Oakmark Select Fund: Second Quarter 2017
June 30, 2017
The Oakmark Select Fund was up 1.9% for the quarter, trailing the S&P 500 Index’s 3.1% return. Three quarters into our fiscal 2017, the Oakmark Select Fund has increased by 15.7%, compared to a 13.5% gain for the S&P 500 Index.
During the quarter, we added one new position to the Fund, Weatherford International. Weatherford is the fourth-largest company in the oilfield services industry. The business was built through approximately 300 acquisitions over the past 30 years. These deals provided Weatherford with many high-quality business lines, but the financial results were disappointing due to poor integration efforts, inefficient operations, losses from non-core product lines, and—most recently—the most severe oil industry downturn in a generation. The majority of these headwinds are now abating. The previous management team has been replaced by a proven industry leader with a reputation for cost cutting. The company is divesting money-losing business lines and rationalizing its bloated operations. Although oil prices are still a challenge for the service industry, activity levels have increased substantially. Over the next few years, the combination of the operational improvements and oil market recovery should lead to substantial earnings at Weatherford. We believe Weatherford represents a classic turnaround investment, and its current share price is cheap relative to our estimate of the company’s future cash flows.
We eliminated our position in Intel. We still believe the stock is reasonably priced and continue to hold it in our more diversified products. However, we do not believe it meets the hurdle for inclusion in a concentrated portfolio.
Our best performer in the quarter, up 23%, was Liberty Interactive QVC. As we discussed in our third quarter 2016 letter, after the company reported an unexpected decline in sales, its stock price sagged. But management was taking actions to fix the issues, and at that time, we believed the stock had fallen far in excess of the change in underlying business value. Now, its sales declines have moderated, and growth is expected to resume later this year. The stock price has increased accordingly.
The Fund’s largest holding—and consequently, the biggest contributor to our performance—was Alphabet, up 10%. The company reported excellent earnings, with sales growth greater than 20%. Please see the link to our Value Investing Insight interview for a full discussion of how we’re valuing this company and why we believe it’s still an attractive investment.
Our biggest detractors to performance were energy holdings: Chesapeake and the aforementioned Weatherford. Our energy positions in aggregate subtracted 2.4% from our performance this quarter, well in excess of the 1.2% by which the Fund lagged behind the S&P 500. It’s easy to see that our investments here are quite out of favor. Contrary to current sentiment, however, we believe our investments in this sector are some of the most attractively priced securities in the market today, with balance sheets much improved over the last year and with talented management teams at the helm.
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 (06/30/17)
Since Inception (11/01/96) 12.75%
Expense Ratio as of 09/30/16 was 0.98%
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 06/30/17: Weatherford International Ltd. 3.6%, Intel Corp. 0%, Liberty Interactive Corp. QVC Group, Class A 3.5%, Alphabet Inc., Class C 8.6% and Chesapeake Energy Corp. 2.0%. 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.
All information provided is as of 06/30/2017 unless otherwise specified.