Oakmark Fund: Second 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 report explains how Oakmark Fund performed in the second quarter of 2023, when growth stocks (like tech companies) far outperformed value stocks (like traditional manufacturers and banks). Despite that, the fund still made money by picking individual stocks. More importantly, they sold some high-growth stocks they bought last year (like Adobe and Uber) and bought cheaper traditional value stocks, such as Baxter International (a medical device company trading at less than 10 times normal earnings, meaning its stock price is low relative to profits). For regular investors, this suggests that when everyone chases popular stocks, overlooked cheap ones might offer better opportunities. It's worth reading because it shows how professionals find value in tough markets.
Oakmark Fund returned 8.6% in the second quarter of 2023, slightly underperforming the S&P 500's 8.7%; its year-to-date return stands at 17.4%, outperforming the S&P 500's 16.9%. Despite headwinds for value stocks (the Russell 1000 Growth Index outperformed the Russell 1000 Value Index by 2,400 basi
Theme and Background
This chapter serves as the opening of the Oakmark Fund's second-quarter 2023 investment report, primarily reviewing the fund's performance amid the macro headwind of value stocks persistently underperforming growth stocks. The report notes that despite the Russell 1000 Growth Index outperforming the Russell 1000 Value Index by as much as 2,400 basis points, the fund still achieved excess returns and used this opportunity to pivot toward traditional value stocks.
Core Thesis
The author's core investment argument is that in the current market environment, traditional value stocks have been sold off due to the rebound in growth stocks, making their valuations highly attractive. The fund is exploiting this dislocation by shifting positions from high-growth stocks added last year (such as Adobe and Uber) to traditional value stocks with lower valuations. The counterintuitive judgment is that although value stocks have broadly underperformed, the fund can still outperform the broader market through stock selection, and the current valuation levels of traditional value stocks (e.g., single-digit or low-teens price-to-earnings ratios) provide a margin of safety for long-term returns.
Key Arguments and Data
Oakmark Fund Investor Class has an annualized return of 12.55% since inception, a 1-year return of 27.11%, a 3-month return of 8.64%, and an expense ratio of 0.89%
- Fund Performance: The fund returned 8.6% in the second quarter, slightly below the S&P 500's 8.7%; year-to-date return was 17.4%, outperforming the S&P 500's 16.9%.
- Market Context: The Russell 1000 Growth Index outperformed the Russell 1000 Value Index by 2,400 basis points, reversing last year's value recovery trend.
- Portfolio Adjustments: The fund added five new holdings and removed five (including Adobe, Uber, Take-Two Interactive, and Netflix). The removed stocks were mostly high-growth names added during last year's sharp sell-off; they were sold this year amid the growth stock rebound, with proceeds rotated into traditional value stocks.
- New Holdings Valuations:
- Baxter International: Below 10x normalized earnings.
- Carlisle Companies: 12x next year's estimated EPS.
- Celanese Corp: Single-digit normalized earnings multiple.
- First Citizens BancShares: Below tangible book value, high single-digit normalized earnings multiple.
- IQVIA Holdings: Below 15x normalized earnings.
Companies/Assets Involved
| Company | Role | Key Data | Bullish/Bearish |
|---|---|---|---|
| Amazon | Largest positive contributor | No specific data disclosed | Bullish (held) |
| Alphabet | Largest positive contributor | No specific data disclosed | Bullish (held) |
| Warner Bros. Discovery | Largest negative drag | No specific data disclosed | Bearish (held) |
| Truist Financial | Largest negative drag | No specific data disclosed | Bearish (held) |
| Baxter International | New holding (medical devices) | Below 10x normalized earnings | Bullish (newly bought) |
| Carlisle Companies | New holding (commercial roofing materials) | 12x next year's estimated EPS | Bullish (newly bought) |
| Celanese Corp | New holding (chemicals) | Single-digit normalized earnings multiple | Bullish (newly bought) |
| First Citizens BancShares | New holding (regional bank) | Below tangible book value, high single-digit normalized earnings multiple | Bullish (newly bought) |
| IQVIA Holdings | New holding (clinical research/healthcare technology) | Below 15x normalized earnings | Bullish (newly bought) |
| Adobe | Removed holding | No specific data disclosed | Bearish (sold) |
| Uber | Removed holding | No specific data disclosed | Bearish (sold) |
| Take-Two Interactive | Removed holding | No specific data disclosed | Bearish (sold) |
| Netflix | Removed holding | No specific data disclosed | Bearish (sold) |
Investment Implications
- Directional Advice: Investors should focus on traditional value stocks currently overlooked by the market, particularly those whose share prices have declined due to short-term headwinds (e.g., inflation, supply chain issues) but whose long-term competitive positions remain solid (e.g., Baxter, Carlisle). The fund's rotation from high-growth stocks to traditional value stocks suggests that growth stock valuations may have become excessive, while value stocks are entering a favorable entry window.
- Risk Warning: The trend of value stocks underperforming growth stocks may persist, but the fund believes current valuations already provide sufficient margin of safety, making long-term returns achievable.