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 argues that owning too many stocks in a fund can actually hurt your returns. Instead of spreading money across 100+ stocks, the author says it's better to focus on just 20 or so carefully chosen ones. This 'concentrated investing' can lead to higher long-term gains, even if it's more volatile in the short run. The key is to trust the fund manager's stock-picking skill. The report also notes that the fund managers themselves are buying more of their own funds, showing real confidence.
An Oakmark research article examines the pros and cons of active management versus index investing, with the core argument that concentrating investments in a select few stocks can yield higher long-term returns. The article notes that in 2015, most active management funds underperformed, with 90% o
This chapter discusses whether concentrated investing can still generate excess returns against the backdrop of generally poor performance by active management funds in 2015. The report notes that most active management funds incurred losses in 2015, with 90% of such funds underperforming the S&P 500 in 2014, leading to accelerated investor redemptions and a shift toward index funds. Oakmark argues that markets are not always efficiently priced, and active management can still achieve long-term excess returns through careful selection of a small number of stocks.
The author’s core investment argument is: Concentrating investments in a small number of carefully selected stocks (e.g., the Oakmark Select Fund holds only 20 stocks) can enhance long-term returns more than broad diversification, despite higher short-term volatility. Counterintuitive judgments include:
1. Historical Performance Comparison: The Oakmark Select Fund outperformed the Oakmark Fund in 14 out of 19 calendar years, with significantly higher cumulative returns.
2. Differences in Concentrated vs. Diversified Holdings:
3. Theoretical Refutation: Academic theory views diversification as a “free lunch,” but this assumes all stocks are fairly priced. The author argues that if stocks are mispriced, diversification reduces expected returns.
4. Case Demonstration: If an investor allocates $90,000 equally among the top-ranked funds in Morningstar’s nine style boxes, the resulting portfolio holds over 1,000 stocks, with a printed list exceeding 30 feet in length—illustrating the absurdity of over-diversification.
This chapter continues Oakmark’s in-depth exploration of concentrated active management strategies, focusing on how its flagship funds, Oakmark Select and Oakmark Global Select, have adjusted their concentration levels over long-term practice and why the firm adheres to this philosophy even during periods of short-term underperformance. The report challenges the market consensus that “diversification reduces risk” and directly addresses the struggles faced by active management funds in 2015 and early 2016, when they broadly underperformed their benchmarks.
The author’s central investment argument is: When stock-picking ability is effective, concentrated investing amplifies excess returns; excessive diversification only dilutes value. Counterintuitive judgments include:
1. Concentration adjustments are not about reducing risk, but adapting to changes in market correlations: Oakmark Select reduced its top five holdings from 50% to 35% of assets, not because it lost faith in concentrated investing, but because rising correlations among stocks required a larger number of holdings (from 7–10 to 10–15) to achieve the same level of volatility reduction.
2. Tracking error is not risk; permanent capital loss is: The author explicitly states that the firm will not minimize tracking error to hug the index, as it is not considered a useful measure of risk.
3. Short-term losses are opportunities to add to positions, not reasons to abandon the strategy: Although most funds underperformed their benchmarks over the prior two years (2014–2015), every portfolio manager increased their personal stake in their respective funds over the past 12 months, demonstrating conviction through action.
The report supports its views with historical practice and specific data:
Comparative Data Table:
| Metric | At Inception | Current (Post-Adjustment) |
|---|---|---|
| Number of securities needed for diversification | 7–10 | 10–15 |
| Maximum position weight limit | 10–15% | 7–10% |
| Top five holdings as % of total assets | ~50% | ~35% |
| Oakmark Global Select vs. peer performance (over 9 years) | - | Outperformed in 6 years, higher cumulative returns |
This chapter does not mention specific companies; it primarily discusses Oakmark’s fund products:
For investors, the key takeaways from this chapter are:
1. Do not equate “diversification” with “safety”: In a market environment with rising stock correlations, excessive diversification may merely reduce volatility while sacrificing the potential for excess returns. The true risk is permanent capital loss, not short-term volatility or tracking error.
2. Focus on portfolio managers’ “skin in the game”: When managers invest their own money alongside investors, their actions speak louder than words. The increased personal stakes of Oakmark’s portfolio managers over the past 12 months are a critical signal of their conviction in the strategy.
3. Accept the cyclical performance of active management: Concentrated strategies inevitably experience periods of short-term underperformance relative to benchmarks. Investors should assess their ability to tolerate such volatility and understand that these periods may represent windows for contrarian accumulation, not reasons to exit.