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 fund manager Bill Nygren to investors at the end of 2018, when stocks were falling and his fund was down. Instead of panicking, he saw opportunity. He explains that while stock prices dropped, company earnings grew, making stocks cheaper. For example, the banks he owns trade at just 7 to 8 times earnings (price divided by profit per share), far below the market average, and these banks are much safer than before the 2008 crisis. He also warns against chasing popular 'safe' stocks like utilities, which aren't actually cheap. In short, this letter helps you spot good companies that are unfairly beaten down during a market panic.
An Oakmark research article notes that although the portfolio companies' performance met expectations, their stock prices have consistently underperformed relative to fundamentals, and this divergence is frustrating. The core view is that the current stock market is more attractive than usual, and t
This chapter continues the theme from the previous quarter, discussing the persistent divergence between the fundamentals of held companies and their stock prices. The author notes that despite corporate performance meeting expectations, stock price performance has consistently lagged, and this frustrating situation persisted in the fourth quarter of 2018. Overall market valuations have improved significantly due to falling stock prices and rising corporate earnings, creating more attractive entry opportunities for long-term investors.
The author clearly asserts that the current stock market is more attractive than usual, and that stock differentiation makes the Oakmark portfolio even more undervalued relative to the market. Counterintuitively, although the market decline is painful, the author and their team are increasing positions in their personal accounts. Another contrarian view is that bank stocks have become higher quality since the 2008 crisis, yet the market continues to price them at an unusually large discount.
| Company/Asset | Role | Key Data | View |
|---|---|---|---|
| Alphabet, Regeneron, Netflix, Gartner, MGM, News Corp, Facebook | Expensive under GAAP but actually undervalued | Account for ~15% of portfolio | Bullish, believing GAAP expenses or asset values are misjudged |
| Citigroup, Bank of America, Capital One, Ally Financial, State Street | Financials/Banks | P/E 7-8x, dividend yield 3%, significant buybacks | Bullish, believing banks have reduced leverage, tightened standards, and improved technology advantages |
| Fiat Chrysler | Largest cyclical holding | P/E 4x, cash exceeds debt | Bullish, with profits from Jeep and Ram brands, set to begin dividends and buybacks |
| Apple | Largest tech holding | P/E 12x (11x after cash adjustment) | Bullish, believing the market mistakenly views it as an ordinary consumer electronics company |
| CVS Health | Largest healthcare holding | P/E 10x | Bullish, believing the market has not reflected the synergy value from the Aetna merger |
| Utilities, REITs, Telecom, Consumer Staples | Zero or minimal allocation | P/E equal to or higher than S&P 500 | Bearish, believing low-risk businesses do not equal low-risk stocks, and the current premium is unjustified |
This chapter focuses on the performance of the Oakmark Fund in 2018 and explains why, in a year of poor performance, the composition of its portfolio actually warrants greater investor attention. By comparing the fund's returns with those of its benchmark index, the report reveals the characteristics of value investing strategies amid short-term market fluctuations.
The author's central argument is that, despite Oakmark's disappointing returns in 2018, the stocks in the current portfolio represent the optimal selections based on its long-standing and effective investment philosophy. This judgment implies a contrarian stance—during periods of underperformance, the quality of the portfolio allocation is actually higher.
The report provides return data for various periods as of December 31, 2018, compared with the S&P 500 Total Return Index:
| Metric | Oakmark (OAKMX) | S&P 500 Total Return |
|---|---|---|
| 2018 QTD (Quarter) | -17.30% | -13.52% |
| 1 Year | -12.73% | -4.38% |
| 3 Year (Annualized) | 7.76% | 9.26% |
| 5 Year (Annualized) | 6.03% | 8.49% |
| 10 Year (Annualized) | 13.92% | 13.12% |
| Since Inception (Annualized, from Aug 1991) | 11.98% | 9.29% |
The data shows:
This chapter does not mention specific companies or assets; it only analyzes the fund's overall performance and the benchmark index.
For investors, the report suggests that when a value investing strategy performs poorly in the short term, its long-term effectiveness should not be easily dismissed. The current portfolio composition may be the result of rigorous value screening, and investors should remain patient, avoiding deviations from the established strategy due to short-term performance fluctuations. Over the long term (10 years or more), this strategy has proven capable of generating excess returns.