Oakmark, still a large company fund | U.S. equity market commentary 4Q 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 explains why Oakmark fund was reclassified from 'Large Value' to 'Mid Value' by Morningstar, making investors worry the fund changed strategy. In fact, the threshold for large-cap stocks rose from $17 billion to $68 billion because tech stocks inflated, pushing truly big companies like GM and AIG into mid-cap. For regular investors: don't trust fund labels; check what they own. Oakmark still buys large firms by sales and profits, avoiding risky small-but-expensive tech stocks. Worth reading because it shows how classification can mislead and why focusing on fundamentals matters.
Oakmark’s fourth-quarter 2024 report reviews the challenges posed by changes in fund style classification since 2000. At that time, as the internet and large-cap growth stocks drove the S&P 500, Oakmark’s traditional value stocks underperformed, prompting Morningstar to reclassify its style from “La
Theme and Background
This chapter discusses investor confusion triggered by Morningstar’s style classification change of the Oakmark Fund from “Large Value” to “Mid Value.” The core background is that since 2000, the market capitalization of large-cap growth and technology stocks has inflated, squeezing the space for traditional value stocks within the “large-cap” classification. As a result, many large enterprises held by Oakmark—measured by fundamentals such as sales and net profit—have been reclassified by the market as “mid-cap.” The author argues that this reflects a structural market shift, not a change in the fund’s strategy.
Core Thesis
The author’s core investment argument is: The Oakmark Fund has always invested in large enterprises (measured by fundamental scale); Morningstar’s classification adjustment is a result of market distortion, not style drift. Counterintuitive judgment: The current “large-cap” classification is filled with high-risk “small-company, large-market-cap” stocks (e.g., small tech firms), while Oakmark’s “mid-cap” holdings are actually large global enterprises (e.g., General Motors, AIG) with lower risk. The author believes that adhering to value investing and avoiding overvalued “large-cap growth” stocks is precisely rational behavior.
Key Arguments and Data
- Morningstar Classification Logic: Based on market capitalization ranking, the large-cap/mid-cap cutoff is set at 70% of total U.S. market capitalization (the bottom 30% is classified as mid-cap, small-cap, and micro-cap). Ten years ago, the cutoff was $17 billion; today, it has risen to $68 billion.
- Sharp Decline in Large-Cap Stock Count: As of December 31, 2024, Morningstar classified only 22 stocks as “Large Growth,” but the average actively managed fund in the same category holds 54 stocks—meaning fund managers are forced to buy more mid-cap stocks or stocks that do not meet the growth definition.
- Oakmark Portfolio Structure: Of the 52 holdings, 50 meet the author’s definition of “large enterprises” (ranked in the top 250 in the U.S. by sales, EBIT, or shareholder equity); 39 have market capitalizations above $25 billion; only 4 have market capitalizations below $10 billion.
- Historical Comparison: A similar situation occurred in 2000, when Oakmark wrote “Oakmark, A Large Company Fund” to explain that its strategy remained unchanged; the number of “small-company, large-market-cap” stocks today is five times that of a decade ago.
The Oakmark Fund Investor Class has delivered an annualized return of 12.82% since inception, a one-year return of 16.02%, a three-year return of 14.79%, and an expense ratio of 0.91%
| Metric | 10 Years Ago | Current |
|---|---|---|
| Morningstar Large/Mid Cap Cutoff | $17 billion | $68 billion |
| Number of Morningstar “Large Growth” Stocks | — | 22 |
| Average Holdings of Peer Funds | — | 54 |
| Oakmark Holdings with Market Cap > $25 billion | — | 39 |
| Oakmark Holdings with Market Cap < $10 billion | — | 4 |
Companies/Assets Involved
- General Motors: The largest U.S. automaker, reclassified as mid-cap by Morningstar due to a market capitalization below $68 billion, but the author considers it still a large global enterprise.
- AIG Corporation: One of the largest U.S. insurance companies, similarly reclassified as mid-cap.
- Oakmark Fund: The fund itself is the subject of analysis. As of December 31, 2024, it has delivered an annualized return of 12.82% since its inception in 1991, a one-year return of 16.02%, and an expense ratio of 0.91%. The author is bullish on its strategy.
Investment Implications
- Beware of Misleading “Large-Cap” Classifications: Many stocks currently classified as “Large Growth” are small tech companies with inflated market capitalizations, carrying far higher risk than traditional large enterprises. Investors who select funds solely based on Morningstar classifications may take on unexpected risk.
- Adhere to Fundamental Scale Measurement: The author advises investors to focus on fundamental metrics such as sales and net profit, rather than relying solely on market capitalization classifications. Oakmark’s strategy—buying cheap stocks among the top 250 largest enterprises—is more defensive in the current environment.
- Risk of Forced Manager Adjustments: Due to the shrinking number of large-cap stocks, many actively managed funds are forced to buy more mid-cap or low-quality growth stocks, potentially diluting the purity of their strategies. Oakmark, drawing on historical experience (having navigated a similar situation in 2000), does not need to change, but other funds may face style drift.