Oakmark International Fund: Second Quarter 2016
June 30, 2016
The Oakmark International Fund declined 8% for quarter ended June 30, 2016, underperforming the MSCI World ex U.S. Index, which declined 1%. Most importantly, the Fund has returned an average of 9% per year since its inception in September 1992, outperforming the MSCI World ex U.S. Index, which has averaged 6% per year over the same period.
The United Kingdom’s vote to exit the European Union (EU) caused extreme reaction in the global financial markets. Our exposure to the European Financials sector was one of the key reasons for our underperformance versus the Index. Please see the International lead letter for more information on this topic.
Ashtead Group (U.K.), an international equipment rental company, was the top contributor for the quarter, returning 15%. While Ashtead is based in the U.K., it derives a majority of its revenue (84%) from North America. Ashtead recently released solid fiscal year 2016 results, showing 19% growth in its U.S. equipment rental business. Given that the market only grew 6% over the period, these results imply that Ashtead has continued to significantly gain market share. We have seen a secular shift in the U.S. market toward renting equipment instead of buying it, as it relieves the client of upfront investment and ongoing maintenance responsibilities. The rental market has also expanded significantly into non-construction related categories, which possess both higher returns and lower volatility than the general construction business. These factors should help Ashtead generate greater through-cycle profitability compared to the previous period.
Credit Suisse, one of Switzerland’s top financial services groups, was the largest detractor from performance for the quarter, declining 22%. Although the U.K.’s decision to leave the EU has negatively impacted Credit Suisse Group’s share price, it is important to remember that the bank derives only 2% of its revenues from the U.K., while 13% of its costs are denominated in pound sterling currency—the net result of which may be somewhat positive for profitability. While the decision to leave the EU has caused notable market upheaval, global market declines were actually more extreme in the first few months of 2016 due to significant commodity price weakness, concerns regarding slowed economic growth in the U.S. and China, and monetary decisions by major central banks. Even so, Credit Suisse was able to grow net new money by 6.1% in the first quarter, which was meaningfully better than the 3.8% we estimated for the full fiscal year and higher than our expected normal run-rate of 5%. Additionally, we believe its overall first quarter results were good. Performance in its investment bank division lagged behind the industry, however we recognize that the underperformance is partially due to restructuring activity and we expect performance to improve when restructuring is complete. Also during the first quarter, Credit Suisse realized about half of its intended CHF 1.4 billion in cost cuts, which was ahead of schedule. Although the company’s near-term results may suffer, it is too early to know the extent to which the U.K.’s EU exit will affect Credit Suisse. The company reports its second-quarter financial results in late July, at which time we’ll have a clearer view.
During the quarter, we sold our position in Burberry Group (U.K.). We believe Burberry has a good brand but is run by an average management team. Given our significant exposure to luxury goods, we decided to sell our position in Burberry and allocate the capital to our other luxury goods names run by stronger management teams. We also sold our position in BMW (Germany). We strive to invest in owner-oriented management teams that build shareholder value over time. We have been disappointed in BMW’s capital allocation and significant cash position. We had hoped to discuss our concerns with management, but management refused to hear our thoughts on the topic. Given our concerns about capital allocation, management’s unwillingness to meet with us and our significant exposure to the automotive sector, we decided to sell our shares.
Geographically, we ended the quarter with 68% of our holdings in Europe, 17% in Japan and 3% in Australia. The remaining positions are in South Korea, Indonesia, the United States, China, Hong Kong, Mexico, Taiwan and Israel.
Despite the weakening of many currencies during the quarter, we continue to believe some currencies are overvalued versus the U.S. dollar. We maintained our defensive currency hedges and ended the quarter with approximately 28% of the Swiss franc and 13% of the Australian dollar hedged.
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 (06/30/16)
Since Inception (09/92) 9.02%
Expense Ratio as of 9/30/15 was 0.95%
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 To obtain the most recent month-end performance data, view it here.
The holdings mentioned above comprise the following percentages of the Oakmark International Fund’s total net assets as of 06/30/16: Ashtead Group PLC 2.2%, Credit Suisse Group 4.2%, Burberry Group PLC 0%, and Bayerische Motoren Werke AG 0%. Portfolio holdings are subject to change without notice and are not intended as recommendations of individual stocks.
Click here to access the full list of holdings for The Oakmark International Fund as of the most recent quarter-end.
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.
The Fund’s portfolio tends to be invested in a relatively small number of stocks. As a result, the appreciation or depreciation of any one security held by the Fund will have a greater impact on the Fund’s net asset value than it would if the Fund invested in a larger number of securities. Although that strategy has the potential to generate attractive returns over time, it also increases the Fund’s volatility.
The percentages of hedge exposure for each foreign currency are calculated by dividing the market value of all same-currency forward contracts by the market value of the underlying equity exposure to that currency.
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.