What a volatile, interesting year it has been! A year ago, we wrote about weakening global credit markets, contracting liquidity, declining consumer confidence and failing financial giants like Lehman Brothers. Although our current environment remains unclear, the market seems to have returned from what some called the brink of disaster.
We are happy to report that the Oakmark International Fund returned 18% for the year ended September 30, 2009, compared to the MSCI World ex U.S. Index, which returned 3% over the same period. The Fund has returned 50% year to date and 24% for the quarter, compared to the MSCI World ex U.S. Index’s returns of 30% and 19%, respectively. Most importantly, the Fund has returned an average of 11% 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.
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Average Annual Total Returns (9/30/09)
10–year 8.65%
5–year 8.15%
1–year 17.71%
Expense Ratio as of 9/30/08 was 1.10%
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. |
We have written about Signet Jewelers in the past four consecutive Fund commentaries; so let’s make it a fifth. Signet Jewelers was the largest contributor to the Fund’s return over the last year. Although its 12.6% return over this period does not seem outstanding, the holding contributed so much to performance because we took advantage of its significant price weakness and bought additional shares throughout the year. Signet’s management continues to deliver on its targeted $100 million expense-reduction plan in the U.S., which it initiated to help offset declining sales. Signet’s differentiated merchandise and exclusive offerings, like the Russell Simmons line or Jane Seymour’s Open Heart Necklace, have helped Signet consistently outperform its peers. Although these exclusive lines are only slightly more profitable than regular offerings, they enable Signet to stand out relative to peers and increase foot traffic and sales. Signet’s continued strength will likely enable the company to get a first look at future exclusive product lines which may further support their outperformance. Signet returned 26.5% during the most recent quarter, and even though the company’s performance has been volatile over the past year, we maintain our positive, long-term outlook on the stock and believe it will emerge from this downturn in an exceptionally strong competitive position.
The largest detractor from the Fund’s performance over the past year was Lloyds Banking Group. Although Lloyds seemed to be successfully navigating the economic crisis, the company’s balance sheet and financial strength suffered as a result of its purchase of HBOS. We believed that the bad debt and risky assets that came with HBOS would damage Lloyds’ reputation and financial security, and we viewed the purchase as significantly changing our original investment thesis. As such, we sold our investment in Lloyds in May 2009. Another security that detracted from the Fund’s performance for the year was Daiwa Securities Group, 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 reduced our estimate 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 the stock continues to trade at a significant discount to the company’s fair value. For these reasons, Daiwa has remained in our portfolio.
We had numerous changes to the portfolio during the past quarter. In addition to selling our positions in ASML Holding and Kone OYJ, we purchased six new names into the Fund, four of which the Fund has owned before: Heineken Holding, a Dutch-based producer and distributor of beer, wine, spirits and soft drinks; L’Oreal, a French manufacturer, marketer and distributor of personal care products; Reed Elsevier, a U.K.-based professional service provider; and Rolls-Royce, a U.K.-based global power systems provider with significant operations in civil aerospace, military aerospace, marine, and energy sectors. Other additions include Foster’s Group, an Australian-based beer and wine manufacturer of brands such as Penfolds, Beringer, Victoria Bitter, and Carlton; and Unilever plc, a global consumer products manufacturer.
Our geographical composition changed only slightly over the past year. We decreased our European holdings to approximately 77% and our Asia exposure to approximately 16%. We increased our Latin and North America exposure to 7%, and the remainder, excluding cash, is invested in the Middle East.
Due to the weakening dollar during the past quarter, we initiated a 15% hedge of our underlying euro exposure, and at quarter end, approximately 19% of the Fund’s Japanese yen and 28% of the Fund’s Swiss franc exposures were hedged.
The global equity markets have been extremely volatile over the past year. While this volatility has negatively impacted returns of some Fund holdings, it has also presented opportunities for us to purchase high-quality names at extremely distressed prices. We remain confident in our long-term value approach and are thankful to you, our shareholders, for your continued support.
David G. Herro, CFA
Portfolio Manager
oakix@oakmark.com
Robert A. Taylor, CFA
Portfolio Manager
oakix@oakmark.com
As of 9/30/09, Lehman Brothers Holdings Inc. represented 0% of The Oakmark International Fund's total net assets, Signet Jewelers Ltd. 3.0%, Lloyds Banking Group 0%, HBOS plc 0%, Daiwa Securities Group Inc. 3.0%, ASML Holding N.V. 0%, Kone Oyj 0%, Heineken Holding 0.3%, L'Oreal SA 0.8%, Reed Elsevier 1.4%, Rolls-Royce Group PLC 0.3%, Foster's Group, Ltd. 1.0%, and Unilever PLC 0.5%. Portfolio holdings are subject to change without notice and are not intended as recommendations of individual stocks.
The MSCI World ex U.S. 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 ex U.S. Index currently consists of the following 22 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, and the United Kingdom. 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.
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.
