The latest from Bill Nygren of Oakmark Fund. H/T GuruFocus .
The Oakmark Fund gained 11% during the past quarter. Though that was an exceptional absolute return, it was caused entirely by a very strong stock market, as the S&P 500 finished up 12%. For the calendar year, the Fund and the S&P 500 both returned 2%. Neither the relative nor the absolute return appears very noteworthy. However, 2011 was an unusually difficult year. As The Wall Street Journal reported in late December, over 75% of professional managers did not outperform the S&P, and Oakmark’s market-matching performance placed it in the 20th percentile of Morningstar’s large-blend universe. So, at least we made fewer mistakes than many others did.
During the quarter, the Fund owned five stocks that increased by over 25% (Disney, Fortune Home and Security, Google, Home Depot and State Street) and only four that were negative (Bank of America, Baxter, EnCana and Oracle). Any quarter with stats like that is bound to show a good return. None of the stock prices increased enough to reach our sell targets, and none of the decliners exhibited the poor business performance that would cause us to sell. In fact, we added to our Bank of America position. If ever there was a stock that portfolio managers wanted to avoid seeing on year-end reports, Bank of America was that stock. Yet, looking at business value rather than stock performance led us to a very different conclusion.
We eliminated one holding that increased close to its sell target, Bristol Myers-Squibb, and added one that was significantly below our buy target, Delphi Automotive.
Delphi Automotive (DLPH – $22)
Delphi is a global leader in auto-parts manufacturing. Like its former parent company, GM, Delphi had a labor force that had accumulated such large post-retirement benefits that there was no value left for the owners of the business. Those liabilities forced Delphi into a 2005 bankruptcy filing. Through the bankruptcy process, Delphi was able to exit product lines where it had no competitive advantage, and it was able to give back to GM all of its UAW workers and their related post-retirement liabilities. The company returned to the public market via an IPO in November. Normally IPOs trading just below their offering price don’t strike us as values because the sellers tend to cherry-pick their timing. In Delphi’s case, however, we believe the timing of the IPO had less to do with valuation than it did with its owners’ need for liquidity. Delphi is expected to report EPS of about $3 for the year just ended. We expect that number to grow to about $4 over a couple of years due to emerging-market growth and a cyclical recovery in developed markets. We consider seven times trailing earnings and just over five times our estimate of 2013 earnings to be a bargain price for this industry leader.
| Average Annual Total Returns (12/31/11)10–year 4.15%5–year 1.44%1–year 1.82%Expense Ratio as of 9/30/10 was 1.11% |
