Oakmark Fund: Third Calendar Quarter 2025

Theme and Background

This chapter is the opening summary of the Oakmark Fund's third-quarter 2025 report, outlining the fund's quarterly performance, key contributors and detractors, as well as new purchases and liquidations. The report notes that the fund underperformed the S&P 500 Index during the quarter but has outperformed the benchmark cumulatively since its inception.

Core Viewpoint

The author argues that despite the underweight in the information technology sector dragging relative performance, the fund is finding attractive opportunities to invest in high-quality, undervalued companies across multiple industries. The core judgment is that the negative market pricing of certain stocks (such as Centene) is temporary rather than structural. Meanwhile, newly purchased Targa Resources and Union Pacific were both acquired at significant discounts to intrinsic value, offering long-term upside potential.

Key Arguments and Data

• Alphabet: The stock price rose, benefiting from a favorable ruling in the Google Search antitrust case and broadly better-than-expected second-quarter results. The Cloud business accelerated growth due to strong demand from AI workloads. The author believes the stock remains undervalued on a sum-of-the-parts basis, and its AI leadership could further drive upside.
• Centene: The company withdrew its 2025 earnings per share guidance and sharply lowered expectations due to cost pressures in the Medicaid and Marketplace businesses. The author believes the current valuation implies the market views its difficulties as structural, but considers them temporary factors, expecting significant earnings recovery over the next few years.
• Targa Resources: Controls 90% of fractionation capacity in the Mont Belvieu area (the world's largest NGL hub), benefiting from geographic advantages and high entry barriers. Approximately 90% of earnings come from multi-year fee-based contracts, providing resilience against oversupply or recontracting risks. The author purchased the stock at a discount to normalized earnings and intrinsic value compared to peers.
• Union Pacific: The largest and most profitable Class I railroad in the U.S. The industry is characterized by irreplaceable infrastructure, strong pricing power, and low risk of technological disruption. CEO Jim Vena is driving cultural and operational improvements, but the stock has significantly underperformed the market due to macroeconomic headwinds and uncertainty surrounding a merger with Norfolk Southern. The author bought the stock at a significant discount to intrinsic value, believing it is undervalued even without a merger, with additional upside if the merger is approved.

Companies/Assets Involved

Investment Implications

• Buying temporary distressed stocks at lows: Centene's difficulties have been excessively priced by the market as structural. If temporary factors subside, earnings recovery could bring significant upside. Investors can watch for similar managed care companies mispriced due to regulatory or cost pressures.
• Infrastructure-type energy assets offer defensive value: Targa Resources' fee-based contract model provides stable earnings amid energy price volatility, with high geographic barriers. Similar assets (e.g., midstream natural gas/NGL infrastructure) hold allocation value under current macroeconomic uncertainty.
• Undervalued opportunities in the railroad industry: Union Pacific has been overlooked by the market due to merger uncertainty, but its industry moat (irreplaceable infrastructure, pricing power) and operational improvements provide a margin of safety. If the merger is approved, valuation re-rating potential is greater. Investors can focus on similar high-quality railroad stocks suppressed by event-driven factors.