Now that the Olympics have successfully come to a close, we are happy to see that the year-long delay wasn’t prolonged. We at Oakmark can relate with the athletes who had to maintain their patience and disciplined routines amid the uncertainty. We only wish our wait has been as short as theirs.
But starting last November, value started to see its day, outperforming growth once again. By the time the first quarter of 2021 ended, six out of seven Oakmark funds1 experienced their single best one-year returns of all time–receiving the proverbial gold medal for annual performance. And the lone excluded fund? It took silver, with its returns up 90%, ranking second out of 98 quarters in its history.
Table 1: Ranking Each Oakmark Fund One-Year Return Ending March 31, 2021 Relative to Its History
| Fund | Rolling One-Year Absolute Return | Historical Rank |
|---|---|---|
| Oakmark | 87.4% | 1 out of 115 quarters |
| Oakmark Select | 90.6% | 1 out of 94 quarters |
| Oakmark Global | 85.8% | 1 out of 83 quarters |
| Oakmark Global Select | 80.7% | 1 out of 54 quarters |
| Oakmark International | 84.8% | 1 out of 111 quarters |
| Oakmark International Small Cap | 89.8% | 2 out of 98 quarters |
| Oakmark Equity and Income | 53.7% | 1 out of 98 quarters |
Absolute return is the return that an asset achieves over a certain period and does not make any comparison against other possible investments or to a benchmark.
However, after a strong first two months of the second quarter, growth roared back in a record-setting June, dramatically outpacing value for the full quarter. And as of late, stock markets have fallen from their highs as the media’s obsession with the fast-spreading delta variant has frightened investors. So, is this the end of the value run?
Bill Nygren (Trades, Portfolio), Harris Associates Chief Investment Officer-U.S. Equities, recently weighed in on the subject on a quarterly shareholder call. “For those of you who are concerned that the value run might be over, clearly our funds have had an unusually good trailing year. But that outperformance wasn’t driven by a good relative period for value. The Russell Value and the Russell Growth Indexes each increased by similar amounts, 43.7% and 42.4% respectively, over the past year through June 30. So everything I’ve been talking about over the past year, highlighting what we believe is an unusually large opportunity to add value by focusing on stock price rather than just expected earnings growth, is just as valid today as it was then.”
After the strong one-year returns for value, it might be surprising to hear that valuations are still at historic lows for the price paid for value versus the price paid for growth. For example, European and global value indexes are trading at a 53% and 51% P/E discount to growth, respectively. Today’s levels are the lowest in over two decades, while the historic relationship is closer to a 30% discount.
David Herro (Trades, Portfolio), Harris Associates Chief Investment Officer-International Equities, believes this gap between value and growth will close. “I expect to see pressure on interest rates benefit the greatest pocket of value—global financials. Other areas in the international market, including industrials and materials, are well placed to benefit from higher growth due to the reopening of national economics and further stimulus.”
At Oakmark, our investment team will keep its focus on measuring fundamental business value so we can keep score of the most attractive risk-rewards in the market. Our dialogue with management teams suggests they adeptly managed through the pandemic and their businesses are benefiting from the reopening of the global economy. Yet, the select businesses we own are still trading at significant discounts to our estimate of intrinsic value.
The relative returns of the Russell Value versus Russell Growth Indexes over the last five years still resemble the descent from the 10-meter diving platform (Chart 2). This time period reminds us of the internet bubble in 2000 when the Oakmark Fund outperformed the S&P 500 by 2100bps. But it wasn’t too late. Given the exuberance that built up the bubble, the Fund’s three-year trailing performance still lagged the S&P 500 by 3800bps. In 2001 and 2002, the Fund went on to outperform by another 3300bps (Chart 3). We think this is a similar situation because the magnitude of the slope was—and is—so steep. If the comparison holds, we believe our investors could be set up for similar relative performance in the years ahead.
We think the latest bout of uncertainty provides a great opportunity. We don’t believe investors should be underweight value going into an accelerating period of economic growth. At Oakmark, our experience suggests we are closer to the opening ceremony than the closing ceremony of the value recovery.
Go USA!
1As of March 31, 2021, the Oakmark Bond Fund didn’t have a one-year track record so it wasn’t included in this analysis.
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 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.
