Why we think Oakmark Funds’ year will end in the wilderness

Harris Associates manages more than $50 billion in benchmark-agnostic, value-oriented equity funds and often has an outsized impact on investors. In 2023, its clients enjoyed excellent returns with top performance from the US-focused Oakmark OAKMX and Oakmark Select OAKLX funds, in addition to unparalleled results from Oakmark International OAKIX. But 2024 has proven to be more challenging as all three funds struggle to stay ahead of their benchmarks. What explains their recent misery, and why is it worth hanging on to?

Oakmark’s investor share class, the fund’s largest by assets, gained 15.6% this year through Oct. 30. That’s a strong absolute return, but lagged behind the 16.2% of the Russell 1000 Value Index.

Led by industry veteran Bill Nygren, the investment team focuses on controversial or out-of-favor stocks. This often works against you if the market favors recent winners. Indeed, momentum flourished this year and Oakmark’s sales of high-flyers Meta META, Amazon.com AMZN and KKR KKR resulted in foregone additional profits. That said, the portfolio continued to hold and benefit from other stocks with strong momentum, including a large overweight in the financials sector, weakening the argument that missed momentum alone is responsible for this year’s underperformance.

Instead, portfolio stock selection and an industry omission were the main culprits. While the average energy stocks in the Russell 1000 Value Index rose, three of Oakmark’s four energy holdings – APA APA, ConocoPhillips COP and Phillips 66 PSX – were in the red. APA bled more than 30% of its value.

Oakmark’s communications services and healthcare businesses also disappointed. Warner Bros. Discovery WBD plummeted as it faced deep structural challenges in its television and streaming businesses. Charter Communications CHTR, CVS CVS and Centene CNC also fell double digits, while Comcast CMCSA and Liberty Broadband LBRDK were about flat.

Oakmark Select has underperformed Oakmark this year, gaining 10.4% for its advisor shares. Like Oakmark, poor stock picks in the energy, communications and healthcare sectors hurt, but its bigger bets on them from its focused sibling were even worse.

In addition, Oakmark Select’s approach to the consumer cyclical sector differed sharply from Oakmark’s. While Oakmark benefited from strong players such as General Motors GM, eBay EBAY and Hilton Worldwide HLT, Oakmark Select opted for a single name, Lithia Motors LAD, whose 4% year-to-date return has been relatively poor.

Among technology stocks, Oakmark Select’s Paycom Software PAYC also looked poor, while Oakmark enjoyed big gains from Oracle’s ORCL. Neither fund owned utilities, which was the best-performing sector of the value index with an average gain of 30%. The funds’ underweight in the industrial sector, which also delivered strong returns, also held them back.

Oakmark International, led by David Herro, has had an even more difficult year. The institutional share class fell slightly through October 30, while the average peer rose 8%. Poor stock selection was widespread. Continental CON and Kering KER – two of the fund’s largest holdings – plummeted. British insurer Prudential PLC PRU, another top 10 holding company, also fell sharply. Although the fund saw strong performances from Prosus NV PRX, Lloyds Banking Group LLOY and DSV DSV, a large part of the portfolio – more than a fifth of assets – was made up of shares that fell by 20% or more.

The long view

While 2024 has been a tough year for Harris, equity strategies remain promising. With targeted funds, ups and downs are a certainty, and one year shouldn’t weigh too heavily in your assessment. Nygren and Herro’s retirement is looming (although nothing has been announced), but the company has appointed co-managers to ensure smooth transitions and continuity of its proven techniques. It’s not just the intrinsic value philosophy, long-term orientation or willingness to deviate from indexes that sets Oakmark funds apart. The company’s culture of rigorous internal debate plays a crucial role in shaping its portfolios.

The Oakmark funds’ disciplined approach to value investing remains compelling in a world where patience is often in short supply.

This article first appeared in the October 2024 issue Morningstar FundInvestor. Download a free copy of Fund Investor Through visit this website.