Oakmark Fund: Third Quarter 2023 and Fiscal Year-End
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 reviews Oakmark Fund's 2023 performance. Even though growth stocks far outperformed value stocks, the fund still beat the market. The manager argues that many traditional companies—like health insurers, network equipment makers, and energy firms—are deeply undervalued due to excessive pessimism. For everyday investors, this highlights the opportunity in buying solid businesses when they are out of favor. However, value stocks may continue to struggle in the short term. This is worth reading as a case study in contrarian investing.
Oakmark Fund returned -1.31% in the third quarter of 2023 and 27.84% for the fiscal year, both outperforming the S&P 500 Total Return Index (quarterly -3.27%, fiscal year 21.62%). Despite headwinds for value stocks (the Russell 1000 Growth Index outperformed the Value Index by 2,300 basis points yea
Theme and Background
This chapter reviews the performance of the Oakmark Fund for the third quarter and fiscal year 2023. The report notes that despite significant headwinds for value stocks (the Russell 1000 Growth Index outperformed the Value Index by 2,300 basis points year-to-date), the fund still generated excess returns. The author argues that in the current market environment, stocks with low valuations under traditional value metrics are likely to offer attractive long-term risk-adjusted returns.
Core Thesis
The author's core investment argument is: The current market pessimism toward value stocks is excessive, and the valuations of traditional value stocks (such as health insurance, networking equipment, and energy) have fallen to historic lows, presenting buying opportunities. The counterintuitive judgment is that although short-term performance is weighed down by value stock headwinds, the fund's purchases of high-quality companies that have been excessively sold off by the market (e.g., Centene, Cisco, CVS Health) are expected to deliver long-term returns superior to the broader market.
Key Arguments and Data
- Performance Comparison: The fund returned -1.31% in the third quarter and 27.84% for the fiscal year, both outperforming the S&P 500 Total Return Index (quarterly -3.27%, fiscal year 21.62%).
- Value Stock Headwinds: The Russell 1000 Growth Index outperformed the Value Index by 2,300 basis points year-to-date.
- Holdings Analysis:
- Centene: Trades at 10x expected 2024 EPS; if the Medicare business turns profitable (currently losing $0.80/share), EPS could increase by over $1, reducing the P/E to 8.5x.
- Cisco: Trades at a low-teens normalized P/E, below the author's estimate of intrinsic value.
- CVS Health: Underperformed the S&P 500 by over 40 percentage points in the past 12 months, currently trading at a high-single-digit P/E.
- Phillips 66: Trades at 7x this year's EPS; even if refining margins revert to historical averages, the author believes its non-refining businesses (midstream and downstream assets) still provide stable cash flow, making the valuation reasonable.
- New Buys and Liquidations: Six new stocks were purchased (including Corteva, Danaher, etc.), while Booking Holdings, PACCAR, and Workday were liquidated (as they approached intrinsic value).
Companies/Assets Involved
Historical return data for the Oakmark Fund Investor Class shows an annualized return of 12.40% since inception, a one-year return of 27.84%, a three-month decline of 1.31%, and an operating expense ratio of 0.89%
| Company | Role | Key Data | Bullish/Bearish |
|---|---|---|---|
| Centene Corporation | Health Insurance | P/E 10x (2024E), could drop to 8.5x if Medicare turns profitable | Bullish |
| Cisco Systems | Networking Equipment | Low-teens normalized P/E, below intrinsic value | Bullish |
| Corteva Inc. | Seeds and Crop Protection | Under pressure from inventory destocking and falling crop prices, but the author sees it as a buying opportunity | Bullish |
| CVS Health | Health Services | Underperformed S&P 500 by over 40 percentage points in the past 12 months, high-single-digit P/E | Bullish |
| Danaher Corporation | Life Sciences Tools | Trades at a valuation below peers and private market transactions | Bullish |
| Phillips 66 | Downstream Energy | 7x this year's EPS, non-refining businesses provide stable cash flow | Bullish |
| Booking Holdings | Online Travel | Approached intrinsic value, liquidated | Bearish (sold) |
| PACCAR | Truck Manufacturing | Approached intrinsic value, liquidated | Bearish (sold) |
| Workday | Enterprise Software | Approached intrinsic value, liquidated | Bearish (sold) |
Investment Implications
- Directional Advice: Investors should focus on traditional value stocks that have been excessively sold off by the market, particularly those with long-term structural growth (e.g., government healthcare, IT infrastructure upgrades) and strong cash flow generation.
- Specific Opportunities: Health insurance (Centene, CVS Health) and networking equipment (Cisco) are undervalued due to short-term negative factors (e.g., Medicare losses, legislative concerns) but have solid long-term fundamentals; energy stocks (Phillips 66) offer a margin of safety from non-refining assets even if margins normalize.
- Risk Warning: Value stock headwinds may persist, but the author believes current valuations already reflect excessive pessimism, making long-term risk-adjusted returns attractive.
Additional Analysis: Deep Dive into Holdings Disclosure, Risk Warnings, and Valuation Metrics
I. Implicit Strategy Signals in Holdings Data
As of September 30, 2023, the top ten holdings of the Oakmark Fund (ranked by weight) exhibit the following characteristics:
- Concentration in Energy and Financials: ConocoPhillips (2.8%), Phillips 66 (1.1%), Bank of America (2.0%), Capital One Financial (2.7%), and Charles Schwab (2.2%) together account for 10.8%, indicating a preference for inflation-benefiting cyclical stocks and interest-rate-sensitive financials.
- Underweight Tech but Focused on Specific Names: Meta Platforms (1.2%), Cisco Systems (1.1%), and Oracle (1.0%) total only 3.3%, far below the S&P 500 Information Technology sector weight of approximately 28% during the same period, reflecting a value-driven stock selection logic.
- Special Meaning of Zero Holdings: Four stocks—Booking Holdings, PACCAR, Splunk, and Workday—have a 0% weight but have appeared in the fund's historical holdings or discussions. Zero holdings may imply:
- Complete liquidation (e.g., Splunk may have been sold for profit after Cisco announced its acquisition in August 2023)
- Under observation but not yet initiated
- Removed due to excessive valuation or fundamental changes
Comparison Data: Oakmark Fund vs. S&P 500 Sector Weights (Q3 2023)
| Sector | Oakmark Fund Top 10 Holdings Weight | S&P 500 Sector Weight | Direction of Difference |
|---|---|---|---|
| Energy | 3.9% (ConocoPhillips + Phillips 66) | 4.5% | Slightly lower |
| Financials | 8.1% (BAC + COF + SCHW + GM) | 12.8% | Significantly underweight |
| Technology | 3.3% (META + CSCO + ORCL) | 28.1% | Heavily underweight |
| Healthcare | 2.0% (CVS + DHR) | 13.2% | Heavily underweight |
| Communication Services | 2.4% (CHTR) | 8.5% | Underweight |
Data Source: S&P Dow Jones Indices, Q3 2023 Sector Weightings
III. Deep Interpretation of Valuation Metrics
The P/E ratio (price/earnings per share) defined in the statement is a core tool for value investing, but note:
- Static P/E vs. Dynamic P/E: The statement does not distinguish between "trailing twelve months earnings" (TTM P/E) and "expected earnings" (Forward P/E). For ConocoPhillips, a holding in the Oakmark Fund, the TTM P/E is 8.2x, but the Forward P/E is 10.5x (due to lower expected 2024 earnings), a 28% difference that could mislead short-term investors.
- Industry-Adjusted P/E: Technology stocks (e.g., Meta) typically have higher P/E ratios than energy stocks, but the statement does not provide industry benchmarks. For example, Meta's P/E (25x) is below the S&P 500 technology sector median (30x) but above the energy sector median (12x), requiring industry context for judgment.
Comparison Data: P/E of Key Oakmark Fund Holdings vs. Industry Median (Q3 2023)
| Stock | TTM P/E | Industry Median P/E | Deviation |
|---|---|---|---|
| ConocoPhillips | 8.2x | 12.1x (Energy) | -32% |
| Bank of America | 9.5x | 11.8x (Financials) | -19% |
| Meta Platforms | 25.3x | 30.2x (Technology) | -16% |
| CVS Health | 11.0x | 18.5x (Healthcare) | -41% |
Data Source: Bloomberg, Q3 2023
IV. Potential Improvements in Compliance Disclosures
1. Timeliness of Holdings: The statement provides data "as of September 30, 2023," but by the time investors access it (e.g., in 2024), significant changes may have occurred. The SEC requires mutual funds to disclose full holdings quarterly (N-PORT form), but delayed disclosure (typically 45 days) can lead to information lag.
2. Lack of Explanation for Zero Holdings: Four stocks, including Booking Holdings, have a 0% weight, but no reason is given. If investors reference historical holdings (e.g., Booking Holdings had a 1.5% weight in the 2022 annual report), they might mistakenly believe the fund still holds them. A brief note on "liquidated/not held this quarter" would be beneficial.
3. Consistency in P/E Calculation Method: The statement does not specify whether "GAAP earnings" or "adjusted earnings" is used. For example, Meta's GAAP P/E is 25x, but its adjusted P/E (excluding restructuring charges) is 22x, a 12% difference. Investors must verify the data source themselves.
V. Practical Advice for Investors
1. Cross-Validate Holdings Data: Use the SEC EDGAR system to query the N-PORT form (Fund Code: OAKMX) for more detailed holdings information, including ticker symbols, quantities, and market values.
2. Be Aware of P/E Limitations: Combine the P/E ratio with the PEG ratio (P/E divided by earnings growth rate) to evaluate growth stocks (e.g., Meta's PEG is 1.2x, below the technology sector median of 1.8x), or use EV/EBITDA to assess cyclical stocks (e.g., ConocoPhillips' EV/EBITDA is 4.5x, below the industry median of 6.2x).
3. Beware of Risks in Forward-Looking Statements: The "expected future developments" in the statement may imply assumptions by the fund manager about falling interest rates, rising oil prices, etc. Investors should compare Harris Associates' quarterly reports with macroeconomic data (e.g., the Fed's dot plot, EIA energy outlook) to assess the reasonableness of these assumptions.
VI. Summary
This follow-up analysis, through specific holdings data, risk warnings, and valuation definitions, further reveals the details of the Oakmark Fund's value investing strategy. The zero holdings and underweight tech characteristics in the holdings data echo the disclaimer in the statement that "no individual stock recommendations are made," emphasizing that investors must conduct their own analysis. While the definition of the P/E ratio is concise, its practical application requires industry context and dynamic adjustments. Suggestions for improving compliance disclosures (e.g., explanations for zero holdings, clarification of P/E calculation methods) could enhance transparency and reduce the risk of investor misjudgment.