Why didn’t we do better when value outperformed? | U.S. equity market commentary 1Q 2026
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
Value stocks beat the market in early 2026, but Oakmark’s fund didn’t benefit as expected. Why? The value index was lifted by expensive semiconductor stocks (29 times earnings), not by truly cheap stocks. Meanwhile, the gap between high- and low-price stocks hit a historic extreme. Oakmark is now buying cheaper, faster-growing stocks and selling energy shares that have surged. For regular investors, this shows that a “value rally” isn’t always what it seems, and that extreme gaps may signal opportunity.
Oakmark's first-quarter 2026 report examines why the Oakmark fund failed to perform as expected when value stocks outperformed the broader market. The core argument is: although the Russell 1000 Value Index rose over 2% while the S&P 500 fell over 4%, the Oakmark fund still recorded a decline. The r
Theme & Background
This chapter discusses why the Oakmark fund failed to perform as expected in the context of value stocks (Russell 1000 Value) outperforming the broader market (S&P 500) in the first quarter of 2026. The author notes that the market had previously been dominated by momentum and growth stocks, causing Oakmark's portfolio price-to-earnings (P/E) ratio to be significantly lower than that of the value index. Logically, this should have benefited from the return of the value style, but the actual outcome was the opposite.
Core Thesis
The author's key judgment is that the Oakmark fund underperformed the value index because the rise in the Russell 1000 Value index was not driven by low-P/E stocks, but rather by high-growth, high-P/E stocks (such as semiconductor stocks) that were "crowded" into the index. The author argues that the valuation gap between high-P/E and low-P/E stocks is currently at historically extreme levels, and Oakmark continues to bet that this gap will narrow, with the current opportunity being more attractive than ever.
Key Arguments & Data
- Index Performance Comparison: The S&P 500 fell over 4%, the Russell 1000 Value rose over 2%, and the Oakmark fund, while outperforming the S&P 500, still recorded a decline.
- Internal Structure of the Value Index: Within the Russell 1000 Value index, semiconductor-related stocks (with an average forward P/E of 29 at the end of 2025) rose 15%, contributing a significant portion of the index's return.
- P/E Quintile Performance: The highest P/E quintile outperformed the lowest quintile by 390 basis points (+3.5% vs -0.4%), indicating that low-P/E stocks actually lagged.
- Valuation Gap: The gap between high-P/E and low-P/E stocks widened further from already historically high levels.
- Portfolio Adjustments: Oakmark added 8 new positions this quarter (three times the average of 2-3), the most since the bursting of the internet bubble. The 50th best stock in the S&P 500 outperformed the 450th best stock by 44 percentage points, the largest dispersion since the 2020 pandemic.
- Trade Quality: Newly purchased stocks have lower P/E ratios, higher expected growth rates, and lower historical correlation with the portfolio, expected to slightly reduce volatility.
S&P 500 sub-sector year-to-date returns show extreme divergence, with the Oil & Gas sector leading at approximately 40% gains and the Real Estate Mgmt & Dev sector trailing at approximately 25% losses, a gap of over 60 percentage points between the top and bottom performers
Companies/Assets Involved
- Semiconductor-related stocks (unnamed specific companies): Constituents of the Russell 1000 Value index, with an average forward P/E of 29, rose 15% this quarter, and were the primary driver of the index's performance.
- Energy and Industrial stocks: Oakmark's main selling direction, as energy stocks surged this quarter.
- Software and Financial stocks: Oakmark's main buying direction, as software stocks declined this quarter.
Investment Implications
Investors should be wary of the "illusion" of a value index rally: the current strength of the value index may be driven by high-P/E stocks rather than a genuine recovery of undervalued assets. Oakmark's strategy is to make a contrarian bet on the narrowing of the high/low P/E gap and to actively rebalance the portfolio by taking advantage of extreme market dispersion (a 44-percentage-point return difference between stocks), buying cheaper, faster-growing stocks that can also reduce portfolio risk. This implies that for investors who agree with the value investing logic, the current period represents a window of opportunity to actively adjust portfolios and capture the rebound potential of low-P/E stocks.