Why We Think Oakmark Funds’ Year in the Wilderness Will End

Managing more than $50 billion in benchmark-agnostic, value-oriented equity funds, Harris Associates often makes an outsize impact on investors. In 2023, its clients basked in excellent returns with top-decile performances from its US-focused Oakmark OAKMX and Oakmark Select OAKLX funds alongside peer-beating results from Oakmark International OAKIX. But 2024 has proved more challenging as all three funds have struggled to stay ahead of their benchmarks. What explains their recent woes, and why is it worth sticking with them?

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 it trailed the Russell 1000 Value Index’s 16.2%.

Led by veteran Bill Nygren, the investment team leans into controversial or out-of-favor stocks. This often works against it when the market prefers recent winners. Indeed, momentum has thrived this year, and Oakmark’s sales of highflyers Meta META, Amazon.com AMZN, and KKR KKR resulted in foregone additional gains. That said, the portfolio continued to hold other stocks with strong momentum and benefited, including much of its financials overweighting, which weakens the argument that missed momentum alone is responsible for its underperformance this year.

Instead, the portfolio’s stock selection and a sector omission were mostly to blame. While the average energy stock in the Russell 1000 Value Index climbed, three of Oakmark’s four energy holdings—APA APA, ConocoPhillips COP, and Phillips 66 PSX—were in the red. APA hemorrhaged over 30% of its value.

Oakmark’s communication-services and healthcare holdings 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 slid by double-digit percentages, while Comcast CMCSA and Liberty Broadband LBRDK were roughly flat.

Oakmark Select has fared worse than Oakmark this year, gaining 10.4% for its advisor shares. Much like Oakmark, poor stock picks in energy, communication services, and healthcare hurt, but this concentrated sibling’s larger bets on them stung more severely.

Moreover, Oakmark Select’s approach to consumer cyclicals diverged sharply from Oakmark’s. While Oakmark reaped the rewards from strong performers like General Motors GM, eBay EBAY, and Hilton Worldwide HLT, Oakmark Select opted for a single name, Lithia Motors LAD, whose 4% return for the year to date was relatively puny.

In technology stocks, Oakmark Select’s Paycom Software PAYC also looked like a dud, while Oakmark enjoyed Oracle’s ORCL big gain. Neither fund owned utilities, which was the value index’s best-performing sector with average gains of 30%. The funds’ underweightings in industrials, which also posted strong returns, also held them back.

Oakmark International, led by David Herro, has had an even tougher year. Its institutional share class was slightly down for the year through Oct. 30, while its average peer climbed 8%. Its poor stock selection has been widespread. Continental CON and Kering KER—two of the fund’s largest positions—tumbled. UK insurer Prudential PLC PRU, another top-10 holding, also fell hard. Although the fund enjoyed strong performances from Prosus NV PRX, Lloyds Banking Group LLOY, and DSV DSV, a huge share of the portfolio—more than a fifth of assets—resided in stocks that fell 20% or more.

The Long View

While 2024 has been a rocky year for Harris, its equity strategies remain promising. With focused funds, ups and downs are a certainty, and one year shouldn’t weigh too heavily in your assessment. Nygren and Herro’s retirements loom (though nothing has been announced), but the firm has put comanagers in place to ensure smooth transitions and continuity of its proven techniques. It’s not just the intrinsic value philosophy, long-term orientation, or willingness to diverge from indexes that sets the Oakmark funds apart. The firm’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 of Morningstar FundInvestor. Download a complimentary copy of FundInvestor by visiting this website.