Oakmark Select Fund commentary for the third quarter ended September 30, 2016.
H/T Dataroma
The Oakmark Select Fund returned 8% for the quarter, ahead of the S&P 500’s 4% return. This brings the Fund’s return for the fiscal year ended September 30, 2016 to 12%, compared to 15% for the S&P 500.
Oakmark Select Fund – Portfolio Review
During the quarter, our largest contributors to performance included Alphabet (+12%), Bank of America (+18%), MasterCard (+16%), and AIG (+13%). From a sector standpoint, our stock selection in Energy, as well as our selection and allocation to Financials, had the most positive impact. We also benefitted by what we didn’t own in the quarter. For some time now, we have had trouble finding value in the Consumer Staples, Utilities and Telecommunications sectors. In these sectors, we have found that share prices appear to be valued more closely to bonds, which we believe to be unattractive at current yields. Not owning these three sectors added over 1% to our performance relative to the S&P 500.
[drizzle]Our largest quarterly detractor was Liberty Interactive QVC (-21%). After a long period of rather stable but low single-digit growth, the company announced that sales fell by a mid-to-upper single digit amount in June, and these trends continued through July. The management team cited numerous company-specific reasons for the decline and is taking action accordingly. We continue to hold our position because we believe the company’s underlying value has only been modestly affected, relative to the decline in its share price. Only three other investments showed declines during the quarter: General Electric, Oracle and FNF Group.
For the fiscal year, our largest contributors were LinkedIn (+66%), Apache (+67%), and Alphabet (+28%). Our largest detractors were Liberty Interactive QVC (-24%), Citigroup (-4%), and CBRE Group (-13%).
Recall that earlier in 2016, we swapped most of our Chesapeake stock at approximately $4 per share for the company’s bonds at $48 per $100 par value, believing the bonds offered similar upside and less downside while capturing a tax loss. Last quarter we reported that the bonds had rallied to $85 per $100 par value, and the stock was trading at $4.28. Given the relative performance of the bonds to the stock and our comfort with the improved liquidity position of the company, we elected to swap back into the stock. Today our position in Chesapeake is exclusively in the form of equity.
We sold our remaining shares of LinkedIn and established a new position in casino operator MGM Resorts International (MGM). We believe the recovery potential in the Las Vegas market and MGM’s profit improvement plan are both underappreciated at the current value. Meanwhile, management has been busily working to close the price-value gap on the shares by monetizing latent real estate value and improving the balance sheet. In the short time we’ve owned MGM, both the fundamentals and management actions have been consistent with our thesis.
Thank you for your continued investment in the Fund.
William C. Nygren, CFA
Portfolio Manager
Anthony P. Coniaris, CFA
Portfolio Manager
Win Murray
Portfolio Manager
[/drizzle]
