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We build portfolios in the same manner we would manage our personal capital: We seek to maximize after-tax returns over a multi-year time horizon by concentrating our investments in the most undervalued businesses, managed by capable and properly motivated management teams.
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Although many prognosticators warned that political trends in 2016 would be problematic for securities markets, the stock markets have proven to be quite resilient.
Given the stock market’s seasonal tendency to decline in the quarter, investors expected the period to be challenging. But as is so often the case, the market surprised, this time to the upside.
We continue to do our best to optimize the returns of the Fund by purchasing undervalued companies that are growing their intrinsic value over time and that are managed by individuals who think and act like long-term owners of the business.
As interest rates normalize, spreads between financial industry liabilities and assets will widen, and profitability should materially increase.
Although most developed markets closed out the year with modest or negative returns (when expressed in U.S. dollars), considerable volatility occurred beneath the surface of the market averages. This has availed us plentiful opportunities to reorient the portfolio.
We expect the Fund’s holdings to continue to generate free cash flow, invest in their businesses, pay dividends and repurchase stock, and, in general, grow their intrinsic value per share.
In managing funds in the Oakmark group, we insist on buying companies at a meaningful discount to our intrinsic value of the business – regardless of the volatility in the security’s price.
In the first quarter, European equities in particular benefited from the European Central Bank’s initiation of a larger than expected quantitative easing program.
When we analyze a company as a potential investment, its home base is relevant primarily for us to understand the laws and accounting conventions under which it must operate.
We initiated positions in a French bank and a Swiss luxury goods company during the quarter.
Last quarter we began our report comparing the dichotomy between the macro environment and the performance of the equity markets. For better or worse, the same can be written once again for the June quarter.
Given our value investing philosophy, it should come as no surprise that we reduced the weight of U.S. holdings in the portfolio during the previous quarter.
We like to remind our shareholders that as managers and investors in the Fund, our motivation is to invest in the most attractive equity securities wherever they may be found, and not to mirror an index’s allocations.
The September quarter produced strong equity outcomes across most world markets.
The June quarter was a fascinating period for investors in global equities. Several countries’ stock markets entered corrections (i.e., declines in excess of 10%), and Japan’s energetic bull market quickly became a bear market (down 20% from the peak).
As was the case one year ago, the March quarter witnessed a strong rally in world stock markets, with very few countries experiencing losses.
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Investing in value stocks presents the risk that value stocks may fall out of favor with investors and underperform growth stocks during given periods.
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Date of first use: January 24, 2013.