Oakmark Select Fund: First-Quarter 2019

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Includes: APA, CBRE
by: Harris Oakmark
Summary

We are value investors. In constructing portfolios for our clients, we seek out companies that we believe are trading in the market at significant discounts to their underlying value. These businesses must offer significant profit potential and be run by managers who think and act as owners.

We believe in the importance of intensive, fundamental research. Our research process is based on a disciplined quantitative and qualitative screening process.

The Oakmark Select Fund was up 13.5% for the quarter.

Best performer in the quarter, up 36%, was Apache and largest contributor to performance was CBRE Group.

Oakmark Select Fund – Investor Class

Average Annual Total Returns (03/31/19)
Since Inception (11/01/96) 11.39%
10-year 14.75%
5–year 3.84%
1–year -11.30%
3–month 13.47%
Gross Expense Ratio as of 09/30/18 was 1.04%
Net Expense Ratio as of 09/30/18 was 0.97%

Past performance is no guarantee of future results. The performance data quoted represents past performance. Current performance may be lower or higher than the performance data quoted. The investment return and principal value vary so that an investor’s shares when redeemed may be worth more or less than the original cost. To obtain the most recent month-end performance data, view it here.

The Oakmark Select Fund was up 13.5% for the quarter, very modestly trailing the S&P 500 Index’s 13.7% return. After a punishing December 2018, our portfolio reversed sharply in January (and was, in fact, up almost 15% that month alone, compared to 8% for the S&P 500). February and March felt like a continuation of December in our industrial and consumer discretionary investments, while our energy stocks continued to do well.

Our best performer in the quarter, up 36%, was Apache (NYSE:APA). The company reported great results during the quarter and it is growing production more than expected, despite spending less on capital expenditures than had been forecasted. This is a great combination of factors for a company in the energy sector, which is notorious for capital inefficiency, and we believe it should lead to excellent cash flows over time. Despite the stock’s rally, we still believe it remains quite inexpensive.

Our largest contributor to performance was CBRE Group (NYSE:CBRE), up 23% (one of nine stocks in the Fund up 20% or more this quarter). The company is performing exceptionally well due to strong revenue growth across business lines and geographies, margin expansion, and a new share repurchase program. We believe CBRE will continue to benefit from positive trends within the real estate sector and also from its widening competitive moat. Yet, its stock is still trading for only 13x 2019 earnings per share (EPS) estimates.

Our worst performer and largest detractor in the quarter, down 18%, was Qurate Retail (NASDAQ:QRTEA). The stock dropped sharply on its earnings report in late February as the HSN acquisition has, thus far, produced disappointing results while various international QVC assets underperformed. We believe the stock looks very inexpensive at the current $16 price as share repurchases and expected HSN synergies alone should drive EPS (plus amortization) comfortably above $2 in 2019.

Our only other portfolio holding to decline in the quarter was American Airlines (NASDAQ:AAL), which dropped 3% on continued concerns about a possible economic slowdown. With the stock trading at 5x 2019 EPS estimates and with the industry consolidation having produced what appears to be a more rational capacity and pricing backdrop, we believe such concerns are currently over-discounted.

We did not initiate or eliminate any positions during the quarter, other than receiving a small amount of Wabtec (NYSE:WAB) shares as a spin-off from GE, which we subsequently sold.

Thank you, our fellow shareholders, for your continued investment in our Fund.

William C. Nygren, CFA
Portfolio Manager
oaklx@oakmark.com

Anthony P. Coniaris, CFA
Portfolio Manager
oaklx@oakmark.com

Win Murray
Portfolio Manager
oaklx@oakmark.com

The securities mentioned above comprise the following percentages of the Oakmark Select Fund’s total net assets as of 03/31/19: American Airlines Group 3.5%, Apache 3.8%, CBRE Group Cl A 8.8% and Qurate Retail Cl A 3.0%. Portfolio holdings are subject to change without notice and are not intended as recommendations of individual stocks.

Access the full list of holdings for the Oakmark Select Fund as of the most recent quarter-end.

The net expense ratio reflects a contractual advisory fee waiver agreement through January 27, 2020.

The S&P 500 Total Return Index is a float-adjusted, capitalization-weighted index of 500 U.S. large-capitalization stocks representing all major industries. It is a widely recognized index of broad, U.S. equity market performance. Returns reflect the reinvestment of dividends. This index is unmanaged and investors cannot invest directly in this index.

Because the Oakmark Select Fund is non-diversified, the performance of each holding will have a greater impact on the Fund's total return, and may make the Fund's returns more volatile than a more diversified fund.

Oakmark Select Fund: The stocks of medium-sized companies tend to be more volatile than those of large companies and have underperformed the stocks of small and large companies during some periods.

The discussion of the Fund’s investments and investment strategy (including current investment themes, the portfolio managers' research and investment process, and portfolio characteristics) represents the Fund’s investments and the views of the portfolio managers and Harris Associates L.P., the Fund’s investment adviser, at the time of this letter, and are subject to change without notice.

All information provided is as of 03/31/2019 unless otherwise specified.