Assessing Oakmark Select's 2025 Performance: A Value Investor's Perspective on Momentum and Reversion

The performance gap between Oakmark Select's value strategy and the broader market in 2025 was stark. While the fund delivered a solid 1-year return of 14.11%, that figure significantly lagged the S&P 500. This divergence is the hallmark of a momentum-dominated year, where the market's reward for recent winners was exceptionally high. In fact, a simple strategy of buying the top-performing stocks each quarter nearly doubled the S&P 500's return last year, a pattern that repeated from 2024.

This year's market momentum is an outlier, with the spread between the largest and smallest stocks in the S&P 500 reaching extreme levels. The data shows the past two years have been among the strongest for momentum investing since the dot-com bubble, a period where the "what goes up keeps going up" mantra held true. For a value manager like Bill Nygren, this environment is a classic test of discipline. His approach, which seeks to buy businesses trading below their intrinsic value, inevitably misses the biggest gains when the market is chasing recent winners.

Portfolio manager Bill Nygren frames the current AI-driven rally as a classic technological transition. History suggests that during such cycles, investors initially focus on the "arms providers"-the companies supplying the new technology. In the 1980s, that meant computer companies; in the 2000s, it was AOL and Cisco. Today, the focus is on chipmakers and hyperscalers. Yet, with the benefit of hindsight, the biggest long-term beneficiaries have often been the companies that best utilized the new technology to build a durable competitive advantage. This is the core of the Oakmark philosophy: finding those companies that are ahead of their peers in applying AI to improve margins or gain market share, even if they are still selling at single-digit or low-teens price-to-earnings multiples. The challenge in 2025 was that the market was not yet looking past the initial "arms providers" to the beneficiaries of their capital expenditure.

Portfolio Construction and Competitive Moats

The fund's structure is a direct reflection of its value philosophy. As a non-diversified vehicle, Oakmark Select typically concentrates its capital into a tight portfolio of around twenty securities. This approach is not about gambling on a few picks, but about enabling the depth of research that value investing demands. With fewer holdings, the manager can dedicate significant time to understanding the durable competitive advantages, or "moats," of each company. The goal is to find businesses whose intrinsic value is clearly obscured by the market's short-term noise, a principle that guided its sector rotation in Q4 2025 toward communication services and financials.

This concentrated style carries inherent risk, as a higher percentage of the fund's assets can be exposed to a single sector or industry. Yet, it is the logical extension of a value mandate. By focusing on large- and mid-cap companies with a value investment philosophy, the fund seeks to buy a piece of a business for less than what it's worth. The evidence shows this approach has a long-term track record of compounding. Since its inception in 1991, the fund has delivered an average annual return of 12.86%. That consistent performance over multiple market cycles-beating the S&P 500 in many of them-demonstrates the power of a disciplined, patient strategy that prioritizes business fundamentals over price momentum.

The bottom line is that Oakmark Select's portfolio construction is a tool for its philosophy. The concentration allows for a deep dive into each holding's competitive moat, while the value focus ensures the purchase price is a margin of safety. It is a setup designed for the long haul, where the market's temporary obsession with recent winners is less relevant than the company's ability to compound earnings over decades.

Forward-Looking Scenarios and Catalysts

The setup for 2026 is one of potential reversion. Portfolio managers anticipate a normalizing environment, which could finally reward the disciplined value strategy that was sidelined in 2025. The key catalyst here is a market shift away from momentum and toward fundamentals. If the "what goes up keeps going up" cycle loses steam, the focus may turn to the quality and durability of earnings-exactly what Oakmark Select seeks.

Yet, this potential reward comes with heightened risk due to the fund's concentrated structure. With a typical portfolio of around twenty securities, a higher percentage of assets can be invested in a single sector or industry. This concentration, while enabling deep research, also magnifies idiosyncratic risk. The fund's recent sector rotation toward communication services and financials is a strategic bet on these areas. If these sectors underperform in a changing environment, the impact on the fund's returns could be significant.

The primary catalyst for a re-rating of overlooked quality stocks lies in the market's ability to look past the current AI-driven boom. The 2026 outlook suggests a tale of two economies, with AI-related sectors booming while traditional sectors struggle. This divergence creates a fertile ground for value. A disciplined manager with a margin of safety could find compelling opportunities as the market eventually prices in the long-term benefits of technological adoption for established businesses.

A structural shift that could favor larger, more established managers may also act as a catalyst. Evidence points to industry consolidation, with 40% of capital expected to flow to the ten largest firms in private equity. While this is a private market trend, it reflects a broader pattern where scale and stability become more valued. For Oakmark Select, this could mean that its focus on large- and mid-cap companies with durable competitive advantages is well-positioned for a normalization where investors seek resilience over pure growth.

The bottom line is that the fund's success in 2026 hinges on navigating this transition. The concentrated portfolio is a double-edged sword: it allows for deep conviction bets but leaves less room for error. The market's potential reversion to value, combined with structural shifts favoring established players, presents the opportunity. But the fund must execute its philosophy flawlessly to capture it, as the risks of being wrong on a concentrated sector bet are now more acute.