Oakmark Select Fund commentary for the fourth quarter ended December 31, 2016.
H/T Dataroma
The Oakmark Select Fund increased 10% for the quarter, compared to 4% for the S&P 500 Index. For all of calendar 2016, the Fund increased 15%, compared to a 12% gain for the S&P 500 Index. We’re happy to highlight that the Fund hit a new all-time high adjusted NAV this quarter.
As you can see from those numbers, more than all of our 2016 outperformance came from the strong fourth calendar quarter. As always, we invest the Fund’s assets where we believe the market is presenting the most compellingly valued opportunities, and thus were 32% weighted in financials and 0% weighted in health care and consumer staples at the start of the fourth quarter. Although those weightings were responsible for some of the Fund’s relative underperformance throughout most of 2016, these sector weights proved hugely beneficial in the most recent quarter, producing over 450 basis points of relative performance versus the S&P 500 Index. Our top individual performers for the quarter, each up by at least 20%, were Fiat Chrysler (up 40%) and four financial companies (led by Bank of America, up 42%). Our biggest detractors, FNF Group and Intel, were each only down single-digit percentages.
For calendar 2016, our top performers were Chesapeake Energy (stock and bonds) and LinkedIn. While LinkedIn was bought out soon after our initial purchase, we still own Chesapeake and believe that it remains a very attractive investment, despite its strong performance in 2016. Our largest detractors in the calendar year were Liberty Interactive QVC and CBRE Group. We believe both stocks remain undervalued, and we still own stakes in both companies.
We continue to believe that financial stocks are quite undervalued as well. During the quarter we made a new investment in Ally Financial. Ally was founded nearly a century ago as General Motors Acceptance Corporation. Its purpose then was to provide financing to GM dealers and retail customers. Today, Ally is no longer owned by GM. It serves a wide variety of dealers (including Ford, Chrysler and Toyota), and it is carefully building a consumer franchise. In our view, investors are myopically concerned that the auto business is at a cyclical peak. U.S. auto sales are near record levels, and credit losses are below long-term averages. Some believe Ally’s earnings have nowhere to go but down. We believe cyclical pressures will be more than offset by continued internal improvements, such as funding cost reductions (low-cost online deposits grew 19% in the third quarter of 2016) and improving the capital structure. With Ally’s stock trading at roughly 68% of tangible book value, we believe Ally is a compelling addition to the Oakmark Select Fund. We didn’t eliminate any positions during the quarter and exit 2016 with 20 investments in the portfolio.
Thank you, our fellow shareholders, for your continued investment in our Fund. Best wishes for a happy and prosperous 2017.
William C. Nygren, CFA
Portfolio Manager
Anthony P. Coniaris, CFA
Portfolio Manager
Win Murray
Portfolio Manager
