The Case for Oakmark Select Fund in a Diverging Market Landscape

The U.S. equity market in 2025 has been defined by stark divergences. A handful of high-momentum sectors, particularly technology and AI-driven industries, have surged ahead, while other areas of the economy have lagged. In this environment, value investing has shown signs of resurgence, with investors increasingly seeking opportunities where fundamentals outpace speculative fervor. The Oakmark Select Fund (OAKLX) emerges as a compelling case study in this shift, offering a disciplined approach to risk-adjusted returns and a portfolio structure that diverges meaningfully from the S&P 500's concentration risks.

A Discount to Fair Value: The Fund's Value Investing Edge

As of December 2025, the Oakmark Select Fund trades at a price-to-earnings (P/E) ratio of 13 times expected earnings, a stark contrast to the S&P 500's 22 times earnings multiple. This 41% discount reflects the fund's core philosophy: buying stocks at a discount to intrinsic value. By prioritizing undervalued companies with strong fundamentals, the fund aims to mitigate downside risk while preserving upside potential. This strategy aligns with the broader value investing revival observed in 2025, as investors recalibrate expectations in a post-irrational-exuberance market.

The fund's lower P/E is further supported by its sector allocations. Unlike the S&P 500, which has a 35% weighting in technology, Oakmark Select's portfolio includes less than 5% in the sector. This underrepresentation shields the fund from the volatility of AI-driven megacap stocks, which, while delivering extraordinary returns in 2025, have also introduced systemic concentration risks. For instance, NVIDIA's 36.8% return in 2025 and the broader information technology sector's 24.9% gain highlight the outsized influence of a few names-a dynamic that Oakmark Select deliberately avoids.

Diversification Through Strategic Sector Allocation

The fund's non-diversified structure-holding approximately 20 stocks-might seem paradoxical in a market favoring broad exposure. Yet, its strategic sector allocations demonstrate a nuanced approach to diversification. In Q4 2025, communication services and financials were the largest contributors to performance, while industrials detracted. This contrasts with the S&P 500's heavy reliance on technology and communication services, which accounted for 35% and 12% of its 2025 gains, respectively.

Oakmark Select's emphasis on financials and communication services-sectors with more stable cash flows-provides a counterbalance to the high-beta volatility of AI-driven industries. For example, while the S&P 500's industrials sector outperformed in 2025, Oakmark's underweight in this area limited its exposure to cyclical risks. This balanced approach is critical in a market where sector rotations are accelerating, and overconcentration in a single theme can lead to sharp corrections.

Risk-Adjusted Returns: A Track Record of Discipline

Performance metrics underscore the fund's ability to deliver competitive returns while managing risk. Since inception in 1996, Oakmark Select has averaged 11.76% annual returns, with a 10-year average of 10.44% and a 5-year average of 17.66%. These figures outpace the S&P 500's 2025 performance, which, despite a 25.2% return in the technology sector, was skewed by its concentration in high-growth, high-volatility stocks.

The fund's Sharpe ratio of 0.88 further highlights its efficiency in generating returns relative to volatility. With a standard deviation of 19.93%, Oakmark Select's volatility is lower than the S&P 500's, which saw a 24.9% return in the information technology sector driven by a handful of AI leaders. This risk-adjusted edge is particularly valuable in 2025, as investors grapple with macroeconomic uncertainties and the potential for sector-specific corrections.

Strategic Appeal in a Shifting Market

The Oakmark Select Fund's appeal lies in its ability to navigate diverging market dynamics. By avoiding overexposure to high-momentum sectors and adhering to a value-oriented framework, it offers a hedge against the volatility of speculative bets. Its 13x P/E ratio and strategic sector allocations position it to benefit from a potential rotation into undervalued assets-a scenario increasingly likely as AI-driven growth stories face profit-taking and regulatory scrutiny.

Moreover, the fund's non-diversified structure, while inherently riskier, allows for concentrated bets on high-conviction stocks. This approach has historically delivered long-term growth, even if it occasionally underperforms broader market indices during tech-led rallies. For investors seeking resilience in a fragmented market, Oakmark Select's disciplined strategy provides a compelling alternative to the S&P 500's concentration risks.

Conclusion

In a market landscape defined by divergent sector performances and shifting investor sentiment, the Oakmark Select Fund exemplifies the virtues of value investing and strategic diversification. Its lower P/E ratio, sector allocations, and risk-adjusted returns make it a standout option for investors seeking to balance growth potential with downside protection. As 2025 draws to a close, the fund's approach offers a timely reminder that in a world of extremes, discipline and diversification remain timeless virtues.