Bill Nygren's Oakmark Select Fund 1st-Quarter Shareholder Commentary

Discussion of markets and holdings

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Sydnee Gatewood
Apr 13, 2021
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Oakmark Select Fund was up 16.1% for the quarter, ahead of the S&P 500 Index's 6.2% return. For the trailing 12-month period, the Fund increased by 90.6%, compared to the S&P's 56.4% return. The preponderance of that one-year outperformance came from November onwards, after data was announced indicating that effective vaccines would launch in the upcoming months.

Clients regularly ask us, "How do you incorporate macroeconomic factors and forecasts into your investment process?" Our answer is always, "We don't. We just assume things will be normal five years from now." By "normal," we mean that everything should pretty much look like it always does, with extremes moving toward their long-term levels. In other words, if current interest rates are negative or the current oil price is $20 or current unemployment is 12% or if there's some currency exchange rate that means a Big Mac in Europe would cost $40 American dollars, we don't extrapolate those conditions into perpetuity. We assume that five years from now, natural market forces will have worked in such a way as to produce a rational economic backdrop.

Most of the time, this keeps us in line with most other investors' expectations. This means that we don't have a unique or ideological macroeconomic belief that shapes our portfolios. In normal environments (i.e., most of the time), our returns are driven by what we do best: identifying individual businesses that sell at a substantial discount to our estimate of their intrinsic value or what we consider to be their private market values.

However, on rare occasions, the idea that things will be normal in five years looks like a heroically outlier opinion. The last time this occurred, pre-pandemic, was in 2008 during the depths of the global financial crisis. The market was in a state of panic, presuming that the world economy was almost irreparably broken. Our belief that markets would return to normal wasn't widely shared and, thus, our portfolios were loaded with cyclical recovery investments that looked far too cheap relative to our assessment of their intrinsic values. In retrospect, our portfolio positioning proved correct.

Similarly, even in the first few months of the pandemic, we had faith that human ingenuity and market forces would develop solutions that would enable something that resembled normal life (and normal economic activity) to recur. As such, the assumptions underpinning our company valuations presumed future cash flows that were likely higher than the market was forecasting at the time and, thus, our bottom-up portfolios were full of "return to normal" stocks that were priced, in our minds, far too cheaply. We didn't know when "normal" would occur, so we sold out of some cyclical companies with high debt loads (unsure as to whether they could survive an extended downturn), replacing them with similarly valued companies that had better balance sheets. In retrospect, the recovery happened even more rapidly than we had thought, and these trades, while prudent, weren't necessary.

The most significant contributors to performance during the quarter were CBRE Group (

CBRE, Financial) (+26%) and Alphabet (GOOG, Financial)(GOOGL, Financial) (+18%). The most significant detractors were Charter Communications (CHTR, Financial) (-7%) and Netflix (NFLX, Financial) (-4%). We continue to hold all of these investments, as they are still selling at a sizable discount to our estimates of their intrinsic values.

We bought two new positions in the Fund this quarter: Humana (

HUM, Financial) and First Citizens BancShares (FCNCA, Financial). The rationale behind our Humana purchase is well articulated in the Oakmark Equity and Income letter this quarter. First Citizens BancShares is a well-run, undervalued community bank that we believe is creating significant shareholder value through a nicely timed merger with CIT Group. Note that we consider our purchases of the A & B share classes of First Citizens and of CIT Group to be investments in the same entity.

We eliminated our longstanding position in TE Connectivity (

TEL, Financial) during the quarter. The company is still selling at a discount to our estimate of its intrinsic value, but that discount has narrowed as TE's stock price has increased sharply in recent quarters. As such, we don't believe the stock is attractive enough to merit holding in a concentrated portfolio.

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

The securities mentioned above comprise the following percentages of the Oakmark Select Fund's total net assets as of 03/31/21: Alphabet Cl A 10.1%, CBRE Group Cl A 9.5%, Charter Communications Cl A 5.0%, CIT 1.5%, First Citizens Bcshs Cl A 1.0%, First Citizens Bcshs Cl B 0.1%, Humana 2.8%, Netflix 3.8% and TE Connectivity 0.0%. 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 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.

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 03/31/2021 unless otherwise specified.

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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