energy sector.  We believe the overvaluation in perceived low-risk securities that we’ve cited in past letters has somewhat corrected, and generally valuations are more homogeneous today than we’ve seen in the past five years.  However, the market itself still looks to be reasonably priced, so we believe long-term returns should match growth in underlying business values.

Thank you for your continued investment in our Fund, and best wishes for a happy and prosperous 2014.

As of 12/31/13, Forest Laboratories, Inc. represented 5.7%, FedEx Corp. 4.7%, Newfield Exploration Co. 0.8%, Cenovus Energy, Inc. 2.0%, Apache Corp. 3.7%, and Texas Instruments, Inc. 0.2% 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.

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