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Sydnee Gatewood
Sydnee Gatewood
Articles (2485) 

Bill Nygren's Oakmark Select Fund 2nd-Quarter Shareholder Commentary

Discussion of markets and holdings

The second quarter of 2020 was an almost mirror image of the first. The worlds efforts to curb the spread of the coronavirus began to have an impact and the significant U.S. fiscal stimulus, announced in late March, provided much-needed support to consumers, businesses, and the credit markets. The Oakmark Select Fund returned 23% in the second quarter versus a 21% return for the S&P 500 Index. While we are gratified by this result, we understand that we have significant ground to make up with the Fund down approximately 17% YTD (in line with the Russell 1000 Value Index, also down nearly 17%) versus the S&P 500, which is down only 3%. However, we believe we are well positioned for a global economy that is now beginning to normalize.

The most significant contributors to performance were Alphabet (NASDAQ:GOOGL) (+22%), Ally Financial (NYSE:ALLY) (+39%), Apache (NASDAQ:APA) (+223%), and Facebook (NASDAQ:FB) (+36%). We added Facebook to the Fund in the first quarter, and seeing it near the top of our contributors list is a good illustration of the unusually attractive opportunities available during that volatile period. The most significant detractors during the most recent quarter were General Electric (NYSE:GE) (-14%), Concho Resources (NYSE:CXO) (+10% sold), Mastercard (NYSE:MA) (+7% sold), and Hilton Worldwide (NYSE:HLT) (+8%).

As volatility decreased in the quarter, so did our trading activity. We did not establish any new positions and finished selling off two holdingsConcho Resources, which we discussed in last quarters letter, and Mastercard. Mastercard has been a terrific holding for nearly a decade, but its price reached a point where we could no longer justify holding it in a concentrated portfolio like Oakmark Select. Selling Mastercard at more than 10x your original cost base is a great reminder of the benefit of a nearly perfect trifecta for investing: an exceptional business, purchased at a great price, and run by exemplary people.

You also may have noticed the option activity in Netflix (NASDAQ:NFLX) and Regeneron Pharmaceuticals (NASDAQ:REGN). Stock prices for both companies have been much more volatile than our estimates of business value. This presented us the opportunity to sell calls that we believe are overvalued, rather than partially selling our position, when we wanted to reduce our portfolio weights. Further, selling calls allows us to defer realizing the large capital gains that would be incurred if we sold shares outright, given the dramatic outperformance of those companies year-to-date.

Thank you for your continued partnership.

The securities mentioned above comprise the following preliminary percentages of the Oakmark Select Funds total net assets as of 06/30/20: Ally Financial 5.4%, Alphabet Cl A 10.4%, Apache 1.2%, Concho Resources 0%, Facebook Cl A 5.5%, General Electric 3.0%, Mastercard 0%, Netflix 6.1% and Regeneron Pharmaceuticals 5.3%. Portfolio holdings are subject to change without notice and are not intended as recommendations of individual stocks.

Because the Oakmark Select Fund is non-diversified, the performance of each holding will have a greater impact on the Funds total return, and may make the Funds returns more volatile than a more diversified 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 information, data, analyses, and opinions presented herein (including current investment themes, the portfolio managers research and investment process, and portfolio characteristics) are for informational purposes only and represent the investments and views of the portfolio managers and Harris Associates L.P. as of the date written and are subject to change and may change based on market and other conditions and without notice. This content is not a recommendation of or an offer to buy or sell a security and is not warranted to be correct, complete or accurate.

Certain comments herein are based on current expectations and are considered forward-looking statements. These forward looking statements reflect assumptions and analyses made by the portfolio managers and Harris Associates L.P. based on their experience and perception of historical trends, current conditions, expected future developments, and other factors they believe are relevant. Actual future results are subject to a number of investment and other risks and may prove to be different from expectations. Readers are cautioned not to place undue reliance on the forward-looking statements.

All information provided is as of 06/30/2020 unless otherwise specified.

About the author:

Sydnee Gatewood
I am the editorial director at GuruFocus. I have a BA in journalism and a MA in mass communications from Texas Tech University. I have lived in Texas most of my life, but also have roots in New Mexico and Colorado. Follow me on Twitter! @gurusydneerg

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