Oakmark is the mutual fund family launched in 1991 by Harris Associates, the Chicago deep-value firm founded in 1976 (about $105bn AUM). Bill Nygren runs the flagship Oakmark Fund and David Herro the Oakmark International Fund, buying businesses at large discounts to intrinsic value and holding them like owners — publishing quarterly fund commentaries, market commentaries and insight articles.
Oakmark’s fixed-income commentary argues that heavy technology-company bond issuance creates opportunities to assess business value and credit risk. An equal-weight comparison basket of five hyperscaler issuers has an average spread of 132 basis points, versus 115 for BBB-rated bonds, with lower leverage. These are basket metrics, not individual-company metrics. Netflix bonds are a historical example. Protection against disappointing AI investment returns depends on established cash flows and management’s ability to reduce spending.
Oakmark’s fixed-income commentary argues that heavy technology-company bond issuance creates opportunities to assess business value and credit risk. An equal-weight comparison basket of five hyperscaler issuers has an average spread of 132 basis points, versus 115 for BBB-rated bonds, with lower lev
Oakmark opens with the case of its 2017 investment in Netflix bonds to illustrate its core investment philosophy: looking beyond surface-level metrics to understand the underlying business. At the time, Netflix’s stock traded at over 100 times earnings, its bonds were rated single-B, and the market priced in an implied default probability of roughly one-quarter (25%) over five years. The Oakmark team was not deterred by these metrics. Through analysis, they found:
Based on this analysis, the Oakmark Bond Fund and the Oakmark Equity and Income Fund invested in Netflix bonds (which they no longer hold). The author emphasizes that this research approach of “understanding the business” is part of Harris | Oakmark’s DNA, enabling the discovery of both undervalued stocks and mispriced bonds.
Today, Oakmark sees a similar opportunity in heavily issuing technology companies, particularly “hyperscalers.” Market focus has shifted from Netflix’s “cash burn” to “new bond supply.” Oakmark judges that concerns over supply have led to distorted market pricing, allowing them to lend to stronger companies on terms typically reserved for weaker ones.
Global bond issuance from the hyperscaler group has surged dramatically:
Investors demand higher yields (lower prices) to absorb this supply. Oakmark believes this supply pressure has become excessive, pushing bond prices below levels justified by the companies’ financial strength and growing business value.
Oakmark constructs an equal-weight “hyperscaler exposure” portfolio from its holdings in five hyperscalers (Meta, Alphabet, Amazon, Oracle, SpaceX) and compares it against the investment-grade index (ex-financials) and several cyclical sectors. The fundamental advantages are significant:
| Metric | Hyperscaler Exposure | IG (ex-Financials) | Capital Goods | Basic Industry | Consumer Cyclical |
|---|---|---|---|---|---|
| Profitability (EBITDA Margin) | 46.6% | 32.3% | 18.3% | 24.8% | 22.0% |
| Revenue Growth (2026-28 CAGR) | 22.6% | 9.2% | 8.0% | 5.7% | 8.5% |
| Net Leverage | 0.4x | 2.8x | 4.2x | 1.8x | 1.8x |
| Gross Leverage | 1.3x | 3.3x | 4.6x | 2.3x | 2.6x |
Source: Bloomberg, Barclays, Harris | Oakmark analysis. Hyperscaler exposure represents equal-weighted issuer averages, not actual fund position weights.
Oakmark argues that these bonds are priced with credit risk far exceeding what their fundamentals warrant. This is evidenced by:
1. Extremely Low Leverage: The hyperscaler exposure’s average net leverage is only 0.4x, compared to 3.5x for the average BBB-rated company in the IG index. Even excluding cash, their gross leverage (1.3x) is well below the BBB average (3.9x). Even after capitalizing off-balance-sheet obligations like future leases and project financing, their estimated leverage (~2.9x) remains below that of BBB-rated companies.
2. Ample Business Value Coverage: Measured by market enterprise value, hyperscalers have roughly $33 of business value for every $1 of debt, compared to medians of only about $4 and $3 for A-rated and BBB-rated companies, respectively.
3. Higher Spreads: On bonds with approximately 10-year maturities, the hyperscaler exposure’s average spread is 132 basis points, higher than both BBB-rated (115 bps) and A-rated (84 bps) bonds. Oakmark notes that one would typically expect lower spreads from companies with lower leverage, stronger profitability, and better growth prospects, but the opposite is true.
| Comparison Item | Hyperscaler Exposure | BBB-rated | A-rated |
|---|---|---|---|
| Credit Spread (vs. Treasuries) | 132 bps | 115 bps | 84 bps |
| Gross Leverage (Debt/EBITDA) | 1.3x | 3.9x | 3.1x |
| Business Value per Dollar of Debt | $32.9 | $3.3 | $4.2 |
Source: Bloomberg, Barclays, Harris | Oakmark analysis. Spread data as of September 30, 2026, corresponding to approximately 10-year bonds.
Oakmark acknowledges that, as a lender, one must understand where management is deploying capital and assess the return on investment. They hope new investments will generate returns exceeding the cost of capital but must also consider scenarios where returns fall short. The author argues that even if these companies’ earnings disappoint, they take on more debt, or bring off-balance-sheet obligations onto their books, they would still have the capacity to meet their debt service obligations. This investment approach of “leaving room for disappointment” is the core reason for their current bullishness on hyperscaler bonds.
The author argues that disappointing returns on AI investments do not necessarily translate into higher credit risk, as management has the ability to cut future capital expenditures.
The author believes current bond prices undervalue the strong financial strength and flexibility of these tech giants.
The author cites Netflix as an example of their investment philosophy.
The following are the holdings mentioned in the original text as a percentage of fund net assets:
| Security Name | Oakmark Bond Fund Weight | Oakmark Equity and Income Fund Weight |
|---|---|---|
| Alphabet | 0% | Cl A: 0.3%, Cl C: 2.7% |
| Amazon.com | - | 2.0% |
| Amazon CB 04/36 5.300% Due 07-09-36 | 0.9% | 0.3% |
| Meta Platforms Cl A | - | 1.4% |
| Meta CB 11/55 6.300% Due 05-15-56 | 1.0% | 0.2% |
| Netflix | 0% | 0.9% |
| Oracle CB 05/52 6.900% Due 11-09-52 | 0.9% | 0.2% |
| Space Exploration CB 04/36 144A 5.875% Due 07-15-36 | 1.1% | 0.2% |
Note: Holdings are subject to change and do not constitute a recommendation to buy or sell any security.