Oakmark Select Fund commentary for the fourth quarter ended December 31, 2015.
The Oakmark Select Fund returned 7% for the quarter which matched the S&P 500 Index’s return. For all of calendar 2015, the Oakmark Select Fund declined by 4%, compared to a 1% gain for the S&P 500 Index.
Oakmark Select Fund - Top performers
Our top performers in the quarter, each up by at least 24%, were Alphabet (formerly known as Google), General Electric (GE), and Amazon. Alphabet and GE ended the quarter as the two largest positions in the Fund, and we believe both investments remain substantively undervalued, possess strong fundamentals, and are run by excellent management teams. We’ve always believed that Alphabet’s highly valuable search business makes more money than investors give it credit for, and the company’s new reporting structure should better highlight this profit stream. General Electric, meanwhile, is completing its portfolio transformation by selling off finance assets, acquiring what we believe is a quality industrial asset at a great price (Alstom), and buying back stock with proceeds from its Synchrony share exchange. We expect the newly refocused GE to have significant margin expansion potential over the next few years.
Oakmark Select Fund - Portfolio changes
We eliminated our Amazon stake during the quarter, as the stock’s rapid climb in 2015 brought the shares up to our estimate of intrinsic value. While our holding period for Amazon (first purchased in the Fund in the second quarter of 2014) was much shorter than is typical for us, we’ve always said that turnover is simply a byproduct of the length of time required for price to converge with value. We’ll happily show high turnover when it is the result of rapid stock price appreciation. We reinvested the Amazon proceeds across existing holdings, ending the quarter with investments in 19 companies; the Fund generally holds about 20 positions.
Oakmark Select Fund - Worst performers
Our worst quarterly performer by far was Chesapeake Energy, down 39%, while only two other positions declined—FNF Group down 2% and Calpine down 1%. In our opinion, commodity prices have fallen to levels which, if permanent, would bankrupt much of the exploration and production sector of the oil and gas industry. However, we believe commodity prices will rise and that many investments made today in this industry will prove quite rewarding. That said, given Chesapeake’s financial obligations, it is without question a much riskier investment than we normally hold. Securities across Chesapeake’s capital structure have all declined sharply and, in our opinion, are now all attractively priced. We’ve shifted some of our position from common stock to somewhat less risky preferred stock, which we believe reduces risk without forfeiting upside potential.
While the Fund’s full-year performance wasn’t as strong as we would’ve liked, it’s worth noting that our pre-tax and after-tax returns were very similar, despite realizing large gains throughout the year in investments such as FedEx, Medtronic, and Amazon. We actively monetized losses, where appropriate, so that we could eliminate the need for capital gains distributions this year.
Thank you, our fellow shareholders, for your continued investment in our Fund. Best wishes for a happy and prosperous 2016.
William C. Nygren, CFA
Anthony P. Coniaris, CFA