In a recent Q4 2018 commentary, Bill Nygren from Oakmark Funds shared his views on the current fund’s performance and defended its strategy. Mr. Nygren holds the opinion that the companies, in which his fund invested, have performed quite well, but the problem was in the performance of their stocks. It seems that the businesses and stock prices weren’t in sync, which resulted in the fund being down by 17.30% in the fourth quarter of 2018. Mr. Nygren further pointed out that it is should be expected that stock prices and business performances converge in time, but since there cannot be any guarantees, he called on to investors to reexamine their investments and make sure they still believe in Oakmark Fund’s investment strategy and its stock picks.
“I’ll go straight to the conclusion: The stock market looks more attractive to us than it usually does, and the divergence among individual stocks allowed us to structure a portfolio that we believe is more undervalued relative to the market than it usually is. Though the decline has made watching the market painful, we are all gritting our teeth and adding to our personal holdings.”
Mr. Nygren began analyzing the fund’s holdings with stocks that it finds undervalued despite GAAP metrics that make them seem highly priced. Around 15% of Oakamrk Funds’ portfolio make these companies: Alphabet, Regeneron Pharmaceuticals Inc (NASDAQ:REGN), Facebook, Inc. Common Stock (NASDAQ:FB), MGM Resorts International (NYSE:MGM), Netflix, Inc. (NASDAQ:NFLX), News Corporation (NASDAQ:NWSA), and Gartner Inc (NYSE:IT). “In each case, we believe that either expenses as defined by GAAP are penalizing current earnings more than is economically appropriate or that assets with substantial long-term value are not producing significant income. Our willingness to invest in these companies has been—and we believe will continue to be—a positive differentiator for Oakmark.”
Not forgetting the rest 85% of the portfolio, Mr. Nygren further talked about finance companies which make for 25% of its investments. Those finance companies in which Oakmark Funds usually invests are big banks, such as Bank of America, Ally Financial, and Citigroup, to name a few. “These stocks sell for seven and eight times 2019 consensus estimates, average a 3% dividend yield and are repurchasing a lot of their own stock.” Mr. Nygren thinks that these banks have come a long way and really improved their businesses, and he is not afraid that hey will operate badly in the next recession as they did back in 2008.
Following the logic a low risk business isn’t always a low risk stock, Oakmark Funds doesn’t own any position in companies related to utilities, REITs or telecommunication services. And, when it comes to the fund’s holdings of the companies in cyclical businesses such as industrial and energy, its biggest stake is in Fiat Chrysler, which sells at four times expected earnings, and has seen serious profits from its Ram and Jeep truck brands. “And now that the company’s cash exceeds its debt, management expects to begin returning capital through both dividends and share repurchases.”
Mr. Nygren wasn’t shy about discussing Apple Inc. (NASDAQ:AAPL), which is its most valuable technology position, and also the fifth stock among 30 Stocks Billionaires Are Crazy About: Insider Monkey Billionaire Stock Index. The fund finds Apple both a value stock and a very profitable company. “It sells for just 12 times expected earnings (updated for slowing China demand)—11 times if you value its cash separately. That means investors are, incorrectly in our opinion, pricing Apple as a below-average business.”
Past positive performance speaks the most of the fund’s investment strategy, although it isn’t a guarantee of the future success. Oakmark Fund was launched back in 1991 and made a $10,000 investment, which over the years grew to $222,230, while for the same period S&P 500’s $10,000 investment grew to $131,951. Also, it is worth noting that since its inception (in 1991) until December 31, 2018, Oakmark Funds posted gains of 11.98%, outperforming S&P 500, which, in the same period delivered, 9.29%.
In the end, Mr. Nygren concluded:
“The 2018 performance of Oakmark wasn’t what any of us wanted or expected, but given the philosophy that has worked so well for Oakmark, the stocks that are in the portfolio today are the ones you should expect and want us to own.”