Oakmark International Small Cap Fund: Fourth Quarter 2011
December 31, 2011
The Oakmark International Small Cap Fund returned 4% in the quarter ended December 31, 2011, compared to 1% for the MSCI World ex U.S. Small Cap Index. For the calendar year ended December 31, the Fund and the MSCI World ex U.S. Small Cap Index both declined 16%. For the past 10 years, the Fund has earned an annualized rate of return of 10%, compared to the MSCI World ex U.S. Small Cap Index, which has returned 9% for the same period. Since inception, the Fund has had an annualized return of 9%.
The top-performing stock for the quarter was a Dutch company, Wavin NV, the largest producer of plastic pipes in Europe. During the quarter, Wavin’s stock price jumped following news that it received an unsolicited acquisition bid from Mexichem, a Latin American chemical producer whose products also include PVC piping. If this deal is concluded, Wavin would expand Mexichem’s European presence and enhance its product portfolio. The first non-binding takeover offer came in November for 8.5 euros per share, and Mexichem has since raised its bid to 10 euros per share. This latest bid has boosted Wavin’s stock price, and we will continue to monitor the progress of the takeover offer.
The Fund’s top-performing stock for calendar year 2011 was also a large contributor to fourth-quarter returns. Duerr AG, a German company, is the world’s largest paint-shop designer and installer. In August, Duerr reported another strong set of gross results, with revenues continuing to grow and new orders rising 63%. Most of these new orders came primarily from emerging markets, although Duerr’s results demonstrate growth in all areas of the world and in all of its businesses. In order to meet the higher demand, the company plans to hire 600 more employees. Although Duerr raised guidance throughout the year, management believes the backlog indicates that its 2012 sales will be strong once again. This, along with three recent small acquisitions, should help the company in the coming year.
One of the largest detractors from the Fund’s performance for the past quarter and year was gategroup Holding, a Swiss company that specializes in catering for the airline industry. The stock price for gategroup declined sharply in November after the company lowered its 2011 outlook and provided 2012 guidance for the first time. Revenue trends weakened during the fourth quarter as a more difficult macro environment reduced demand for premium air travel. We believe this short-term fluctuation in demand will have a modest negative impact on 2012 earnings but will have little impact on the long-term business value of gategroup. For that reason, we used the stock’s price drop as an opportunity to add to our holdings. At times, gategroup tends to trade as if it were an airline, but we believe it is a much higher-quality business because it has a more flexible cost structure and it maintains long-term contracts, which help to protect its profitability during downturns.
The largest detractor for the calendar year was Goodman Fielder, Australia’s largest food manufacturer. As we wrote in the last commentary, the company has faced a very difficult environment over the past few quarters, which has reduced its profitability. During the fourth quarter, the company announced a number of new executive appointments, including a new CFO, who joins the CEO that started in July. It also announced the decision to consolidate its New Zealand retail operations (dairy, baking and home ingredients), which should allow the company to reduce costs and capitalize on its scale more effectively when negotiating with retailers. Finally, Goodman also announced a significant restructuring of its Fresh Baking division in Australia, which could potentially provide long-term savings. We believe that Goodman has a number of strong market positions and attractive local brands. In our view, the improvement in its management team, its increased investments in the brands that matter, its willingness to exit non-core brands and its commitment to innovation should over time boost the company’s momentum.
We established positions in two securities that were both previously held in the Fund: Michael Page International and Travis Perkins. Michael Page International, based in the U.K. is one of the top employment agencies in the world. The company fills professional positions in areas such as finance and accounting, sales and marketing, office support and engineering. Travis Perkins, also a U.K. firm, markets and distributes products to the U.K. construction and do-it-yourself building trade industries. We believe that both companies are high-quality businesses that demonstrate best-in-class management teams and are trading at significantly lower prices than they were earlier in the year. We took advantage of the share-price drops to own these quality businesses again. We also added Fugro ( Netherlands), a provider of technology, equipment and expertise in natural-resources exploration and development. We eliminated our positions in Matsumotokiyoshi Holdings, Nexans, Ten Network Holdings, Bobst Group and NSD during the quarter.
Geographically, we ended the quarter with our European holdings comprising 56% of the portfolio, and the Pacific Rim holdings representing 41% of the Fund. The remaining 3%, excluding cash, is invested in the Middle East.
We continue to believe the dollar remains undervalued relative to a number of currencies held in the Fund, and we maintained our hedges on these currencies. At the recent quarter-end, approximately 58% of the Fund’s Swiss franc, 70% of the Australian dollar, 54% of the Japanese yen, 66% of the Norwegian krone, 20% of the Swedish krona and 14% of the euro exposures were hedged.
We thank you for your continued confidence and support.
David G. Herro, CFA
Michael L. Manelli, CFA
Average Annual Total Returns (12/31/11)
Expense Ratio as of 9/30/10 was 1.38%
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 12/31/11, Wavin NV represented 1.7%, Mexichem S.A.B. de C.V.0%, Duerr AG 1.8%, gategroup Holding AG 2.0%, Goodman Fielder, Ltd. 2.7%, Michael Page International PLC 1.6%, Travis Perkins PLC 1.4%, Fugro 0.2%, Matsumotokiyoshi Holdings Co., Ltd. 0%, Nexans SA 0%, Ten Network Holdings, Ltd. 0%, Bobst Group AG 0%, and NSD Co., Ltd. 0% of the Oakmark International Small Cap 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. Small Cap Index (Net) is a free float-adjusted market capitalization index that is designed to measure global developed market equity performance, excluding the U.S. The MSCI Small Cap Indices target 40% of the eligible Small Cap universe within each industry group, within each country. MSCI defines the Small Cap universe as all listed securities that have a market capitalization in the range of USD200-1,500 million. 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 stocks of smaller companies often involve more risk than the stocks of larger companies. Stocks of small companies tend to be more volatile and have a smaller public market than stocks of larger companies. Small companies may have a shorter history of operations than larger companies, may not have as great an ability to raise additional capital and may have a less diversified product line, making them more susceptible to market pressure.
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.