The Oakmark International Fund
Report from David G. Herro and Michael J. Welsh, Portfolio Managers
The Oakmark International FundReport from David G. Herro and Michael J. Welsh, Portfolio Managers |
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THE VALUE OF A $10,000 INVESTMENT IN THE OAKMARK INTERNATIONAL FUND FROM ITS INCEPTION (9/30/92) TO PRESENT (6/30/98) COMPARED TO THE MORGAN STANLEY WORLD EX U.S. INDEX |
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6/30/98 NAV $12.93 |
Total Return |
Average Annual Total Return* Through 6/30/98 |
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The Oakmark International Fund |
-11.9% |
13.1% |
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Morgan Stanley World ex U.S. w/inc.** |
.8% |
12.0% |
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Morgan Stanley EAFE w/inc** |
1.1% |
11.9% |
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Lipper Analytical International Fund Index** |
.8% |
14.1% |
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*Total return includes change in share prices and in each case includes reinvestment of any dividends and capital gain distributions. |
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**Each of the three indexes or averages is an unmanaged group of stocks whose composition is different from the Fund. The Morgan Stanley World ex U.S. Index includes 19 country sub-indexes. The Morgan Stanley EAFE Free Index refers to Europe, Asia and the Far East and includes 18 country sub-indexes. The Lipper International Fund Index includes 30 mutual funds that invest in securities whose primary markets are outside the United States. Past performance is no guarantee of future results. |
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FELLOW SHAREHOLDERS:
After a strong first calendar quarter, your Fund has declined by 11.9% in the second quarter of 1998. This compares unfavorably with a .8% return for both the MSCI World ex-USA and Lipper International indices. Since your Fund's inception in 1992, it has returned 13.1% versus the MSCI World ex-USA of 12.0% and a Lipper International return of 14.1%.
EMERGING MARKETS SUBMERGE
Our weak 2nd calendar quarter performance is due to our investment exposure to the Pacific Rim and Latin America. As an example, Brazil was down 18%, Hong Kong 26% and Korea 38%. Even innocent Australia was down nearly 5% during this period. These adverse movements hit us hard because we have increased our investment in these depressed markets, unlike some of our peers who liquidated their holdings.
Many of you have asked why we have not fled Asia like most of our competition. The answer, in one word, is value. As value investors, we remain convinced that over time, the price of a business converges with the value of a business. History has shown this time and time again. In fact, your Fund went through a similar period from March of 1994 through Spring of 1995. During that time, The International Fund dropped approximately 10%, due mainly to the negative price activity in the emerging markets, Latin America specifically. The Fund behaved similarly to today: we increased our weightings in these regions, focusing on companies which were under priced but financially sound and globally competitive. Our performance from late Spring 1995 to late Spring 1997 was outstanding, allowing the Fund to recapture all its losses and add gains. In calendar year 1996, your Fund, along with The Oakmark International Small Cap Fund was one of the top performing diversified international funds. In fact, The Oakmark International Fund climbed over 50% during that period! See graph below.
OAKMARK INTERNATIONAL: LATIN AMERICAN CRISIS & POST LATIN AMERICAN CRISIS
CUMULATIVE RETURN: $10,000 INVESTMENT
Nevertheless, we believe that performance needs to be viewed in the long-term perspective. Our performance history indicates that the pain we are suffering today should eventually lead to gain in the future. As value investors we feel that we are paid to invest our shareholders' money in those stocks which offer the best long-term value. Today, those stocks are in companies located in places like Korea, New Zealand, Brazil and Hong Kong (see below). History and the laws of economics strongly suggest that these markets and companies will rebound. When this happens, there will be a rush by our peers (similar to the LatAm situation) to get back into these areas, eventually driving prices wildly higher. We hope to be the prime beneficiaries when these companies/markets are back in vogue.
EXAMPLES OF HIGH QUALITY AT A LOW PRICE...
In Brazil, two of our larger holdings are Usiminas and Unibanco. Usiminas is one of the most efficient producers of steel in the world. Brazil is one of the fastest growing markets for steel. The company is very shareholder friendly (the company recently announced another stock buy back and yields over 10%). At the time of this writing, the company was priced at 3.5x earnings and 2.3x cash flow, levels which we think are completely unjustified and subject to huge potential upside revision. Unibanco is one of Brazil's leading banks. It has made money in good times and bad and is extremely well positioned to benefit from the growth of financial services in Brazil. It sells for under one times adjusted book, returns greater than 15% on its equity, and is a leader in low loan losses and in expense containment. Compare this to banks in Europe that sell at 3-5 times, a much slower growing book value.
In Asia, value is everywhere, even in Japan. Recently we have added two names, Canon (cameras, copiers, printers, etc.) and Citizen (watches, watch components). Both companies are extremely competitive globally, trade at rock bottom prices, will benefit from a weaker yen and are becoming attentive to shareholder value. In Hong Kong, we own two groups in the hotel business, Mandarin Oriental and Hong Kong and Shanghai Hotel Group (Peninsula), which are extremely strong franchises selling at a fraction of the price European or American hotel companies are selling.
WE ARE CONFIDENT!
Yes, there has been volatility in foreign markets. Yes, select markets have crashed. And yes, many have panicked and left certain regions altogether. But, we remain invested in these emerging markets and are convinced that our approach will again yield strong results. This confidence stems from the knowledge we have of our companies, their competitive positions as well as their financial soundness. We also know that in the past, price and value have converged. Finally, we would like to thank our fellow shareholders for your continued support.
DAVID HERRO
Portfolio Manager
72242.772@compuserve.com
MICHAEL J. WELSH
Portfolio Manager
102521.2142@compuserve.com
July 7, 1998
THE OAKMARK INTERNATIONAL FUND |
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% of Fund |
% of Fund |
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Europe |
49.5% |
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Pacific Rim |
27.6% |
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Great Britain |
25.8% |
Japan |
8.0% |
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France |
11.3% |
Hong Kong |
7.1% |
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Italy |
3.3% |
Singapore |
3.2% |
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Finland |
2.9% |
Australia |
2.8% |
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Sweden |
2.9% |
New Zealand |
2.8% |
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Netherlands |
2.1% |
Korea |
2.4% |
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Switzerland |
1.2% |
Malaysia |
1.2% |
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Thailand |
0.1% |
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Latin America |
18.1% |
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Brazil |
9.8% |
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Argentina |
4.5% |
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Panama |
3.8% |
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THE OAKMARK INTERNATIONAL FUND |
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Description |
Shares Held |
Market Value |
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Common Stocks—95.2% |
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Consumer Non-Durables—5.4% |
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Fila Holding S.p.A. (Italy), (b) |
Athletic Footwear Manufacturing |
2,454,500 |
$36,817,500 |
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Citizen Watch Co. (Japan) |
Watch Manufacturer and Retailer |
2,706,000 |
22,408,114 |
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BYC Co. Ltd. (Korea) |
Textile Manufacturer |
33,540 |
916,060 |
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Yue Yuen Industrial Holdings (Hong Kong) |
Athletic Footwear Manufacturing |
360,600 |
644,593 |
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60,786,267 |
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Food & Beverage—11.5% |
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Quilmes Industrial SA (Argentina), (b) |
Brewer |
5,182,800 |
$50,532,300 |
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Tate & Lyle PLC (Great Britain) |
Sugar Producer & Distributor |
4,538,921 |
36,074,308 |
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Pernod Ricard (France) |
Manufactures Wines, Spirits, & Fruit Juices |
510,780 |
35,399,841 |
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Lotte Chilsung Beverage Company (Korea) |
Manufacturer of Soft Drinks, Juices, & SportDrinks |
123,000 |
3,672,979 |
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Lotte Confectionery Company (Korea) |
Confection Manufacturer |
65,270 |
3,327,677 |
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129,007,105 |
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Household Products—2.0% |
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Amway Japan Limited (Japan) |
Marketing of Household Products |
2,030,900 |
$21,591,256 |
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Amway Japan Limited (Japan), (b) |
Marketing of Household Products |
152,400 |
828,675 |
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22,419,931 |
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Retail—1.2% |
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Giordano International Limited (Hong Kong) |
East Asian Clothing Retailer & Manufacturer |
67,299,000 |
$13,636,994 |
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York-Benimaru Co., Ltd. (Japan) |
Supermarket Chain |
15,200 |
286,917 |
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13,923,911 |
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Other Consumer Goods & Services—6.6% |
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Canon, Inc. (Japan) |
Office and Video Equipment |
1,007,000 |
$22,940,984 |
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Sankyo Company, Ltd. (Japan) |
Pachinko Machine Manufacturer |
1,234,800 |
20,093,295 |
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Mandarin Oriental International Limited (Singapore) |
Hotel Management |
30,539,000 |
17,407,230 |
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The Hongkong and Shanghai Hotels, Limited (Hong Kong) |
Hotel Operator |
28,133,000 |
14,070,131 |
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74,511,640 |
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Banks—9.0% |
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Banco Latinoamericano de Exportaciones, S.A., Class E (Panama), (b) |
Multinational Bank |
1,394,100 |
$42,868,575 |
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Uniao de Bancos Brasileiros S.A. (Brazil), (c) |
Major Brazilian Bank |
1,128,900 |
33,302,550 |
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Uniao de Bancos Brasileiros S.A. - units (Brazil) |
Major Brazilian Bank |
286,362,500 |
16,935,883 |
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United Overseas Bank Ltd., Foreign Shares (Singapore) |
Commercial Banking |
2,600,000 |
8,100,890 |
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101,207,898 |
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Other Financial—3.7% |
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Sedgwick Group plc (Great Britain) |
Insurance Broker, Financial Services |
19,285,000 |
$41,216,209 |
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Marketing Services—9.1% |
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Saatchi & Saatchi plc (Great Britain), (a) |
Advertising Services |
20,007,578 |
$55,455,043 |
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Cordiant Communications Group plc (Great Britain) |
Advertising Services |
21,497,578 |
47,560,219 |
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103,015,262 |
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Broadcasting & Publishing—2.5% |
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Europe 1 Communication (France) |
Television Production |
74,020 |
$16,895,909 |
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Singapore Press Holdings Ltd. (Singapore) |
Newspaper Publisher |
1,530,000 |
10,260,534 |
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Woongjin Publishing Company (Korea) |
Publisher |
148,410 |
1,183,605 |
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28,340,048 |
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Telecommunications—3.5% |
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Telecomunicacoes Brasileiras S.A. (Brazil) |
Telecommunications |
290,100,000 |
$23,076,564 |
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Technology Resources Industries Berhad (Malaysia) |
Telecommunications |
19,707,000 |
13,532,908 |
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SK Telecom Co. Ltd. (Korea) |
Telecommunications |
10,395 |
3,240,393 |
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39,849,865 |
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Transportation—2.9% |
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Volvo AB, Class B (Sweden) |
Automobiles and Trucks |
1,082,600 |
$32,236,397 |
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Transportation Services—1.2% |
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Danzas Holding AG (Switzerland), (a) |
Freight Distributor |
51,950 |
$13,996,962 |
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Aerospace—4.9% |
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Rolls-Royce plc (Great Britain) |
Jet Engines |
9,068,552 |
$37,589,421 |
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Hong Kong Aircraft Engineering Company Ltd. (Hong Kong) |
Commercial Aircraft Overhaul & Maintenance |
11,091,700 |
17,178,679 |
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54,768,100 |
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Airlines—1.4% |
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Qantas Airways Limited (Australia) |
International Airline |
10,670,000 |
$16,094,863 |
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Oil & Natural Gas—0.6% |
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ISIS (France), (a) |
Oil Services |
57,000 |
$6,976,860 |
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Chemicals—5.1% |
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Fernz Corporation Limited (New Zealand) |
Agricultural & Industrial Chemical Producer |
14,132,500 |
$31,621,546 |
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European Vinyls Corporation International N.V. (Netherlands) |
PVC Manufacturer |
1,367,785 |
23,887,034 |
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Nagase & Co., Ltd. (Japan) |
Chemical Wholesaler |
532,000 |
1,946,857 |
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57,455,437 |
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Components—2.7% |
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Varitronix International Limited (Hong Kong) |
Liquid Crystal Displays |
15,374,000 |
$30,755,937 |
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Machinery & Metal Processing—1.6% |
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Outokumpu Oyj (Finland) |
Metal Producer |
731,800 |
$9,346,019 |
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The Rauma Group (Finland) |
Pulp Machinery |
429,500 |
8,815,601 |
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18,161,620 |
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Mining and Building Materials—2.0% |
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Pioneer International Limited (Australia) |
Concrete Products, Aggregates |
6,585,176 |
$15,737,825 |
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Keumkang Ltd. (Korea) |
Building Materials |
560,460 |
4,816,772 |
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Siam City Cement Public Company Limited, Foreign Shares (Thailand) |
Cement Producer |
2,082,349 |
1,480,343 |
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Asia Cement Manufacturing Company Ltd. (Korea) |
Cement Producer |
40,350 |
$ 191,023 |
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22,225,963 |
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Other Industrial Goods & Services—13.5% |
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Tomkins plc (Great Britain) |
Industrial Management Company |
10,616,228 |
$ 57,742,170 |
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Chargeurs SA (France) |
Wool Production Holding Company |
602,387 |
49,769,639 |
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Charter plc (Great Britain) |
Welding Products Manufacturer |
1,469,100 |
15,392,300 |
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Kone Corporation, Class B (Finland) |
Elevators |
103,870 |
14,592,076 |
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Groupe Legris Industries SA (France) |
European Crane Manufacturer |
217,815 |
10,195,949 |
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Dongah Tire Industry Company (Korea), (a) |
Tire Manufacturer |
156,670 |
4,221,988 |
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151,914,122 |
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Steel—3.3% |
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USIMINAS (Brazil), (a) |
Steel Production |
7,251,370 |
$ 36,991,987 |
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Pohang Iron & Steel Company Ltd. (Korea) |
Manufactures Steel Products |
14,000 |
395,630 |
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37,387,617 |
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Diversified Conglomerates—1.5% |
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Compagnie Generale des Eaux (France) |
Industrial Services |
38,000 |
$ 8,114,528 |
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Tae Young Corporation (Korea) |
Heavy Construction |
633,000 |
5,347,997 |
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First Pacific Company Ltd. (Hong Kong) |
Diversified Operations |
6,897,000 |
2,893,037 |
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Lamex Holdings Ltd. (Hong Kong) |
Office Furniture Supplier |
14,040,000 |
543,624 |
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16,899,186 |
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Total Common Stocks (Cost: $1,248,179,123) |
1,073,151,200 |
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Description |
Principal Value |
Market Value |
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Short Term Investments—4.8% |
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Commercial Paper—3.5% |
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American Express Credit Corp., 5.51% due 7/6/1998–7/7/1998 |
$10,000,000 |
$10,000,000 |
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Ford Motor Credit Corp., 5.57% due 7/9/1998–7/10/1998 |
10,000,000 |
10,000,000 |
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General Electric Capital Corporation, 5.57%–6.00% due 7/1/1998–7/8/1998 |
20,000,000 |
20,000,000 |
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Total Commercial Paper (Cost: $40,000,000) |
40,000,000 |
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Repurchase Agreements—1.3% |
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State Street Repurchase Agreement, 5.65% due 7/1/1998 |
$14,241,000 |
$14,241,000 |
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Total Repurchase Agreements (Cost: $14,241,000) |
14,241,000 |
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Total Short Term Investments (Cost: $54,241,000) |
54,241,000 |
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Total Investments (Cost $1,302,420,123)—100.0% |
$1,127,392,200 |
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Foreign Currencies (Proceeds $2,753,194)—0.2% |
2,764,594 |
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Other Liabilities In Excess Of Other Assets—(0.2)% (d) |
(2,783,886) |
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Total Net Assets—100% |
$1,127,372,908 |
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(a) Non-income producing security.
(b) Represents an American Depositary Receipt.
(c) Represents a Global Depositary Receipt.
(d) Includes portfolio and transaction hedges.
