Oakmark Fund: First Calendar Quarter 2023
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 is Oakmark Fund's first-quarter 2023 update. The fund returned 8.1%, slightly beating the S&P 500. They sold three stocks that had reached fair value and bought two cheap ones: Kroger (the second-largest U.S. grocery chain) and Truist Financial (a regional bank). Kroger trades at just 10 times next year's expected earnings. If its merger with Albertsons goes through, profits could accelerate; if not, Kroger could buy back over 25% of its stock. Truist's stock fell due to banking fears, but its deposit base is solid, and its insurance brokerage unit alone might be worth 35% of the current share price. For everyday investors, this shows that buying quality companies at low prices during market panic can pay off.
Oakmark Fund returned 8.1% in the first quarter of 2023, outperforming the S&P 500 Index's 7.5%. Over the past decade, its annualized return stands at approximately 12%, roughly in line with the S&P 500 Index. The largest individual contributors to the quarter's performance were Meta Platforms and S
Theme and Background
This chapter is the opening section of the Oakmark Fund's first-quarter 2023 letter to shareholders. It primarily reviews the fund's performance for the quarter, the logic behind portfolio adjustments, and focuses on the investment rationale for two newly purchased stocks—Kroger and Truist Financial. The market backdrop involves a sharp decline in financial stocks due to turmoil in the banking sector, while value investing, after a prolonged period of underperformance relative to growth stocks, still sees some sectors trading at low valuations.
Core Thesis
The author argues that, despite short-term outperformance relative to the index, the long-term (ten-year) annualized return of approximately 12% is on par with the S&P 500 Index, which is a respectable result for value investing in a headwind environment. Current holdings in the energy and financial sectors are particularly attractive, as many stocks trade at single-digit multiples of normalized earnings. The newly purchased Kroger and Truist Financial offer better risk-adjusted returns than the sold positions in Cummins, Etsy, and Gartner.
Key Arguments and Data
- Performance Comparison: The fund returned 8.1% in the first quarter, outperforming the S&P 500's 7.5%; the ten-year annualized return is approximately 12%, roughly in line with the index.
- Portfolio Adjustments: Sold Cummins, Etsy, and Gartner because these investments approached the author's estimate of intrinsic value; newly purchased Kroger and Truist Financial.
- Kroger: The second-largest grocery retailer in the U.S. (behind Walmart), trading at just 10x next year's EPS estimate. If the merger with Albertsons is approved, it could accelerate earnings growth and bring scale advantages; if the merger is blocked, the company has the capacity to return over 25% of its market capitalization to shareholders.
- Truist Financial: A large U.S. regional bank with a high-market-share deposit base, primarily focused on the fast-growing Southeastern market. The current stock price has fallen sharply due to market concerns over unrealized losses in the securities portfolio and deposit outflows, but the author believes its reputation, relationships, and liquidity are sufficient to manage these issues. The stock trades at a single-digit multiple of normalized earnings, with a historical return on tangible equity (ROTE) in the high teens. Its capital-light insurance brokerage subsidiary (contributing approximately 10% of reported earnings) could be worth 35% of the current stock price, based on a recent minority stake sale price.
| Company | Role | Key Data | Bullish/Bearish |
|---|---|---|---|
| Kroger | New Purchase | Valued at 10x next year's EPS; could return over 25% of market cap if merger fails | Bullish |
| Truist Financial | New Purchase | Single-digit multiple of normalized earnings; insurance brokerage subsidiary could be worth 35% of current stock price | Bullish |
| Cummins | Sold | Approached intrinsic value estimate | Neutral (Sold) |
| Etsy | Sold | Approached intrinsic value estimate | Neutral (Sold) |
| Gartner | Sold | Approached intrinsic value estimate | Neutral (Sold) |
| Meta Platforms | Holding | Largest contributor for the quarter | Bullish (Still held) |
| Salesforce | Holding | Largest contributor for the quarter | Bullish (Still held) |
| Charles Schwab | Holding | Largest detractor for the quarter | Bullish (Still held) |
| APA Corporation | Holding | Largest detractor for the quarter | Bullish (Still held) |
The annualized return data for the fund's Investor Class shares as of March 31, 2023, shows a since-inception return of 12.36%, 10-year 11.71%, 5-year 9.67%, 1-year -3.82%, and the most recent 3 months at 8.10%, with an expense ratio of 0.89%.
Companies/Assets Involved
- Kroger: New purchase, bullish. Low valuation (10x EPS), beneficial whether through merger or buybacks.
- Truist Financial: New purchase, bullish. Low valuation (single-digit multiple), strong deposit base, undervalued insurance subsidiary.
- Meta Platforms: Holding, bullish. Largest contributor for the quarter.
- Salesforce: Holding, bullish. Largest contributor for the quarter.
- Charles Schwab: Holding, bullish. Largest detractor for the quarter, but the author believes the discount remains significant.
- APA Corporation: Holding, bullish. Largest detractor for the quarter, but the energy sector overall has low valuations.
- Cummins, Etsy, Gartner: Sold, as prices approached intrinsic value.
Investment Implications
- Value Investing Remains Effective Over the Long Term: Despite value styles underperforming over the past decade, the Oakmark Fund still achieved returns comparable to the index, demonstrating that stock selection can offset style headwinds.
- Focus on Quality Companies in Low-Valuation Sectors: In the energy and financial sectors, many stocks trade at single-digit earnings multiples, but fundamentals (e.g., Kroger's scale advantage, Truist's deposit base) have not deteriorated. Market over-pessimism provides buying opportunities.
- Merger Arbitrage and Shareholder Returns: The Kroger case shows that even if the merger fails, the company has the capacity to support its stock price through large-scale buybacks (over 25% of market cap), limiting downside risk.
- Hidden Assets in Bank Stocks: The value of Truist's insurance brokerage subsidiary is overlooked by the market. Based on comparable transaction valuations, it could contribute 35% of the current stock price, providing a significant margin of safety.