ETFs, interest rates, the election—what shareholders are asking about | U.S. equity market commentary 3Q 2024
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 summarizes Oakmark's shareholder Q&A for Q3 2024. Key takeaways: elections have little lasting impact on market returns; higher bond yields (around 5%) make bonds attractive again; their equity-income fund offers similar returns to the S&P 500 with much lower risk and likely no capital gains distributions (taxable profits from selling stocks) this year. Worth a read for investors looking for tax-efficient options and a balanced perspective on interest rates and politics.
Oakmark 2024 Third Quarter Report Responds to Shareholder Questions on ETFs, Interest Rates, and Elections Core View: Economic forces are stronger than political forces. The stock market has risen under both Republican and Democratic administrations, so the report advises against over-focusing on el
Theme and Background
This chapter addresses shareholders' core concerns raised in the third quarter of 2024 in a Q&A format, covering topics such as ETF progress, election impact, tax distributions, the interest rate environment, and fund performance differences. The report emphasizes that economic forces are stronger than political forces and discloses that Oakmark has submitted an ETF registration application to the SEC based on a large-cap strategy.
Core Views
- Limited Election Impact on Markets: Stock markets have risen under both Republican and Democratic administrations, so the report does not overemphasize elections; however, a change in administration may accelerate corporate mergers and acquisitions, benefiting funds holding potential acquisition targets.
- Interest Rate Normalization Benefits Bonds and Bank Stocks: Current bond yields of nearly 5% (Oakmark Bond Fund) make bonds attractive again for investment; bank stocks benefit from an interest rate environment slightly above inflation, but the short-term shock of rates rising rapidly from 0% to 5% has already been absorbed.
- Oakmark Equity and Income Fund Undervalued: This fund achieves 94% of the S&P 500's return with approximately 30% lower volatility (standard deviation), delivering significantly superior risk-adjusted returns compared to peers.
Key Arguments and Data
Oakmark Fund Investor Class has an annualized return of 12.86% since inception, a one-year return of 28.39%, and an expense ratio of 0.91%
1. Tax Efficiency: Through long-term holding, tax-loss harvesting, and in-kind redemptions, it is expected that all domestic and global funds will have zero capital gains distributions in 2024.
2. Equity and Income Fund Risk-Return Comparison:
| Metric | S&P 500 | Oakmark Equity and Income |
|---|---|---|
| Standard Deviation (Risk) | Benchmark | Approximately 30% lower |
| Cumulative Return (vs S&P 500) | 100% | 94% |
| Median Decline in Down Years | -15% | -5% |
| Average Decline in Down Years | -17% | <1% |
| Annualized Return Since Inception (1995) | — | 9.65% |
Oakmark Select Fund Investor Class has an annualized return of 11.76% since inception, a one-year return of 23.42%, and an expense ratio of 1.00%
3. Oakmark Select vs. Oakmark Fund Long-Term Performance:
- Since inception in 1996, Select has grown 22 times cumulatively, while Oakmark Fund has grown 14 times.
- However, Select has lagged over the past decade, primarily due to value investing's prolonged underperformance and weak performance in small-cap stocks.
4. Interest Rate Environment:
- The Oakmark Bond Fund currently yields approximately 5% (as of September 30, 2024).
- The Equity and Income Fund yields over 2% (same period).
Companies/Assets Involved
Oakmark Equity and Income Fund Investor Class has an annualized return of 9.65% since inception, a one-year return of 19.78%, and an expense ratio of 0.86%
- Oakmark Fund: Flagship fund with an annualized return of 12.86% (since inception in 1991) and a one-year return of 28.39%.
- Oakmark Select Fund: Concentrated holdings fund with an annualized return of 11.76% (since inception in 1996) and a one-year return of 23.42%.
- Oakmark Equity and Income Fund: Balanced equity and bond fund with an annualized return of 9.65% (since inception in 1995) and a one-year return of 19.78%; approximately 40% allocated to bonds, with a current yield over 2%.
- Oakmark Bond Fund: Pure bond fund with a current yield of approximately 5%.
- Bank Stocks: Benefit from interest rates stabilizing slightly above inflation, but rapid rate hikes caused short-term negative impacts.
Investment Implications
- Monitor ETF Progress: Oakmark has submitted an ETF registration application for a large-cap strategy; if approved, it will provide a more flexible allocation tool.
- Increase Allocation to Bond Assets: Current bond yields of 5% are attractive and can improve the portfolio's risk-return profile.
- Contrarian Positioning in Value Investing: Oakmark Select's long-term excess return logic remains intact; the current downturn in value style may present a window for positioning.
- Leverage Tax Efficiency Advantages: The expectation of zero capital gains distributions makes Oakmark funds more competitive in tax-sensitive accounts.