For the quarter, the Oakmark Select Fund increased 3%, compared to a 6% gain for the S&P 500 Index. While good on an absolute basis, we aren’t satisfied by the relative return this quarter, but understand that our investment process of buying companies that have a clear path to per-share value growth, that are run by strong management teams, and that trade at significant discounts to intrinsic value works well on average and over time, but not necessarily every quarter.
Nearly half of the underperformance relative to the S&P 500 came from our two energy holdings as oil and gas prices pulled back somewhat during the quarter. The three largest detractors—Apache (-19%), Chesapeake Energy (-15%) and General Electric (-5%)—all have direct or indirect exposure to oil and gas prices. Energy price volatility notwithstanding, the fundamentals of all three companies are largely tracking with our expectations. Furthermore, recent oil and gas property transactions confirm our belief that Apache and Chesapeake Energy are trading at substantial discounts to fair value, and in the case of Chesapeake, insiders have been buying stock. We added to the Fund’s holdings in both Chesapeake and Apache during the quarter.
The three largest contributors to performance were Fiat Chrysler (+20%), CBRE Group (+10%) and Oracle (+16%). There was no identifiable catalyst for the performance at Fiat or CBRE beyond these well-run companies continuing to demonstrate good fundamentals. Often times, this is enough for stocks that are just too cheap. Oracle’s latest earnings report showed continued progress managing its transition to more of a cloud-based software model. This strong performance was consistent with our expectations, but appeared to have positively surprised others.
There were no new additions or deletions from the portfolio in the quarter. We added significantly to our MGM (MGM, Financial) investment after what we believe was an overreaction to its earnings release, and we trimmed JPMorgan (JPM, Financial) and Bank of America (BAC, Financial) after continued strong price performance had somewhat narrowed their discounts to value.
Thank you for your continued investment in the Fund.
William C. Nygren, CFA
Portfolio Manager
[email protected]
Anthony P. Coniaris, CFA
Portfolio Manager
[email protected]
Win Murray
Portfolio Manager
[email protected]
The securities mentioned above comprise the following percentages of the Oakmark Select Fund’s total net assets as of 03/31/17: Apache Corp. 4.6%, Chesapeake Energy Corp. 4.1%, General Electric Co. 5.5%, Fiat Chrysler Automobiles N.V. 4.9%, CBRE Group, Inc., Class A 7.0%, Oracle Corp. 4.3%, MGM Resorts International 4.8%, JPMorgan Chase & Co. 3.9% and Bank of America Corp. 4.0%. Portfolio holdings are subject to change without notice and are not intended as recommendations of individual stocks.
