September 30, 2014
The Oakmark Fund increased fractionally during the past quarter, bringing the gain to 20% for the fiscal year ended September 30. The S&P 500 advanced 1% for the quarter and gained 20% for the fiscal year. The Oakmark Fund hit another all-time high price during the third calendar quarter. We are pleased with strong fiscal year gains, but we continue to believe that unusually strong equity performance over the past several years will lead to more moderate near-term returns.
For both the fiscal year and the calendar third quarter, the highest contributions came from the information technology and financial services sectors. We think these are still among the most attractive sectors of the market, and they represent a combined 52% of the equities in our portfolio. Our two best performers for the fiscal year were Forest Laboratories and Intel, and the worst performers were Diageo and General Motors. Our research team continues to find attractive investment opportunities, and we added five new names to the portfolio this quarter (see below). Over the past twelve months, we have added 14 names to the portfolio, all of which, in our view, can be described as well-managed, high-quality businesses selling at average or below-average valuation levels. During the quarter, we eliminated positions in Delphi Automotive, Devon Energy and McDonald’s.
Accenture PLC (ACN - $80)
Accenture (ACN) is one of the largest consulting and outsourcing companies in the world with over $30 billion of net revenues. Accenture is one of very few companies that can serve customers in both capacities globally, with scale, and across most industry verticals. As a result, roughly 60% of revenue is from projects where Accenture is the sole service provider from conception through completion, and more than 90 of Accenture’s top 100 customers have been clients for more than 10 years. Management has a long track record of disciplined capital allocation, having reduced the share count by nearly one-third over the past decade, and it recently initiated a fairly generous dividend. Accenture sells for less than 15x EPS, net of more than $7 per share of cash on the balance sheet. We believe this is an attractive price for such a high-quality and well-managed franchise.
Glencore PLC (GLEN-LON - $5)
Glencore (LSE:GLEN) was formed 40 years ago as a physical commodities trader, and over the years Glencore’s value-focused management team has grown the company into one of the largest miners in the world. After decades of being run as a private company, Glencore went public in May 2011 at a price of $8.57. Like many companies in the mining sector, Glencore’s share price has fallen over the past few years as commodity prices have weakened due to a glut of new supply. We believe the market has overly discounted the effects of lower commodity prices and has provided us with an opportunity to buy Glencore at a compelling discount to value. After giving the company credit for the expected ramp-up in production from large current investments, the company is trading at less than 9 times earnings – too low considering that approximately a quarter of those earnings come from the very high-return trading segment and the rest come from long-lived and well-run mining assets. Couple this low valuation with Glencore’s smart and highly incentivized management team (the senior leaders own billions of dollars of stock and many only receive nominal salaries), and we find Glencore to be an attractive addition to the Fund.
Las Vegas Sands Corp (LVS - $62)
While best known in the U.S. for its Venetian and Palazzo casino hotels in Las Vegas, the vast majority of the earnings of Las Vegas Sands (LVS) are generated in Macau (60% of EBITDA) and Singapore (30% of EBITDA). A weaker economy and the recent crackdown on corruption in China have pressured gambling volumes in Macau, especially in the portion of the business catering to VIP customers. The Macau gaming market is rather bifurcated between a large and more mature VIP business and a smaller, higher growth and higher margin mass-market business. Roughly 85% of LVS’s profits in Macau come from the more attractive mass-market segment. Furthermore, LVS is well positioned within that segment because it controls 56% of the casino-operated hotel rooms in the market, which gives it an edge in attracting high value customers. We view the recent slowdown in Macau as a temporary phenomenon that has given us the opportunity to own one of the best-positioned global gaming companies at a significant discount to our estimate of intrinsic value. Meanwhile, shareholders currently are benefiting from a dividend yield that is over 3% and an owner-operator management team that is buying back stock.
T. Rowe Price Group (TROW - $79)
With more than $730 billion of assets under management, T. Rowe Price (TROW) is a leading global investment manager that offers a broad array of mutual funds, sub-advisory services and separate account management for individual and institutional investors. T. Rowe has an impressive track record of superior performance; 80% of the T. Rowe Price funds have outperformed their respective Lipper averages for the past 10 years. A variety of issues – including fear of equity market peaks, the growth of index/ETF products and minor asset outflows in the institutional side of the business – have caused investors to become cautious. We believe T. Rowe’s success will continue because of its excellent distribution and an enduring investment culture that is the source of superior investment results. Investor skepticism has given us a chance to buy a well-managed company in a lucrative industry for a historically low valuation.
Whirlpool Corp. (WHR - $152)
Whirlpool (WHR) is the leading player in a fragmented global appliance market. The company has a dominant position in the North American market, and the strengthening U.S. housing recovery should increase demand for North American household appliances. Replacement demand is the largest component of Whirlpool’s sales, so an aging base of appliances in the U.S. should lead to further revenue growth as products purchased during the housing boom reach the end of their useful lives. In addition to these revenue tailwinds, Whirlpool’s profitability is also improving as a result of considerable cost cutting and a shift in their sales mix toward more attractive categories. While it is often overlooked, Whirlpool’s KitchenAid small appliance business grows faster and contributes higher margins than the rest of the business. When we consider strong revenue growth, improving profitability and the growing contribution from better categories, we see an attractive business that is selling at a considerable discount to the S&P 500 P/E multiple.
William C. Nygren, CFA
Portfolio Manager
[email protected]
Kevin G. Grant, CFA
Portfolio Manager
[email protected]
As of 09/30/14, Forest Laboratories, Inc. represented 0%, Intel Corp. 2.2%, Diageo PLC 1.9%, General Motors Co. 1.5%, Delphi Automotive 0%, Devon Energy Corp. 0%, McDonald’s Corporation 0%, Accenture PLC 1.0%, Glencore PLC 1.0%, Las Vegas Sands Corp. 1.1%, T.Rowe Price Group, Inc. 1.0%, and whirlpool Corp. 0.7% of the Oakmark Fund's total net assets. Portfolio holdings are subject to change without notice and are not intended as recommendations of individual stocks.
Click here to access the full list of holdings for The Oakmark Fund as of the most recent quarter-end.
The S&P 500 Total Return Index is a market capitalization-weighted index of 500 large-capitalization stocks commonly used to represent the U.S. equity market. All returns reflect reinvested dividends and capital gains distributions. This index is unmanaged and investors cannot invest directly in this index.
EPS refers to Earnings-Per-Share and is calculated by dividing total earnings by the number of shares outstanding.
The Price-Earnings Ratio (“P/E”) is the most common measure of the expensiveness of a stock.
The Oakmark Fund’s portfolio tends to be invested in a relatively small number of stocks. As a result, the appreciation or depreciation of any one security held by the Fund will have a greater impact on the Fund’s net asset value than it would if the Fund invested in a larger number of securities. Although that strategy has the potential to generate attractive returns over time, it also increases the Fund’s volatility.
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.
