Oakmark International Fund: Third Quarter 2014
September 30, 2014
The Oakmark International Fund declined 1% for the fiscal year ended September 30, 2014, underperforming the MSCI World ex U.S. Index, which gained 5%. For the most recent quarter the Fund also underperformed the MSCI World ex U.S. Index, declining 7% versus a decline of 6%. However, the Fund has performed well versus the MSCI World ex U.S. Index since its September 1992 inception, returning an average of 11% versus 6% over the same period.
Intesa Sanpaolo, an Italian retail and commercial bank, was the top contributor to performance over the past 12 months, returning 50%. Intesa’s share price has rebounded as fears over Italy’s banking system and government have subsided. We have always believed these fears were overblown and that Italy was in much better long-term fiscal health than many of its periphery countries. The new CEO has committed to return EUR 10 billion to shareholders via dividends over the next four years. This constitutes a cumulative payout ratio in excess of 70%. Even with this return of capital to shareholders, Intesa should be over-capitalized compared with Basel III requirements, leaving the door open for additional capital returns. Additionally, management plans to increase investments in fee-based businesses, including asset management and insurance, and to exit non-core businesses and investments. We believe management has a solid plan for the future and believe the investment will continue to provide value for our shareholders.
Another top contributor was Olympus, the world leader in endoscopes and other medical equipment, which returned 18% over the past twelve months. Management continues to invest in the medical business with a focus on growth in surgery. Olympus is the dominant player in the gastrointestinal space, but the company is a relative newcomer to surgery. Olympus plans to enlarge its sales staff and enhance its research and development capabilities in the surgical business. Management believes the medical segment will grow 10% this year, driven by higher sales in surgery in addition to endoscope growth in the emerging world. Although the camera business remains weak in our view, Olympus also plans to invest in this division, and management’s goal is to boost revenues enough to cover costs this year.
The largest detractor from performance for the quarter and the past twelve months was CNH Industrial, a manufacturer of agricultural and construction equipment. As expected, the company’s agricultural equipment business is experiencing reduced sales due to lower crop prices and farm profitability. However, we believe the agricultural segment to be a structurally appealing industry. Higher adoption of double cropping, increases in farm sizes in emerging and frontier markets, and the global need to increase yield will increase the demand for larger equipment. We believe CNH will continue to benefit from these trends as the second largest leader in this industry. In addition, the company’s commercial vehicles (Iveco) and construction equipment businesses have performed more poorly than expected. Weakness in Europe and Latin America, combined with adverse currency movements, have negatively impacted these businesses and led to very low levels of profitability. As these conditions return back to a more normal level, we believe these two segments will significantly improve. We believe management is taking important steps to enhance shareholder value with its continued focus on operational improvement and restructuring of the company’s balance sheet.
There was abundant portfolio activity during the past quarter. We sold our positions in Geberit and OMRON and added four new names to the Fund: Exor, an Italian-based investment company which owns stakes in CNH Industrial and Fiat; G4S, a U.K.-based security services company; Melco Crown Entertainment, a Hong Kong-based casino, gaming, and entertainment resort operator; and Swedish Match, a Swedish-based company whose primary source of revenue is derived from smokeless tobacco.
Geographically, we ended the quarter with 79% of our holdings in Europe, 13% in Japan and 4% in Australia. The remaining positions are in North America (Canada), South Korea, Hong Kong and the Middle East (Israel).
The U.S. dollar has strengthened significantly versus most global currencies. This is because of the U.S.’s strong relative economic growth outlook, directions in quantitative easing and geopolitical tensions in other parts of the world. As a result, the Australian dollar, Swiss franc and Swedish krona depreciated during the quarter. Our defensive hedge positions of these overvalued currencies boosted performance for the quarter. We continue to hedge these overvalued currencies and ended the quarter with 42% of our Australian dollar, 33% of our Swiss franc and 30% of our Swedish krona exposure hedged.
We continue to adhere to a long-term value philosophy that has enabled us to build a portfolio of high quality names trading at discounts to our estimate of intrinsic value. We thank you, our shareholders, for your continued support.
David G. Herro, CFA
Robert A. Taylor, CFA
Average Annual Total Returns (09/30/14)
Expense Ratio as of 9/30/13 was 0.98%
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.
As of 09/30/14, Intesa Sanpaolo SpA represented 2.9%, Olympus Corp. 1.0%, CNH Industrial N.V. 2.5%, Geberit AG 0%, OMRON Corp. 0%, Exor SPA 0.4%, Fiat SpA 0%, G4S PLC 0.02%, Melco Crown Entertainment, Ltd. 0.6% and Swedish Match AB 0.2% 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.
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 Oakmark International 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.
Oakmark International Fund: 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.
Oakmark International 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.