Assessing the Oakmark Equity and Income Fund's Long-Term Value Proposition

The Oakmark Equity and Income Fund operates on a timeless principle: the margin of safety. Its founding partners established that if the firm does what's right for clients, the business will take care of itself. This client-first ethos is the bedrock of a disciplined value philosophy. The fund seeks businesses trading at a substantial discount to the manager's estimate of intrinsic value. That gap is the margin of safety-a buffer against error and a source of potential long-term returns. As the fund's philosophy states, this approach reduces risk and allows for above-average returns over time.

This philosophy is not a passive screen but the product of a rigorous, committee-driven research process. It begins with generalist analysts conducting intensive fundamental research across industries. Ideas that pass initial business and management criteria are then vetted by the investment committee. This is where intellectual tension is actively cultivated. Investment professionals debate the merits of each idea, and seasoned committee members vote on the outcome. Only those opportunities that survive this rigorous, owner-focused scrutiny are used to build client portfolios. The process is designed to add value one investment at a time, ensuring that every purchase is made with the mindset of buying a piece of a business.

This blend of value and quality is illustrated in specific holdings. Warner Bros Discovery (WBD) exemplifies a pure value-unlocking story. The fund's top contributor last quarter, WBD's stock surged as multiple parties submitted offers to acquire the company. The board's actions to sell its Streaming and Studios business to Netflix and spin off its Global Networks business are steps to unlock shareholder value. The fund is positioned to benefit from this bidding war, a classic value situation where market mispricing creates an opportunity.

On the quality side, General Motors (GM) represents a different tilt. The fund holds a 2.8% stake, a significant position that signals confidence in the company's long-term business model and management. GM is not a deep-value play but a high-quality compounder trading at a reasonable price. It embodies the fund's search for businesses with durable competitive advantages, where management thinks and acts like an owner. The portfolio's mix-value catalysts like WBD alongside quality compounding businesses like GM-demonstrates the disciplined application of the margin-of-safety principle across a spectrum of opportunities.

Portfolio Quality and the "Cheap vs. Expensive" Continuum

The fund's performance over the past year underscores the power of its disciplined approach. For the 12-month period ending December 31, 2025, the Oakmark Equity and Income Fund delivered a total return of 14.11%. That result outpaced the broader market, which saw the S&P 500 rise 10.87%. This outperformance, while solid, is a reminder of the persistent challenge active managers face in beating the index, a trend noted in recent commentary.

At the sector level, the portfolio's quality shines through its specific drivers. Communication services and health care were the largest contributors to performance, while industrials was the only detractor. This mix reflects a portfolio built on fundamental research, where holdings in these sectors either benefited from specific catalysts or simply held their ground during a period of market volatility. The fund's tendency to concentrate in a relatively small number of stocks means that each holding's performance has a pronounced impact on the overall return, a characteristic that can amplify both gains and losses.

This brings us to a critical evolution in the fund's philosophy. The Oakmark team explicitly acknowledges that the traditional lines between value and growth are often blurred. As they note, buying great businesses at average prices is just as much value investing as buying average businesses at great prices. This view moves beyond a simplistic dichotomy. Instead, they see two separate continuums: one for valuation (cheap to expensive) and another for growth (low to high). The most compelling opportunities often lie in the middle, where a company trades at a reasonable price but possesses durable growth characteristics.

This perspective explains the fund's typical positioning. It is not a pure value fund chasing the cheapest stocks, nor is it a growth fund paying any price for momentum. Rather, it is a blend, seeking businesses that offer a margin of safety while also having the potential to compound earnings over time. The portfolio's composition-holding a high-quality compounder like General Motors alongside a value-unlocking story like Warner Bros Discovery-illustrates this balanced approach. The fund's managers are less concerned with fitting a style box and more focused on the intrinsic quality of the business and the price paid for it. In a market where momentum has been king, this disciplined blend offers a different path to long-term compounding.

Valuation, Volatility, and the Long-Term Compounding Horizon

The fund's long-term track record provides a clear benchmark for its value proposition. Over the past decade, the Oakmark Equity and Income Fund has delivered an annualized return of 13.71%. That figure, which outpaces the broader market's average, is the result of a disciplined process focused on buying businesses at a discount to their intrinsic worth. It is a return built on patience and a margin of safety, not on chasing the latest trend.

Yet this disciplined blend comes with a known trade-off. The fund's focus on medium-sized companies and its investment philosophy-buying businesses at reasonable prices, not necessarily the cheapest-can lead to underperformance during periods of extreme market momentum. As recent history shows, when the market rewards the highest-flying stocks, a strategy built on value and quality can lag. For the past two years, a simple momentum strategy of buying the best-performing stocks has nearly doubled the S&P 500's return. This is the volatility inherent in the Oakmark approach: the expectation that it will sometimes trail the index when growth and momentum are king. The fund's managers acknowledge this, noting that their strategy of selling winners to buy cheaper stocks has missed out on the biggest gains in recent years. This is the cost of adhering to a philosophy that believes what goes up must come down.

The fund's expense ratio of 0.89% is a reasonable cost for this active, research-intensive process. However, the bigger challenge for the long-term investor is not the fee, but the environment. In a market where valuations for quality businesses remain elevated, the margin of safety that defines the Oakmark philosophy becomes harder to find. The fund's ability to compound capital over the next decade will depend on its capacity to maintain that disciplined edge, to identify opportunities where price and value diverge, even as the broader market prices in perfection. The past decade's 13.71% return is a solid foundation. The coming decade will test whether the fund can build on it, navigating the volatility of its own strategy to deliver compounding returns that are both durable and meaningful.

Catalysts, Risks, and What to Watch

The long-term value proposition of the Oakmark Equity and Income Fund rests on a simple but demanding premise: that disciplined, owner-oriented investing will compound capital over full market cycles. The primary catalyst for this outcome is the fund's own rigorous research process. As its philosophy states, the firm is value investors who seek businesses priced at a discount to intrinsic value. This is not a passive screen but an active, committee-driven endeavor designed to add value one investment at a time. The historical track record-delivering a 13.71% annualized return over the past decade-is the validation of that process. The catalyst, therefore, is continued execution: the ability of the team to identify opportunities where price and value diverge, as they have done with holdings like Warner Bros Discovery.

The key risk to this proposition is inherent volatility. The fund's blend strategy-investing in medium-sized companies with a mix of value and quality-means it will often diverge from market leadership. As recent history shows, a momentum strategy of buying the best-performing stocks has nearly doubled the S&P 500's return over the past two years. This is the cost of adhering to a philosophy that believes trends eventually reverse. The fund's managers have acknowledged that their approach of selling winners to buy cheaper stocks has missed out on the biggest gains. This volatility is not a flaw but a feature of the strategy, requiring a long-term horizon from investors who can tolerate periods of underperformance.

Specific watchpoints are clear. First, the successful execution of value-creation events in key holdings. Warner Bros Discovery's stock price surge this quarter was driven by a bidding war initiated by the board's actions to unlock shareholder value. The fund is positioned to benefit from this catalyst, but the outcome depends on the final deal terms and regulatory approvals. Second, the fund's ability to navigate periods where its blend strategy diverges from market leadership. When the market rewards momentum and growth at any price, the Oakmark approach may lag. The portfolio's concentration in a relatively small number of stocks means each holding's performance has a pronounced impact, amplifying both gains and losses. Investors must watch for whether the fund's process can identify new catalysts to drive returns when the broader market is on a different path. The bottom line is that the fund's value proposition is validated by its long-term track record, but its path to future compounding will be defined by its ability to manage volatility and consistently find the next opportunity where price and value meet.