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.
This is a letter from Oakmark's fund manager to investors in mid-2012. The main idea: the European debt crisis and slowing growth in the US and China caused stocks to plunge, but the author thinks the panic is overblown. Companies' true value—what they'll earn in the future—hasn't changed much, so it's a good time to buy quality stocks, especially European banks, industrials, and consumer goods. He also sees long-term potential in China, despite slower growth, because people save a lot and could spend more. For regular investors, the lesson is to ignore short-term noise and focus on long-term value.
Oakmark International Fund recorded a loss in the second quarter of 2012, underperforming its benchmark due to European macroeconomic uncertainty and slowing growth in the U.S. and emerging markets. However, the fund remains ahead on a year-to-date and long-term basis. The report notes that Europe's
This chapter discusses the performance and investment logic of the Oakmark International Fund in the second quarter of 2012 against a backdrop of heightened macroeconomic uncertainty. The market was dominated by the European debt crisis and slowing growth in the U.S. and emerging markets, leading to significantly increased volatility. However, the author believes that this environment instead creates opportunities for value investors.
The author’s central judgment is that the current market’s sharp price declines driven by short-term political and macroeconomic fears are severely excessive. The intrinsic value of companies, based on the present value of all future cash flows, has barely been materially affected, making this an excellent time to buy high-quality enterprises. Counterintuitively, the author argues that the sharp sell-offs in European financials, industrials, and consumer discretionary stocks are not rational pricing but rather a misalignment of market sentiment.
Investors should ignore short-term macroeconomic noise and use market panic to buy high-quality but undervalued European stocks (especially in financials, industrials, and consumer discretionary), as well as assets benefiting from China’s consumption transition. The author emphasizes holding with an investor’s time horizon rather than a trader’s, stating that the current environment is fertile ground for value investing.