Much ado about quality | International equity market commentary 4Q 2025
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 article explains whether the Oakmark International Fund is shifting toward buying high-quality companies (profitable, low debt, stable earnings). The answer: yes, the fund now holds more of them, but its strategy hasn’t changed—it still insists on buying at a big discount to true value. In 2025, these quality stocks actually underperformed weak ones, making them cheaper. For ordinary investors, the lesson is: don’t chase quality without checking the price. It’s worth reading because it shows how disciplined value investing works even in a strong market.
Oakmark International Equity Commentary – Q4 2025: Focus on "Quality" The report's core argument is that while Oakmark International Fund's recent new holdings have indeed enhanced quality attributes, this does not alter its fundamental value investing approach. Quality is defined by five sub-factor
Theme and Background
This chapter discusses whether the Oakmark International Fund has recently been actively shifting toward a "quality" style and whether such an adjustment implies a fundamental change in its investment strategy. The report notes that global stock markets performed strongly overall in 2025, but high-quality companies (high profitability, low leverage, low volatility) actually lagged behind, creating opportunities for value investors.
Core Views
- The report makes a clear judgment: The portfolio has indeed improved its quality attributes, but this does not alter Oakmark's essence as a value manager. The quality enhancement is a result of bottom-up stock selection, not a strategic shift.
- Counterintuitive insight: Quality is not an objective, uniform standard. Investors with different time horizons may have entirely opposite assessments of the same company's quality—historical data can obscure or distort current quality, and price discipline is the key to distinguishing "true quality investing" from "chasing highs."
Key Arguments and Data
In 2025, the average monthly return of high-quality European stocks relative to low-quality ones fell to -0.6%, the worst performance since 2009, significantly below the 2.5% in 2008 and 2.4% in 2011
- Quality Definition: Comprised of five sub-factors—earnings quality (cash conversion), earnings volatility (earnings beta), leverage (debt/earnings and assets), investment (return on growth investment), and profitability (return on assets and profit margins).
- Quantitative Example of Price Discipline:
| Company | Quality Score (out of 10) | Price/Intrinsic Value | Included in Portfolio |
|---|---|---|---|
| A | 9 | 95% | No |
| B | 8 | 50% | Yes |
The report emphasizes: Oakmark requires a significant discount to intrinsic value (present value of future cash flows). Even if the quality score is slightly lower, as long as the price is cheap enough, it will still be prioritized.
- Market Background Data: AQR's "Quality Minus Junk" (QMJ) factor model shows that in 2025, the performance of high-quality relative to low-quality stocks in the European market was the worst since 2009 (the post-financial crisis rebound). The chart displays average monthly returns, with the annualized gap being even larger.
Companies/Assets Involved
- Oakmark International Fund: The subject of the report's analysis. Its portfolio currently has a higher allocation to companies with high profitability, low leverage, and low earnings volatility compared to one year ago.
- AQR: A quantitative research firm that provides QMJ factor model data, used to illustrate the historic underperformance of high-quality stocks relative to low-quality stocks in 2025.
Investment Implications
- Implications for Investors: Currently, high-quality stocks are being "overlooked" due to the overall market rally, making their valuations relatively more attractive. For investors adhering to value discipline, this is a window to buy high-quality companies at reasonable prices. However, caution is needed: one must not abandon the price safety margin solely because of the "quality" label. It is essential to ensure the purchase price is significantly below intrinsic value to control downside risk.