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Oakmark Fund Is Bouncing Back

This Gold-rated fund's overweights in the energy and financials sectors have come roaring back this year.

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The following is our latest Fund Analyst Report for Oakmark Fund (OAKMX). Morningstar Premium Members have access to full analyst reports such as this for more than 1,000 of the largest and best mutual funds. Not a Premium Member? Gain full access to our analyst reports and advanced tools immediately when you try Morningstar Premium free for 14 days.

Little has changed at Oakmark Fund over the past year other than its returns. Proven management, a disciplined approach, and excellent long-term results earn the fund a Morningstar Analyst Rating of Gold.

Bill Nygren, who has managed this fund with Kevin Grant since March 2000, has never been afraid to diverge from the pack. He built a large stake in financials (nearing 40% of assets at times) at this fund in recent years because he felt that banks were being punished for their lower earnings potential while their stronger balance sheets (due to stiffer capital requirements) weren’t being rewarded. He also scooped up a couple of energy stocks after that sector’s initial decline in 2014. Those exposures combined to hurt the fund in 2015 because of concerns over lending practices and declining oil prices, as it lost 4.0% and trailed 84% of its large-blend peers. In 2016, however, those sectors have come roaring back, and the fund has gained 19.6% for the year to date through Dec. 12 (better than nearly all of its peers). Some of the biggest contributors to that showing are exploration and production firms  Apache (APA) and  Anadarko Petroleum (APC) (up 52% and 46%, respectively), and banks  Bank of America (BAC) and  JPMorgan Chase (JPM) (up 36% and 31%, respectively).

Given the strength of the recent rally and the fund’s profile (it still stashed 38% of assets in financials and a combined 5.4% in Apache and Anadarko at the end of September), it wouldn’t be surprising to see the fund suffer if stocks decline in the near future. But this fund’s compact portfolio of roughly 50 stocks and wide performance swings have long made it suitable only for patient investors. (Unfortunately, the fund has seen substantial inflows and outflows at the wrong times in recent years.) Those who have hung on have been well-rewarded: The fund beat more than 95% of its large-blend peers on both a total-return and risk-adjusted basis since the managers took the helm in March 2000, and its record since stocks’ October 2007 peak is excellent as well.

Process Pillar: Positive | Greg Carlson 12/13/2016
Bill Nygren ranks among Oakmark's most seasoned managers, and he played a central role in the development of the process used at each of the shop's seven funds. In collaboration with domestic-equity sector analysts, Nygren and the firm's other portfolio managers vet companies for (among other attributes) financial health, business-growth potential, and management's talent for capital allocation. The result of this work is an approved list of fundamentally vetted firms whose valuations appear attractive in absolute, not relative, terms. Like other Oakmark managers, Nygren won't buy shares of companies he considers pricey simply because industry rivals trade at even richer multiples.

Instead, Nygren and his colleagues invest in firms whose share prices reflect steep discounts to their estimates of the businesses' worth. Depending on the company, their valuation work may focus on private-market acquisition prices, discounted cash flow analysis, sum-of-the-parts valuation, and/or tangible book value. Gauging a company's alignment with its investors is central to the process as well, with management's capital-allocation track record a key consideration.

Oakmark's approach allows the firm's managers to invest wherever they see bargains. That can lead to holdings and exposures that may strike value traditionalists as unusual. Over time, however, the process here has also led to unusual success.

Oakmark Fund's absolute value approach produces portfolios bearing little resemblance to those of more-traditional value managers at times. For example, in 2014 and 2015, substantial portions of the fund's assets resided in companies placing in the large-growth and mid-growth squares of the Morningstar Style Box. However, as the fund's stakes in financials and energy grew--and their valuations remained low or sank--it began to look more valuelike. Indeed, at the end of September 2016, 53% of the assets landed in the large-value or mid-value squares. (That may not last, though, as financials and energy have rallied strongly of late.)

The most eye-catching feature of the portfolio remains its 38% stake in financials, which doubles both the large-blend norm and the S&P 500's weighting.  American International Group (AIG),  Bank of America (BAC),  Citigroup (C),  J.P. Morgan Chase (JPM),  MasterCard (MA), and Visa V all placed in the fund's top 10 at the end of September. Most of these holdings were initially purchased within the past four years. At 3.4%, the fund's stake in Bank of America is notable. It is hardly the healthiest big retail bank, but Bill Nygren believes stock buybacks can enrich shareholders even if the bank's core lending business is flat. He also likes the firm's dominance in retail checking deposits and expects rising rates to benefit the bank. The stock has rallied strongly in the second half of 2016 but still trades at slightly under its book value.

Performance Pillar: Positive | Greg Carlson 12/13/2016
This fund has been an overachiever during the tenure of lead manager Bill Nygren and comanager Kevin Grant. The duo took over in late March 2000, delivering an annualized return of 9.9% between April 2000 and Nov. 30, 2016. During that stretch, the S&P 500 (this fund's benchmark) gained just 4.5% while the typical peer posted an increase of 4.4%.

Most of the outperformance is attributable to the fund's stalwart behavior when stocks decline. While it did modestly surpass the bogy and large-blend Morningstar Category norm in rising markets over this span (106% and 108% upside captures, respectively), it held up far better during downturns, suffering just 81% of the index's declines and 78% of the category's. The fund has topped more than 95% of its peers on a risk-adjusted basis during the duo's tenure.

The fund has also excelled since stocks’ Oct. 9, 2007, peak. From then through November 2016, it gained 8.5% annualized versus 5.6% for its typical peer and 6.2% for the S&P 500. It also ranked in the category’s top decile on a risk-adjusted basis. The fund earns a Positive Performance Pillar rating.

Despite management's knack for effective defense, performance swings (as measured by standard deviation) have been a bit wider than the bogy's and typical peer's, and the fund's Morningstar Risk rating is Above Average. Thus, patience is needed here at times.

People Pillar: Positive | Greg Carlson 12/13/2016
Lead manager Bill Nygren has three decades of investment experience, including an eight-year stint as research director for Harris Associates, the advisor to the Oakmark Funds. He also serves as lead manager of  Oakmark Select (OAKLX) and works alongside David Herro as comanager of  Oakmark Global Select (OAKWX), a concentrated world-stock fund. Nygren invests more than $1 million in each of his charges, all of which have delivered peer-besting results during his tenure. In 2001, Morningstar named Nygren Domestic-Stock Fund Manager of the Year.

Here, he has teamed with comanager Kevin Grant, a former analyst at the firm, since March 2000, when former manager Robert Sanborn exited. Grant, who also serves as co-chair of the firm and thus spends some time on business matters, has been with Harris Associates since 1988, and, like Nygren and virtually all Oakmark managers, he aligns his interests with shareholders' by investing more than $1 million of his own money here.

Harris has five U.S. equity analysts, two of whom are very recent hires, but the team has numerous manager/analyst hybrids who also spend most or all of their time on U.S. stocks, including Anthony Coniaris (comanager of Oakmark Select,  Oakmark Global (OAKGX), and Oakmark Global Select), Win Murray (comanager of Oakmark Select), Colin Hudson, Robert Bierig, and Ed Wojciechowski.

Parent Pillar: Positive | Greg Carlson 08/26/2015
Harris Associates boasts an admirable investing-centric culture. New fund launches, for example, aren't driven by marketing trends but by money managers with decades of experience and outstanding long-term track records. Indeed, Oakmark has launched only one new fund in the past 16 years.

With 17 portfolio managers (nine of whom also serve as analysts) and 10 dedicated investment analysts, Harris is well-staffed with investment professionals. Analysts at the firm are divided into international and domestic teams and, in collaboration with managers, maintain the list of approved stocks from which all Oakmark managers choose for their portfolios.

Overall, Harris is an impressive parent, but its fund lineup should cost less. Assets in the funds rose from roughly $21.5 billion in December 2008 to more than $84 billion in July 2015. (Harris manages $135 billion overall.) While fund fees have declined during the period, the amounts haven't been commensurate with asset growth.

That shortcoming aside, Oakmark investors have been well served over the long haul by managers who also are significant investors in their funds. With just two exceptions (each appointed two years ago), all Oakmark managers invest more than $1 million in their charges. The firm's leading managers are aging, but the firm appears well-prepared for their eventual departures.

Price Pillar: Neutral | Greg Carlson 12/13/2016 
Oakmark just launched Advisor and Institutional share classes for all of its funds, and this fund's I shares have been renamed Investor shares, while the II shares now bear the "Service" moniker.

These changes have no impact on the fund's fee score, as 99% of the assets are in the Investor class. At 0.89%, the expense ratio for those shares is slightly below the median for no-load large-cap funds and earns an Average Morningstar Fee Level rating. Given the fund's $16.5 billion asset base, it could stand to be cheaper. It earns a Neutral Price rating.

Greg Carlson does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.