Oakmark Fund: First Calendar Quarter 2024
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 adjusted its holdings in early 2024. They sold stocks like Amazon and Meta that had reached fair value, and bought cheaper but strong companies: Deere (farm equipment), Delta Air Lines, and Kenvue (consumer health brands like Neutrogena and Tylenol). These stocks were beaten down due to industry worries or legal issues, but the fund believes their long-term advantages are overlooked. For ordinary investors, the lesson is: when growth stocks dominate the news, don't ignore high-quality companies that are temporarily out of favor.
Oakmark Fund returned 10.27% in the first quarter of 2024, slightly underperforming the S&P 500's 10.56%, but has delivered an annualized return of 12.96% since its inception in August 1991, outperforming the S&P 500's 10.51%. The main contributing sectors this quarter were financials and consumer d
Theme and Background
This section is the opening of the Oakmark Fund’s first-quarter 2024 report, summarizing the fund’s performance, portfolio adjustments, and new purchases during the quarter. The report notes that while growth stocks continued to outperform early in the year, value investment opportunities still exist. The fund took advantage of market volatility to increase positions in certain discounted stocks and sold holdings approaching intrinsic value.
Core Thesis
The author’s core investment argument is that despite growth stocks dominating the market, stocks meeting value investment criteria remain attractive. The fund sold positions nearing intrinsic value (e.g., Amazon, Meta) and rotated into targets with lower valuations and stronger competitive advantages (e.g., Deere, Delta, Kenvue) to capture higher potential returns. A counterintuitive judgment is that amid market concerns over a downturn in the agricultural cycle and weakness in the airline industry, the author believes the long-term competitiveness of these industry leaders (Deere, Delta) is undervalued.
Key Arguments and Data
- Performance Comparison: The fund returned 10.27% in the first quarter, slightly below the S&P 500’s 10.56%. However, since its inception in 1991, the fund has achieved an average annual return of 12.96%, outperforming the S&P 500’s 10.51%.
- Portfolio Adjustments: Increased positions in Charter Communications and Warner Bros. Discovery, as these stocks traded significantly below intrinsic value. Sold Amazon, HCA Healthcare, Hilton Worldwide, Meta Platforms, and PHINIA, as these holdings approached intrinsic value.
- Valuation of New Purchases:
- Deere & Company: Purchased at a low-double-digit P/E multiple based on normalized earnings power.
- Delta Air Lines: Trading at 6 times normalized earnings per share.
- Kenvue: Trading at 16.5 times trailing earnings, significantly below the market and other consumer goods companies.
| New Purchase Target | Key Valuation Metric | Valuation Level |
|---|---|---|
| Deere & Company | P/E on normalized earnings | Low double digits |
| Delta Air Lines | Multiple of normalized EPS | 6 times |
| Kenvue | Historical P/E | 16.5 times |
As of March 31, 2024, the fund’s annualized return since inception in 1991 is 12.96%, with a one-year return of 33.52%, a 10-year return of 12.16%, a 5-year return of 16.35%, and an expense ratio of 0.91%.
Companies/Assets Involved
- Deere & Company (Bullish): A leader in agricultural equipment with dominant market share in North America and Brazil. The stock has declined due to concerns over a downturn in the agricultural cycle, but the author believes it will benefit long-term from population growth and the need for improved agricultural productivity.
- Delta Air Lines (Bullish): A global leading airline with the strongest competitive advantages among the three major U.S. carriers (operational performance, brand, hub network, loyalty program). Trading at 6 times normalized earnings, the valuation is attractive.
- Kenvue (Bullish): A consumer health company spun off from Johnson & Johnson, owning brands such as Neutrogena, Listerine, Tylenol, and Band-Aid. The stock trades at a discount due to litigation and market share losses; the author sees potential for efficiency improvements and reinvestment.
- General Motors (Bullish): One of the largest contributors to the fund’s performance this quarter.
- Kroger (Bullish): One of the largest contributors to the fund’s performance this quarter.
- Charter Communications (Bullish): The largest detractor this quarter, but the fund increased its position.
- Warner Bros. Discovery (Bullish): The largest detractor this quarter, but the fund increased its position.
- Amazon, Meta Platforms, HCA Healthcare, Hilton Worldwide, PHINIA (Bearish/Sold): Holdings approached intrinsic value and were sold to reallocate into more attractive opportunities.
Investment Insights
- Value Opportunities Persist: In a growth-stock-dominated market, investors should focus on industry leaders undervalued due to short-term concerns (e.g., cyclical downturns, litigation), especially those with brand, technology, or distribution advantages.
- Focus on Normalized Earnings Valuation: The investment rationale for Deere and Delta is based on normalized earnings power, not current cyclical troughs. Investors can seek similar targets that are mispriced due to cycles or sentiment but have solid long-term competitiveness.
- Defensive Opportunities in Consumer Goods: Kenvue’s discount reflects short-term negatives, but its brand moat and potential for efficiency improvements may offer a margin of safety. Investors can watch for consumer goods companies undergoing spin-offs or restructurings.