The Oakmark Select Fund's performance since the end of the second quarter has been dreadful. Not only has the market declined significantly, but our Fund has fared meaningfully worse. What is especially frustrating is that this decline has not been caused by an unusual number of reductions in the earnings or growth prospects of the businesses we own.
One of the primary negatives has been fear in the home mortgage market. This has caused sharp declines in the stocks of mortgage originators, and our largest holding, Washington Mutual (WM), has been hit hard, though not as hard as many in that business. We believe that Washington Mutual has taken on less risk in their loan portfolio than their peers have, as demonstrated by the strong credit ratings of their borrowers (FICO scores) and their lower loan-to-value ratios. Further, as a bank, Washington Mutual has much longer term funding than do pure mortgage originators, which means that they have more control over the decision to maintain their mortgage investments than do competitors that rely on short term borrowing.
Because poorly funded competitors are exiting the business, this difficult period should end up enhancing Washington Mutual's long term earnings potential.
Bill Nygren, manager of Oakmark Select, comments on the fund's performance in an August 16 letter to shareholders: