Oakmark International Fund: Second Quarter 2011
June 30, 2011
The Oakmark International Fund returned 2% for the quarter ended June 30, 2011, outperforming the MSCI World ex U.S. Index, which returned 1% over the same period. Since its inception in September 1992, the Fund has returned an average of 11% per year, outperforming the MSCI World ex U.S. Index, which has averaged 7% per year over the same period.
One of the top contributors to performance for the quarter was Olympus, a global optoelectronics manufacturer based in Japan, which returned 20%. The market reacted favorably to strong performance in the endoscopes business, a faster-than-expected recovery from Japan’s earthquake and management’s cost-cutting initiatives, which have focused on improving profitability and cash generation. Olympus’s camera business has detracted from performance in recent years, and management plans to fix that business through cost-cutting programs and product innovation. In addition, new product upgrades and strong brand value for its camera business have enabled Olympus to gain market share in Europe. Although its camera and imaging businesses are perhaps best-known among consumers, most of Olympus’s value derives from its endoscopes business. Through innovation and differentiation, the company has achieved a 70% global market share in gastrointestinal endoscopes. It has developed new technology for better light distribution, which improves endoscope image quality. The company is also focused on design changes that will increase patient comfort.
Another top contributor to performance was Roche, the second-largest global pharmaceutical company, which returned 17% during the quarter. Over the past year, a string of disappointing news has weakened its share price. However, during the past quarter, investors reacted favorably to positive data from seven of the company’s Phase II and Phase III clinical trials. The Phase II results were most encouraging because they found that a compound that combines traditional antibodies with a chemotherapy agent was significantly more effective and safer than the current standards-of-care for breast cancer. If this approach proves successful, it could be useful in treating many other types of cancer. In addition to this good news, the CATT report (Comparison of Age-related macular degeneration Treatment Trial), which was released last quarter, also helped Roche. Previously, investors feared that all wet age-related macular edema (AMD) sales would shift from Lucentis to Avastin, a much-lower-cost drug. (Both are produced by Roche, so a move to Avastin could affect overall profits.) However, even though the report found Avastin might be as effective as Lucentis in AMD treatment, it also found that Avastin carried an increased risk of adverse events. Given this increased risk, and the fact that Roche has not filed Avastin for approval for use in the treatment of AMD, we believe ophthalmologists will be slow in making the switch to Avastin, easing the threat to the sales and profitability of Lucentis.
A top detractor from performance during the quarter was ROHM, a Japanese-based semiconductor manufacturer, which fell 9% during the quarter. In May, the company released 2010 fiscal-year results that were below company guidance, which hurt the stock price. The strong yen and Japan’s earthquake and tsunami have also weakened ROHM’s 2011 fiscal-year outlook. In addition, internal production stoppages, as well as disruptions at Japan’s automakers and within the mobile-phone supply chain, have decreased demand for ROHM’s products. The yen’s strength has not only hurt dollar-generated sales, but it has also affected operating margins, since most of ROHM’s production is based in Japan. However, we believe the negative consequences from the strong yen will dissipate as the currency weakens and moves more toward purchasing-power parity. We also believe that the economic recovery in many regions around the world will help the company’s stock price over the longer term.
During the past quarter, we sold the Fund’s holding of Aperam and purchased two new names: Orica, an Australian-based global mining and explosives business; and Philips Electronics, a Dutch electronics and lighting manufacturer. We also added Treasury Wine Estates, a vineyard and wine-distribution company based in Australia that was spun off from Fund holding Fosters.
Geographically, we ended the quarter with our European holdings decreasing to approximately 65% of the portfolio, the Pacific Rim holdings increasing to approximately 33% and the balance in Latin and North America.
We still believe that many currencies are overvalued compared to the U.S. dollar and we continued to defensively hedge the Fund’s currency exposure. We initiated a hedge for part of the Fund’s euro exposure during the quarter. Approximately 72% of the Fund’s Swiss franc, 69% of the Australian dollar, 52% of the Japanese yen, 28% of the Swedish krona and 20% of the euro exposure were hedged at quarter-end.
We continue to focus on finding what we believe are attractive, undervalued international companies with management teams focused on building shareholder value. We thank you for your support.
David G. Herro, CFA
Robert A. Taylor, CFA
Average Annual Total Returns (06/30/11)
Expense Ratio as of 9/30/10 was 1.08%
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 6/30/11, Olympus Corp. represented 2.2%, Roche Holding AG 2.3%, ROHM Ltd. 2.6%, Aperam 0%, Orica, Ltd. 1.3%, Koninklijke (Royal) Philips Electronics NV 1.2%, Treasury Wine Estates, Ltd. 0.2%, and Foster's Group, Ltd. 0.8% of the Oakmark International 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 ex U.S. Index (Net) is a free float-adjusted market capitalization index that is designed to measure international developed market equity performance, excluding the U.S. 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.
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.