The global equity markets have been extremely volatile during the past year. The Oakmark Global Select Fund returned 22% for the year ended September 30, 2009, compared to the MSCI World Index, which was down 2% for the same period. Year to date and quarter to date, the Fund has returned 46% and 21%, respectively, comparing favorably to the MSCI World Index which returned 25% and 17%, respectively. Since inception, the Fund has returned an average of 2% per year, outperforming the MSCI World Index, which has averaged -4% per year over the same period. We achieved these results by remaining disciplined about our value investment approach.
As we have mentioned before, stock prices have been much more volatile than business values over the past year. An example of this phenomenon is one of our holdings, U.S.-based Liberty Entertainment, which has |
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Average Annual Total Returns (9/30/09)
Since Inception (10/06) 1.71%
1–year 22.24%
Expense Ratio as of 9/30/08 was 1.35%
The performance data quoted represents past performance. The above performance information for the Fund does not reflect the imposition of a 2% redemption fee on shares redeemed within 90 days. If reflected, the fee would reduce the performance quoted. Past performance does not guarantee future results. The investment return and principal value will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. Average annual total return measures annualized change, while total return measures aggregate change. To obtain most recent month-end performance data, view it here.
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returned 183% since our initial purchase in November 2008. This superior performance is due partly to the fact that we purchased the stock near its all-time low price. When we initiated our position, the stock was trading at about half the value of its equity investment in DirecTV Group. Even though the underlying business remained unchanged, the discount disappeared when DirecTV announced their intention to merge with Liberty Entertainment.
Another top contributor to the Fund for the year was Swiss-based Compagnie Financiere Richemont (Richemont), a luxury goods manufacturer and retailer of brands such as Cartier and Montblanc, which returned 86.8%. Similar to Liberty Entertainment, Richemont’s outstanding performance in the Fund is partly because we purchased the stock in February ’09, near the bottom of the market. In addition, Richemont has a strong collection of brands, and it has significantly outperformed its peers. Their sizeable presence in emerging markets and their limited exposure to the U.S. market helped contribute to their outperformance relative to peers. Because the company’s balance sheet contains nearly one billion euros in net cash, we believe that our investment carries little risk—no matter how long the downturn lasts. We maintain our belief that Richemont is very well positioned, owns one of the premier portfolios of luxury brands, and has a world-class management team.
The biggest detractor from the Fund’s performance for the year was Daiwa Securities Group, a financial services company based in Japan, which was down 25%. Daiwa has been hurt by numerous factors including decreased equity and capital market activity given the global financial crisis. Additionally, shares reacted to news that Daiwa had ended its investment banking joint venture with Sumitomo Mitsui Financial Group (SMFG). Daiwa raised a significant amount of new equity to finance its purchase of SMFG’s stake in the joint venture. Although we decreased our assessment of Daiwa’s intrinsic value after the transaction, the share price dropped well below our new estimate of the company’s value. Finally, Daiwa’s balance sheet remains well capitalized during this uncertain time and should more than adequately cover any new regulatory demands for improved balance sheet strength. We maintain our belief that Daiwa is a powerful brand, and that the stock continues to trade at a significant discount to the company’s fair value. For these reasons, Daiwa has remained in our portfolio.
Capital One Financial Corp.’s stock price rebounded in the third quarter, increasing 63%. However, its one-year performance of -28% significantly detracted from the Fund’s performance. The stock suffered due to high unemployment, global economic uncertainty, and regulatory reform. We expect that an economic recovery, most notably an improvement in unemployment figures, would reduce credit provisioning and would cause earnings to improve rapidly.
We made minor changes to the portfolio this quarter. We sold our investment in Credit Suisse Group and used the proceeds to purchase another international financial services company, UBS. While our investment thesis for Credit Suisse had not changed, UBS was trading at a larger discount to our estimate of fair value, and given its similar business profile, we decided to swap holdings.
We continue to hedge some of the Fund’s currency exposure. Due to a further weakening in the dollar during the past quarter, we initiated a 15% hedge of our underlying euro exposure, and at quarter end, approximately 21% of the Fund’s Japanese yen and 28% of the Fund’s Swiss franc exposures were hedged.
Short-term market fluctuations have enabled us to build a portfolio with high-quality companies trading at significant discounts to their fair value. We will continue to focus on our long-term value approach. We thank you, our shareholders, for your continued confidence and support during what has been an unprecedented year in the global markets.
William C. Nygren, CFA
Portfolio Manager
oakwx@oakmark.com
David G. Herro, CFA
Portfolio Manager
oakwx@oakmark.com
As of 9/30/09, Liberty Media Corp. - Entertainment represented 6.3% of The Oakmark Global Select Fund’s total net assets, Compagnie Financiere Richemont SA 7.9%, Daiwa Securities Group Inc. 4.7%, Sumitomo Mitsui Financial Group 0%, Capital One Financial Corp. 3.3%, Credit Suisse Group 0%, and UBS AG 6.2%. Portfolio holdings are subject to change without notice and are not intended as recommendations of individual stocks.
The MSCI World Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed markets. The MSCI World Index consists of the following 23 developed market country indices: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, the United Kingdom, and the United States. This index is unmanaged and investors cannot invest directly in this index.
Investing in value stocks presents the risk that value stocks may fall out of favor with investors and underperform growth stocks during given periods.
Because The Oakmark Global Select Fund is non-diversified, the performance of each holding will have a greater impact on the Fund's total return, and may make the Fund's returns more volatile than a more diversified fund.
Investing in foreign securities presents risks that in some way 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.
