Oakmark Global Select Fund: Third Quarter 2012
September 30, 2012
The Oakmark Global Select Fund returned 17% for the year ended September 30, 2012, underperforming the MSCI World Index’s 22% return. For the latest quarter and calendar year to date, respectively, the Fund was up 3% and 12%, while the MSCI World Index returned 7% and 13%. The Fund has returned an average of 4% per year since its inception in October 2006, outperforming the MSCI World Index’s annualized gain of 1% over the same period.
The top contributor to performance for the past 12 months was Comcast, the largest cable provider in the U.S., returning 71%. The company’s business services, broadband units and recently acquired NBC assets have enjoyed strong results. We continue to like Comcast’s positioning as both the largest system operator (video, internet and digital phone services) and a large producer of content. Its cable business has considerable scale advantages and continues to thrive despite growing availability of video via the Internet. Over the past year management has returned more capital to shareholders, which we applaud, by boosting its dividend 44% and announcing a new $6.5 billion share-repurchase authorization. We believe Comcast is poised to continue providing good returns for our shareholders.
ROHM, a Japanese-based semiconductor manufacturer, was the top detractor for the year, falling 34%. Share prices fell the most during the second quarter of 2012 after ROHM released fiscal year results that showed a year-over-year sales decline of approximately 11% and an operating profit decline of approximately 81%. Most of ROHM’s troubles revolve around its failure to expand its customer base outside of Japan. Historically ROHM’s management focused on Japanese consumer electronics companies because of proximity and ease of communication. However, ROHM’s new president and previous head of overseas sales, Satoshi Sawaura, has prioritized overseas expansion. We think that investing in overseas offices to get closer to clients is a very positive move. For example, ROHM’s backlog for chips used in automobiles has been growing, and the recent Thai floods caused more non-Japanese auto companies to approach ROHM for potential business. ROHM was sold from this highly concentrated Fund during the quarter, though it remained in the more diversified Oakmark International and Oakmark Global.There was a flurry of trading activity during the quarter. In addition to ROHM, we sold our positions in Diageo, Nestle and SAP and added four new names to the portfolio. Since there are so many new names in the portfolio, we would like to familiarize our shareholders with the new holdings by providing an overview of each name below.
Canon is a Japan-based professional and consumer imaging solutions company and patent-holder of digital imaging technologies. The company’s products also include business office equipment, semiconductor manufacturing equipment, television broadcast lenses and devices used for eye examinations. We think that Canon is an attractive investment due to its formidable technological innovation and strength. The company holds several patents for the products it manufactures, giving the firm a measure of exclusivity. Over the past 10 years, Canon has consistently ranked second or third each year among the top 10 corporations awarded U.S. patents. The firm enjoys an original equipment manufacturer relationship with Hewlett-Packard that has spanned 25 years. Over the past few years, Canon has been Hewlett-Packard’s sole source for printers and Laser Beam Printers (used primarily by businesses). In addition to its core products, Canon also sells the related consumables, resulting in considerable supplemental cash flow. Management has repurchased almost 13% of outstanding shares since 2005, and plans are in place to continue stock repurchases.
Fiat Industrial was spun off from Fiat SpA in January 2011 and currently consists of three main divisions: Iveco, FPT Industrial and Case New Holland Global (CNH). Iveco makes trucks and commercial vehicles, mostly in Western Europe and Latin America. FPT Industrial is an engine manufacturer for CNH, Iveco and other non-captive clients. CNH is second in the world among agricultural equipment companies, behind Deere, and the fifth-largest construction equipment company. While Fiat Industrial currently owns just under 90% of CNH, Fiat Industrial’s management just announced it is pursuing a full merger with the company. We believe CNH is strong and is well-positioned to benefit from global food consumption growth. In our view, this merger will provide Fiat Industrial with several advantages, including improved utilization of FPT technology with CNH, a more efficient capital structure along with significant net interest expense savings, better integration of financial services, increased scale in emerging markets and more flexibility to pursue strategic actions. We also think that based on these expected advantages, this merger is very good news for Fiat Industrial shareholders. The economic distress enveloping Italy has depressed the stock prices of many choice companies domiciled there, enabling us to purchase shares of Fiat Industrial at what we view as an extreme discount. Fiat Industrial is an internationally diversified company that generates only a fraction of its sales and profits in Italy and less than 25% of its sales in Western Europe.
Kuehne + Nagel is one of the world’s leading freight forwarders and is a high-growth, high-return, cash-generating business. As a freight forwarder, it benefits directly from expanding global trade, which has been on the rise over the past 20-plus years. In our view, Kuehne + Nagel has the best global operating assets in its industry and is employing an effective business model. Currently, the company holds the leading market position for ocean shipping operations, is second in air operations and has a true global warehouse network. Importantly, its air and ocean volumes had a compound annual growth rate since 2000 of 12% and 18%, respectively, and it also generates healthy operating returns on assets. We believe that Kuehne + Nagel’s management team is one of the best in its sector. The company has gained market share in both its air and ocean businesses for the past 10 years, which in our view demonstrates management’s extensive expertise.
PPR, a French consumer discretionary company, is the world’s third-largest luxury group (behind LVMH & Richemont) and owns a 99% stake in exclusive Italian company Gucci Group. Other elite brands include Alexander McQueen, Bottega Veneta, Stella McCartney and Yves Saint Laurent, among others. PPR’s management has been divesting businesses that add little value and is working to strengthen market presence for its core and, in our view, its higher quality Luxury and Sport & Lifestyle divisions. One of the company’s premier brands, Gucci Group, appears to us to be considerably underappreciated. Sales channels for Gucci products have been expanded, as Gucci goods are now available at several mass retail operations as well as through direct distribution. Demand for Gucci merchandise has been surging in China and other emerging markets, which has significantly improved PPR’s competitive position in these high growth regions. PPR’s other luxury brands are also particularly well-positioned with a strong presence in the Leather and Shoes trade, which is the fastest growing (and one of the highest margin) segments of the luxury sector. Additionally, the company’s Sport & Lifestyle group, which already houses the well-known PUMA brand, recently acquired the Cobra Golf and Volcom names. We believe these additions will provide ongoing added value. Lastly, management has a significant vested interest in growing shareholder value, as insiders own approximately 40% of the company’s shares.
Geographically, 45% of the Fund’s assets were invested in U.S.-domiciled companies as of September 30, while approximately 34% was allocated to equities in Europe and 16% to Japan. The remaining assets were invested in Canadian stocks.
Due to the U.S. dollar’s weakness relative to other global currencies, we currently hedge two underlying foreign currencies, the Japanese yen and the Swiss franc.
We have built a fund of what we feel are undervalued companies that trade at attractive prices and that are run by management teams who focus on building shareholder value. We believe that the Fund is well-positioned to generate favorable long-term results for our fellow shareholders. We thank you for your continued support and confidence.
William C. Nygren, CFA
David G. Herro, CFA
As of 9/30/12 Comcast Corp., Class A represented 5.8%, ROHM Co., Ltd. 0%, Diageo PLC 0%, Nestle SA 0%, SAP AG 0%, Canon, Inc. 5.4%, Hewlett-Packard Co. 0%, Fiat Industrial SPA 4.4%, Fiat SPA 0%, Deere & Co. 0%, Kuehne + Nagel International AG 3.8%, PPR SA 4.4%, LVMH Moët Hennessy Louis Vuitton SA 0%, and Compagnie Financière Richemont SA 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 Fund’s investments and investment strategy (including current investment themes, the portfolio managers' research and investment process, and portfolio characteristics) represents the Fund’s investments and the views of the portfolio managers and Harris Associates L.P., the Fund’s investment adviser, at the time of this letter, and are subject to change without notice.