David Herro Market Commentary | 4Q16

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.

Bill Nygren、David Herro · 1991 · 美国芝加哥Deep value / contrarian long-term

Theme and Background

This chapter discusses how Oakmark International and global investment strategies achieved value growth through contrarian allocation amid significant market volatility in 2016. The report emphasizes that the market's pursuit of "safe" assets has led to valuation distortions, and value investors should capitalize on such mispricing.

Core Views

Market consensus is often wrong: Investors pay excessive premiums for "safe" assets (e.g., utilities, consumer staples) while underestimating the earnings resilience of cyclical sectors such as financials and industrials.
Counterintuitive judgment: Despite concerns over low/negative interest rates and energy loan losses, widespread earnings collapses in financial stocks have not materialized. Some banks have instead achieved earnings growth through loan expansion and cost cuts. The Federal Reserve's rate hikes further boosted net interest margins for commercial banks.

Key Arguments and Data

Valuation divergence: Financial stocks trade at extremely low valuations (single-digit P/E ratios, below book value), while consumer staples trade at forward P/E ratios exceeding 20x. For example, Daimler AG has a forward P/E of just 7x and a dividend yield above 5%, starkly contrasting with consumer staples.
Earnings resilience: The feared earnings collapse in financial stocks has not occurred. Some banks have achieved earnings growth through loan growth, expense reductions, and increased fee income.
Impact of macro events: The report argues that geopolitical events (e.g., referendums, elections) will continue to disrupt stock prices, but value investors should focus on companies' long-term cash flow drivers rather than short-term volatility.

Comparison Item	Daimler AG	Consumer Staples (Typical)
Forward P/E	7x	Above 20x
Dividend Yield	5%+	Lower
Valuation Level	Significantly Undervalued	Overvalued

Companies/Assets Involved

Daimler AG: An automaker, representing 3.3% of Oakmark International Fund's total assets (as of December 31, 2016). The report is bullish, citing its extremely low valuation (7x forward P/E, 5%+ dividend yield) and well-covered cash flows.
Financial stocks (not specifically named): The report is overweight, believing their earnings resilience is underestimated by the market, and Fed rate hikes benefit net interest margins.

Investment Insights

Directional recommendations: Investors should reduce holdings in overvalued "safe" assets (e.g., utilities, consumer staples) and increase exposure to deeply undervalued cyclical sectors (financials, industrials, consumer discretionary, materials), particularly those with solid earnings and sustainable cash flows.
Core principle: Avoid letting macro events (e.g., referendums, elections) dictate decisions; instead, invest based on companies' long-term cash flow generation capabilities. When stock prices deviate significantly from intrinsic value due to short-term panic, act decisively to buy.