Oakmark Global Select Fund: Third Quarter 2011
September 30, 2011
The Oakmark Global Select Fund lost 2% for the year ended September 30, 2011, outperforming the MSCI World Index’s 4% decline. For the latest quarter and calendar year to date, respectively, the Fund was down 16% and 10%, while the MSCI World Index lost 17% and 12%. The Fund has returned an average of 2% per year since its inception in October 2006, outperforming the MSCI World Index’s annualized loss of 2% over the same period.
The top contributor to performance for the last 12 months was the French television operator Societe Television Francaise 1 (TF1), which returned 26% before being sold from the portfolio in March 2011. We used the proceeds to purchase names trading at a larger discount to our estimate of intrinsic value.
Another top contributor was Comcast, the largest cable provider in the U.S., which returned 23%. Comcast derives most of its revenue from television, Internet and digital-phone services offered in 39 states and the District of Columbia. It has approximately 17 million broadband Internet subscribers and more than 8 million customers use its XFINITY computer-based telephony service. Comcast also has cable programming interests, and it owns entertainment channel E!. Comcast has one of the biggest and, we what we believe, best integrated systems (cable TV, Internet and digital phone) in the industry. Its cable business has considerable scale advantages and continues to thrive despite several competitive threats. Also, there has been a change of leadership in the cable unit, as Neil Smit took over operational responsibilities after the NBC-Universal joint venture was completed. We are excited about this management shift, and we have confidence that performance in this division will continue to improve as a result. Additionally, Comcast’s Internet service business is gaining market share, and its digital-phone business has been growing despite a decline in overall landline usage. We believe that Comcast has the potential for ample growth across all business lines, and we are especially optimistic about future results from its commercial-services sector, which is Comcast’s most rapidly growing segment and could be one of its highest return investments.
The largest detractor from Fund performance for the year was Adecco, a Swiss-based personnel and temporary staffing company, which lost 23%. Adecco is currently trading at prices last seen in April 2009. Despite macroeconomic concerns, Adecco's business today is considerably better-positioned and is trading at significantly lower multiples than it was in April 2009. To put this in perspective, Adecco generated EUR 14.8 billion in revenue and EUR 402 million in operating profit in 2009, so we were paying a high-teens multiple on 12-month expected EBIT. In 2011, we forecast that Adecco will generate EUR 20.5 billion in revenue and more than EUR 850 million in operating profit, so today we are buying the business for 8x 12-month forward EBIT. In addition, despite a relatively lackluster recovery in employment across most of the developed world, Adecco's revenue has increased more than 20% since 2009 because employers value the flexibility that temporary staff provides in today's more volatile world. Adecco has also grown via mergers and acquisitions. It has utilized almost EUR 1 billion of the EUR 1.25 billion it generated in free cash flow over the past three years to buy professional staffing businesses, such as MPS in the U.S. Even with its mergers and acquisitions spending, Adecco returned nearly EUR 250 million to shareholders via dividends without increasing its leverage.
Another large detractor from performance for the year was U.S.-based electronics retailer Best Buy. Shares declined amid general softness in sales of consumer electronics and continued concerns that increasingly price-sensitive consumers are moving to competitors such as Wal-Mart and Amazon. While we believe Best Buy is undervalued, we sold our position and used the proceeds to purchase FedEx, a U.S.-based global parcel and freight delivery company. FedEx shares fell sharply during the past quarter as investors focused on the slowing economy. Short-term investors see FedEx as an offensive play that is unlikely to be successful in a deteriorating macro environment. However, we use long-term earnings power to estimate business value, and we believe FedEx offers considerable long-term earnings potential. The company’s investments during this extended downturn have set the company up for an enormous amount of earnings power in an industry with extremely high barriers to entry. The gap between FedEx’s price and value increased significantly during the most recent quarter, making it appear to be one of the most undervalued stocks on our approved list that we did not yet own. FedEx also gives the Fund more industrial exposure than we previously had in the portfolio.
We made some changes to the portfolio during the quarter. In addition to selling Best Buy and buying FedEx, we sold our positions in G4S and UBS, and we purchased Credit Suisse Group, an international financial services group based in Switzerland, and Daimler, a global automotive company based in Germany.
On a regional basis, 43% of the Fund’s assets were invested in U.S.-domiciled companies as of September 30, while approximately 32% was allocated to equities in Europe and nearly 21% to Japan. The remaining 4% was invested in Canadian stocks.
Due to the U.S. dollar’s weakness relative to other global currencies, we currently hedge three underlying foreign currencies. At quarter-end, approximately 75% of the Fund’s Swiss franc, 74% of the Japanese yen and 19% of the euro exposures were hedged.
Thank you for your continued support!
William C. Nygren, CFA
David G. Herro, CFA
Average Annual Total Returns (09/30/11)
Since Inception (10/06) 2.02%
Expense Ratio as of 9/30/10 was 1.29%
Past performance is no guarantee of future results. The performance data quoted represents past performance. Current performance may be lower or higher than the performance data quoted. The investment return and principal value vary so that an investor’s shares when redeemed may be worth more or less than the original cost. The performance of the Funds does not reflect the 2% redemption fee imposed on shares redeemed within 90 days of purchase. To obtain the most recent month-end performance data, view it here.
As of 9/30/11, Societe Television Francaise 1 represented 0%, Comcast Corp., Class A 4.8%, Adecco SA 5.3%, Best Buy Co., Inc. 0%, Wal-Mart Stores, Inc. 0%, Amazon.com, Inc. 0%, FedEx Corp. 4.0%, G4S PLC 0%, UBS AG 0%, and Credit Suisse Group 5.0% of the Oakmark Global Select Fund’s total net assets. Portfolio holdings are subject to change without notice and are not intended as recommendations of individual stocks.
The MSCI World Index (Net) is a free float-adjusted market capitalization weighted index that is designed to measure the global equity market performance of developed markets. This benchmark calculates reinvested dividends net of withholding taxes using Luxembourg tax rates. This index is unmanaged and investors cannot invest directly in this index.
Because The Oakmark Global Select Fund is non-diversified, the performance of each holding will have a greater impact on the Fund's total return, and may make the Fund's returns more volatile than a more diversified fund.
Investing in foreign securities presents risks that in some ways may be greater than U.S. investments. Those risks include: currency fluctuation; different regulation, accounting standards, trading practices and levels of available information; generally higher transaction costs; and political risks.
The discussion of the Funds’ investments and investment strategy (including current investment themes, the portfolio managers' research and investment process, and portfolio characteristics) represents the Funds’ investments and the views of the portfolio managers and Harris Associates L.P., the Funds' investment adviser, at the time of this letter, and are subject to change without notice.