Oakmark Fund: Fourth Quarter 2022
Oakmark is the mutual fund family launched in 1991 by Harris Associates, the Chicago deep-value firm founded in 1976 (about $105bn AUM). Bill Nygren runs the flagship Oakmark Fund and David Herro the Oakmark International Fund, buying businesses at large discounts to intrinsic value and holding them like owners — publishing quarterly fund commentaries, market commentaries and insight articles.
In plain words
This report covers Oakmark Fund's performance in late 2022. Despite a down market, the fund beat the S&P 500. The manager made some contrarian moves: selling energy stocks after they surged and buying cheaper financials instead. They also added Adobe (bought after its price dropped due to an acquisition) and Magna International (a car parts supplier hit by low production). For regular investors, this shows the value of not chasing hot sectors and looking for solid companies that are temporarily out of favor.
The Oakmark Fund returned 10.3% in the fourth quarter of 2022, outperforming the S&P 500 Index's 7.6%; for the full year, it returned -13.4%, outperforming the S&P 500's -18.1%. The report's core argument is that despite lagging the relative value index due to an overweight position in the communica
Theme and Background
This chapter is the opening section of the Oakmark Fund's fourth-quarter 2022 report, reviewing the fund's performance in the fourth quarter and full year of 2022, and introducing major adjustments to the portfolio. The market backdrop is a broad decline in equities in 2022, though the fund outperformed the S&P 500 Index in both the fourth quarter and the full year.
Core Thesis
The report's central investment argument is that despite lagging the relative value index due to an overweight position in the communication services sector, the fund adheres to a disciplined investment approach and expects to achieve absolute returns over the long term. The counterintuitive judgment is that in a year when the energy sector performed strongly, the fund chose to reduce its energy holdings and instead increase positions in more undervalued opportunities, such as financials.
Key Arguments and Data
- Performance: The fund returned 10.3% in the fourth quarter, outperforming the S&P 500's 7.6%; the full-year return was -13.4%, better than the S&P 500's -18.1%.
- Sector Contribution: All held sectors contributed positive returns in the fourth quarter, with financials and energy contributing the most; for the full year, energy and industrials led, while communication services and financials were drags.
- Stock Contribution: The largest contributors in the fourth quarter were Netflix and APA Corp, while the largest detractors were Amazon and Alphabet; for the full year, the largest contributors were EOG Resources and APA Corp, and the largest detractors were Meta Platforms and Ally Financial.
- Portfolio Adjustments: The fund reduced energy holdings, sold Diamondback Energy and General Electric, and initiated new positions in Adobe and Magna International. Additionally, due to the spin-off of Fortune Brands Home & Security, the fund received shares of MasterBrand.
| Metric | Oakmark Fund | S&P 500 Index |
|---|---|---|
| Fourth-Quarter Return | 10.3% | 7.6% |
| Full-Year Return | -13.4% | -18.1% |
| Annualized Return Since Inception (August 1991) | 12.19% | - |
| 10-Year Annualized Return | 11.86% | - |
| 5-Year Annualized Return | 7.78% | - |
Companies/Assets Involved
As of December 31, 2022, the fund's Investor Class has an annualized return since inception of 12.19%, a 10-year return of 11.86%, a 5-year return of 7.78%, a 1-year return of -13.36%, a 3-month return of 10.29%, and an expense ratio of 0.91%
- Netflix: Largest individual stock contributor in the fourth quarter, bullish.
- APA Corp: Largest individual stock contributor in both the fourth quarter and the full year, bullish.
- Amazon: Largest individual stock detractor in the fourth quarter, bearish.
- Alphabet: Largest individual stock detractor in the fourth quarter, bearish.
- EOG Resources: Largest individual stock contributor for the full year, bullish.
- Meta Platforms: Largest individual stock detractor for the full year, bearish.
- Ally Financial: Largest individual stock detractor for the full year, bearish.
- Adobe: Newly initiated position, purchased after the stock fell to a three-year low following the acquisition of Figma. The report argues that its Creative Cloud and Acrobat products have durable competitive advantages, with free cash flow per share growing 18% annually over the past decade. Its valuation is comparable to the S&P 500 but should command a premium. Bullish.
- Magna International: Newly initiated position, a major global automotive supplier. Its performance has been pressured by weak global production, but the report expects significant revenue growth once production recovers. It trades at less than 7 times normalized earnings per share. Bullish.
- Diamondback Energy: Sold, bearish.
- General Electric: Sold, bearish.
- Fortune Brands Innovation (FBIN): Held after the spin-off, considered undervalued, bullish.
- MasterBrand: Held after the spin-off, a leading cabinet manufacturer, considered undervalued, bullish.
Investment Insights
- Reduce Energy, Increase Financials: After the energy sector's strong performance, the fund chose to take profits and rotate into more undervalued sectors like financials, suggesting investors watch for sector rotation opportunities.
- Focus on Adobe's Valuation Recovery: Adobe's stock has been pressured by the Figma acquisition, but its core business is growing strongly. Its valuation is comparable to the S&P 500 but should command a premium, potentially offering a buying opportunity.
- Cyclical Opportunity in Auto Parts: Magna International is affected by weak global production, but its normalized valuation is extremely low (below 7 times earnings). A recovery in production would drive significant growth, suggesting investors watch for a cyclical rebound in the automotive supply chain.
- Value Unlock from Spin-offs: After Fortune Brands' spin-off, both MasterBrand and FBIN are considered undervalued, suggesting investors watch for independent value revaluation opportunities from corporate spin-offs.