Weekly Mutual Fund Review: Oakmark Equity & Income (OAKBX)

One of the more common things I hear from people is that they want to obtain average returns of equities but do not want the volatility that comes with it. The obvious answer would be to utilize some sort of asset allocation by introducing more stable fixed-income investments, but then you have the argument that this will drag down performance. This isn’t always the case and the Oakmark Equity & Income I Fund (OAKBX) has a strategy that provides returns that rival or even outperform a 100% stock portfolio while significantly reducing volatility/risk.

Key Stats

  • Manager: Clyde McGregor (11 year tenure)
  • Min. Initial Investment: $1000
  • Front-Load: None
  • 12(b)-1 Fee: None
  • Expense Ratio: 0.86%
  • Net Assets: $11.23 billion
  • Average Market Cap: $2.4 billion
  • Turnover: 81%

Performance

OAKBX This fund has done quite well considering it generally holds between 25-50% of government or highly-rated bonds in its investment mix. A fund that relies that heavily on bonds would generally be thought to lag considerably behind equities. Here we have a 5-year average return of 10.84% and a 10-year annualized return of 13% which is quite good considering the allocation. As you can see by the chart the line is very smooth indicating the low volatility.

What I find even more impressive is when you look back 10 years:

OAKBX
As you can see in this chart it has done phenomenal over the longer time period. It is up over 200% in the past 10 years and significantly beats its peers during this period. The most important thing to consider is the period from 2000 through 2002. During this time the market took a significant downturn, and even similar moderate portfolios saw little or no gains through these years. This fund on the other hand thrived during these years and continued to make sizable returns.

To get a better understanding of how this fund reduces volatility I wanted to compare it to the S&P 500 during the same 10 years. So here is a look at the Vanguard 500 Index Fund (VFINX):

VFINX

When looking at both of the above charts it is easy to see how volatility can affect returns. The S&P, while still performing quite well over the past 10 years reached its returns in a different way. It had sharp upward movement subsequent downward trends, but as we know, over the long-term it goes higher. The Oakmark fund achieves its returns with a more slow and steady approach. By taking out some of the volatility of pure equities it can reduce or eliminate sharp losses so it doesn’t have to spend the next few years recovering those losses. In fact, over this 10-year period you would have made close to $12,000 more on a $10,000 investment had you been invested in the Oakmark fund 10 years ago versus a strict S&P 500 index fund.

Pros

  • No load
  • Low minimum investment ($1,000)
  • Superb performance
  • Stable management
  • Morningstar 5-star rated
  • Low volatility

Cons

  • Expense ratio of 0.86% is a bit higher than some offerings
  • Rapid growth in assets could impact future performance
  • High turnover may make this inappropriate for taxable accounts

The Bottom Line

Some people don’t like risk and it can be difficult to reduce risk while maximizing returns. This fund is a great example of how you can combine stocks and bonds to create a solid portfolio that can keep up with the stock market while reducing the volatility that can make investors uneasy. While not for everyone, this fund could provide a solid starting point for new investors building a retirement portfolio. With broad exposure to stocks and bonds while offering a low minimum initial investment of only $1,000 it is a great option for immediate diversification.

Author: Jeremy Vohwinkle

My name is Jeremy Vohwinkle, and I’ve spent a number of years working in the finance industry providing financial advice to regular investors and those participating in employer-sponsored retirement plans.

3 comments
Private Equity Partner
Private Equity Partner

I agree with sun, at 2% most people are going to be looking elsewhere for value, even investors that do not like to take risks with volatile funds may see it as not yielding a good enough return. But like you summarise jeremy is all depends on the type of investor.

Jeremy
Jeremy

Sun, this is true. But what I think is more important with a fund of this style is the risk adjusted return. This fund only has a beta of around 0.55 which is quite low for the returns it provides.

I agree the yield is a bit low compared to some other funds but most income or value and income funds focus on high yielding lower rated bonds which end up producing more volatility (of course maybe slightly higher returns in the end as well).

Sun
Sun

I own this fund in my taxable account since 2002 and the performance is quite OK to me. However, I have two problems with it: 1) the expense ratio is a little bit high for a $11+ billion fund, and 2) the yield of the fund is quite low. At less than 2% yield, the fund can hardly be categorized as income fund as there are many value funds yield more than that.