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 report explains how companies with lots of extra cash can boost shareholder returns through dividends (paying out profits), stock buybacks (reducing shares in circulation), and acquisitions. The author argues that these actions make earnings per share and dividends grow faster than the company's underlying profit growth, but the market overlooks this. For example, if companies raise their payout ratio from 30% to 50%, dividend growth could double. For regular investors, focusing on firms that both pay dividends and buy back stock, with low debt, might beat just chasing profit growth. It's worth a read because it reveals a hidden driver of stock performance.
Oakmark Research notes that M&A activity over the past two quarters has hit a five-year high, with Dealogic data showing first-quarter transaction volume reaching $268 billion, including deals exceeding $200 billion for the first time since 2007, such as Heinz (over $27 billion) and Dell ($21 billio
This chapter focuses on how companies deploy excess cash and the long-term impact of these actions on shareholder value. Oakmark notes that corporate balance sheets are currently exceptionally strong, with cash generation far exceeding reinvestment needs, and the market generally underestimates the role of such capital allocation in driving earnings per share (EPS) and dividend growth.
The author's core investment argument is: The market mistakenly assumes that EPS and dividend growth will move in lockstep with organic net income growth, but historically low payout ratios (30%) and aggressive share buybacks/M&A activity will cause both to consistently outpace organic growth. Counterintuitive judgments include: a return of the payout ratio to its historical average (50%) would result in dividend growth more than double the rate of earnings growth; the EPS boost from share buybacks (e.g., 5% earnings growth + 2% share reduction = 7% EPS growth) is overlooked by investors.
| Period | S&P 500 Payout Ratio |
|---|---|
| 2012 | 30% |
| 1960s-1980s Average | 50% |
This section primarily discloses the specific holdings of the Oakmark Fund and the Oakmark Select Fund as of March 31, 2013, along with index explanations. This provides investors with the actual portfolio allocation of the institution under the themes of mergers and acquisitions and capital allocation discussed in the report.
This section contains no clear investment thesis or market judgment; it is solely a disclosure of holdings and index definitions. The core information is that the Oakmark funds adjusted positions in certain M&A targets (such as H.J. Heinz and Dell) during the reporting period, while maintaining heavy positions in companies such as AIG, DIRECTV, and Capital One Financial.
| Company/Asset | Fund | Position Percentage | Role/Judgment |
|---|---|---|---|
| H.J. Heinz Co. | Oakmark Fund | 0% | Liquidated (previously an M&A target) |
| H.J. Heinz Co. | Oakmark Select Fund | 0% | Liquidated |
| Dell, Inc. | Oakmark Fund | 2.1% | Holding (M&A target) |
| Dell, Inc. | Oakmark Select Fund | 4.5% | Heavy position (M&A target) |
| Apple, Inc. | Oakmark Fund | 1.9% | Holding |
| Apple, Inc. | Oakmark Select Fund | 0% | Not held |
| American International Group, Inc. (AIG) | Oakmark Fund | 2.3% | Holding |
| American International Group, Inc. (AIG) | Oakmark Select Fund | 5.1% | Heavy position |
| DIRECTV | Oakmark Fund | 2.4% | Holding |
| DIRECTV | Oakmark Select Fund | 4.9% | Heavy position |
| Capital One Financial Corp. | Oakmark Fund | 2.3% | Holding |
| Capital One Financial Corp. | Oakmark Select Fund | 5.2% | Heavy position |