The Oakmark International Small Cap Fund returned 27% for the quarter ended September 30, 2009, compared to the MSCI World ex U.S. Small Cap Index, which rose 23%, and the MSCI World ex U.S. Index, which increased 19%. For the fiscal year ended September 30, the Fund returned 16% while the MSCI World ex U.S. Small Cap and the MSCI World ex U.S. Index returned 15% and 3%, respectively. Since inception, your Fund has earned an annualized return of 11%, compared to the MSCI World ex U.S. Index, which has returned 5% for the same period.
Global markets continued to recover, and consequently the Fund’s U.K. holdings performed well in both the quarter and one-year time periods. In particular, LSL Property Services, a leading provider of residential appraisal and brokerage services, was the largest contributor to Fund performance for both periods, returning 61% for the quarter and 185% over the past twelve months.
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Average Annual Total Returns (9/30/09)
10–year 10.11%
5–year 8.10%
1–year 16.28%
Expense Ratio as of 9/30/08 was 1.41%
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. |
You may recall that in our March 31 report we discussed our reasons for owning LSL. We believed LSL’s strong balance sheet and business model were superior to its peers’ and that it was well positioned to win market share when the U.K. housing market recovered. Indeed, LSL reported very strong second quarter results due to its gains in market share, cost cutting actions and new business initiatives. We believe that LSL will continue to benefit from a further rebound in the U.K. real estate market.
Rheinmetall, a German defense company and automotive parts supplier, was another strong performer during the past year and most recent quarter. During Harris Associates’ 33-year history, we often have discovered value in diversified companies in which one division’s poor results obscure both the success and the value of another, and Rheinmetall is such a case. The automotive industry’s problems had caused Rheinmetall’s share price to fall considerably from its mid-2006 peak. While the automotive parts division remains substantial, we estimate that the automotive component comprises only 20% of the company’s total enterprise value. In contrast, the defense division has tripled its profitability over the past five years because of operational enhancements, an improved business mix and lucrative new contracts. All of these factors have boosted the company’s performance over the past year. Given the current negative investment environment for anything related to automobiles, Rheinmetall’s shares sell for less than their accounting book value. We estimate that the share price reflects only the defense division’s business value, which means we are able to own the automotive parts business for less than zero.
BBA Aviation operates Signature, the dominant network of Fixed Based Operations (FBOs) for the re-fueling of noncommercial aircrafts both in the U.S. and in international markets. This industry has very limited competition and has benefitted from continually increasing usage. The company generates sustainable profit growth and has little capital requirements. The current management team is led by CEO Simon Price, who joined the company in '07. Since his arrival, management cleaned up BBA’s outdated portfolio of businesses and has focused on creating value for shareholders. Short-term concerns over the cyclical nature of general aviation traffic gave us a unique opportunity to build up our position in this well-run, high-quality business at attractive prices. As macro-economic fears started to dissipate, markets have recognized the value of these unique assets, as evidenced by the stock bouncing back from its December 2008 low and returning 37% in the third quarter and 39% over the fiscal year 2009.
The largest detractor from the Fund’s performance over the past year was Carnegie AB , the Swiss investment banking and asset management group. As we discussed in a previous report, Carnegie stopped trading on November 10 after Sweden’s Financial Services Authority revoked Carnegie’s banking licenses and, in coordination with the National Debt Office, seized control of its operating assets. Another large detractor was Japanese brokerage firm Ichiyoshi Securities. Ichiyoshi’s share price has been weakened because of the company’s direct ties to the volatile Japanese market. Further, the Japanese market performed poorly over the past quarter, and this hurt the share price.
We added numerous securities from across the globe to the Fund this quarter, including Mainfreight, a New Zealand freight forwarding services firm and a former Fund holding. From France, we added Bureau Veritas, a leading inspection and verification firm. Other additions include Nifco, a Japanese manufacturer of synthetic resinous fasteners and plastic components for home electronics appliances and automobiles; ElringKlinger, a German manufacturer of original equipment and parts for automobiles; and Coca-Cola Femsa, the largest Coke bottler in Mexico. We sold our holdings in Chargeurs and Raymarine during this past quarter.
These changes to the portfolio during the quarter shifted the Fund’s geographic weighting. European holdings decreased to approximately 71%. The Pacific Rim holdings ended the quarter at 25%, while North American and Latin American holdings comprised 2% each.
We continue to hedge some of the Fund’s currency exposure. At the recent quarter end, approximately 30% of the Fund’s Swiss franc, 14% of the euro and 18% of the Japanese yen exposures were hedged.
During this year of volatility we thank shareholders for your continued confidence and support. We remain committed to finding attractive, undervalued foreign companies with management teams that are dedicated to building shareholder value.
David G. Herro, CFA
Portfolio Manager
oakex@oakmark.com
As of 9/30/09, LSL Property Services PLC represented 3.2% of The Oakmark International Small Cap Fund's total net assets, Rheinmetall AG 3.0%, BBA Aviation PLC 2.9%, D. Carnegie & Co AB 0%, Ichiyoshi Securities Co., Ltd. 1.7%, Mainfreight Limited 0.5%, Bureau Veritas SA 0.8%, Nifco Inc. 0.3%, ElringKlinger AG 0.2%, Coca-Cola Femsa, SAB de CV 0.4%, Grupo Aeroportuario del Pacifico SA de CV 0%, Chargeurs SA 0%, and Raymarine PLC 0%. 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.
The MSCI World ex U.S. Small Cap Index is a free float-adjusted market capitalization index that is designed to measure global developed market equity performance, excluding the U.S. The MSCI World ex U.S. Small Cap Index currently consists of 22 developed market country indices. 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 index is unmanaged and investors cannot actually make investments 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.
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 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.
