The Oakmark International Small Cap Fund
Report from David G. Herro and Michael J. Welsh, Portfolio Managers
The Oakmark International Small Cap 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 SMALL CAP FUND FROM ITS INCEPTION (11/1/95) TO PRESENT (12/31/98) AS COMPARED TO THE MORGAN STANLEY WORLD EX U.S. INDEX |
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12/31/98 NAV $8.62 |
Total Return |
Average Annual |
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The Oakmark International Small Cap Fund |
28.2% |
1.6% |
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Morgan Stanley World ex U.S. w/inc.** |
20.5% |
10.9% |
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Lipper Analytical International Small Cap Fund Average** |
12.4% |
9.7% |
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Micropal International Small Co. Fund Index** |
13.4% |
9.4% |
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*Total return includes change in share prices and in each case includes reinvestment of any dividends and capital gain distributions. **Each of the three indexes or averages is an unmanaged group of indexes or funds whose composition is different from the Fund. The Morgan Stanley World ex U.S. Index includes 19 country sub-indexes. The Lipper International Small Cap Fund Average includes 69 mutual funds that invest in securities whose primary markets are outside the United States. The Micropal Int'l Small Co. Fund Index sector average is an unweighted index comprised of all funds within the international small company fund sector. Past performance is no guarantee of future results. |
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FELLOW SHAREHOLDERS,
Your Fund achieved a very strong return of 28.2% in the final quarter of 1998. This compares quite favorably with the Lipper International Small Cap Average at 12.4% and with the Micropal International Small Cap index at 13.4%. Following our tradition, this letter will discuss the top winners and losers of 1998. For calendar year 1998, the Fund's total percentage gain for the calendar year was 9.2%. According to Lipper Analytical, your fund was the top performing international small cap fund for the 4th quarter of 1998. Returns were driven by a recovery in Asia-Pacific share prices. Lead by South Korea, this area appears to be poised for recovery after a 15-month period of extremely weak equity market conditions. Your Fund has approximately 60% of its assets in Asia Pacific and should benefit from a continued resurgence.
A BIT ABOUT SOUTH KOREA
Throughout the crisis in Asia, your Fund tried to maintain its weightings in South Korea. While stock prices dropped, we increased share positions while adding one new name. We pursued this strategy because we felt strongly that these companies were high quality, extremely over-sold and, therefore, represented excellent value. Korean brewer, Hite, is a good example of this excellent value. We describe this company below in greater detail. In December 1997, pundits declared Korea unfixable and called for a 5-year recovery. However, newly elected president D.J. Kim aggressively pursued reform and brought about dramatic change. In 1998, the Korean market achieved a return of greater then 100% in U.S. dollar terms. We would call it the return paid to independent thinkers.
FIRST THE WINNERS...
Enix, currently the Fund's fourth largest holding, is a Japanese maker of video games software. It is an extremely well-run, shareholder-focused company (rare in Japan) which contributed nearly 2% of total return. As it continues to develop new hits and its valuation remains at a reasonable level, we believe that Enix will deliver positive returns.
Somerfield Plc is a United Kingdom grocer. When we first purchased the shares it was on everyone's sell list and had woefully underperformed its sector and the market. One of our analysts, Dan O'Keefe, recognized the low valuations. He met with the new management, correctly assessed their ability to turn around the company and create a new business plan. After Dan's assessment of the company, we decided to invest. The stock more then doubled in a year's time and actually hit our sell target. Though we no longer own the stock, it contributed over 1.5% of total return in 1998.
Hite Brewing is the largest South Korean brewing company. Its shares were demolished, along with the rest of the Korean stock market during the crisis period. However, we saw the company's strong market position, ability to generate free cashflow, and relatively low indebtedness as reasons to buy more company shares during the crisis. The stock returned over 90% in the 4th quarter of 1998 and contributed close to 1.4% of total return.
Matthew Clark Plc was another company unloved by the "street". Matthew Clark is a UK-based manufacturer of alcoholic cider and boxed wine and the largest distributor of spirits in England. We no longer own Matthew Clark shares because it was taken over, which allowed us to profit nicely from our investment. It provided 1.3% of total return and demonstrates that if the equity markets do not correctly reflect the value of a business the "trade" will.
AND NOW, THE LOSERS...
Royal Doulton Plc is a UK based maker of tableware and gifts. Its share price was hit hard as it came up with disappointing earnings and announced further restructuring. Originally a spin-off of UK "blue-chip" Pearson Plc, it had difficulty operating as an independent company. As the share price tumbled, we looked at it and determined that we liked the new management, the brand franchise and the valuation. Because we were a bit early, it cost the Fund around 2.1% in total return in 1998. However, we think this stock continues to have a HUGE upside and are extremely happy with our existing position. We wouldn't be at all surprised if it ends up on the winner list for '99.
EVC International is a European based PVC company. Though a commodity producer, management seemed to be able to navigate the tough waters by continual cost cutting. Unfortunately, the market for PVC never quite recovered and the company has been unable to stay ahead of all of the pricing pressures with cost cuts. We have sold a majority of the stock and it is now a minimal position of the Fund. In 1998, it cost the Fund just 2% of return.
OPTIMISTIC FOR '99
Based on the quality and value of investments in your Fund, along with a strong 4th quarter, we are extremely optimistic for 1999 and future years in International markets. We thank you, our shareholders, for your continued support and patience while we pledge to work hard to achieve better than average returns going forward.
DAVID HERRO
Portfolio Manager
72242.772@compuserve.com
MICHAEL J. WELSH
Portfolio Manager
102521.2142@compuserve.com
THE OAKMARK INTERNATIONAL SMALL CAP FUND |
THE OAKMARK INTERNATIONAL SMALL CAP FUND |
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Description |
Shares Held |
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Common Stocks—97.7% |
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Consumer Non-Durables—6.5% |
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Royal Doulton plc (Great Britain) |
Tableware and Giftware |
1,780,000 |
$2,336,269 |
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TAG Heuer International SA (Switzerland), (b) |
Watch Manufacturer |
154,700 |
1,102,237 |
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Designer Textiles (NZ) Limited (New Zealand) |
Knit Fabrics |
2,960,000 |
700,905 |
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Dickson Concepts International Limited (Hong Kong) |
Jewlery Wholesaler and Retailer |
20,000 |
15,489 |
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4,154,900 |
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Food & Beverage—6.2% |
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Alaska Milk Corporation (Philippines), (a) |
Milk Producer |
39,327,000 |
$2,305,027 |
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Hite Brewery Company (Korea) |
Brewer |
165,010 |
1,673,418 |
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3,978,445 |
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Retail—15.3% |
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Carpetright plc (Great Britain) |
Carpet Retailer |
720,000 |
$2,679,515 |
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Daimon (Japan) |
Liquor Retailer & Distributor |
435,200 |
1,770,827 |
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D.F.S. Furniture Company plc (Great Britain) |
Furniture Retailer & Manufacturer |
470,000 |
1,471,922 |
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House Of Fraser Plc (Great Britain) |
Department Store |
1,440,000 |
1,244,061 |
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Dylex Limited (Canada) |
Specialty Retail Operator |
275,000 |
827,609 |
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Giordano International Limited (Hong Kong) |
East Asian Clothing Retailer & Manufacturer |
4,312,000 |
807,011 |
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Paris Miki Inc. (Japan) |
Optical Supplies Retailer |
27,000 |
620,964 |
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Jusco Stores (Hong Kong) Co., Limited (Hong Kong) |
Department Stores |
4,802,000 |
402,873 |
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9,824,782 |
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Other Consumer Goods & Services—7.1% |
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CeWe Color Holding AG (Germany) |
Photo Equipment & Supplies |
10,150 |
$1,796,622 |
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Sanford Limited (New Zealand) |
Fisheries |
919,840 |
1,742,488 |
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CDL Hotels International Limited (Hong Kong) |
Hotel Operator |
4,096,691 |
1,052,250 |
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4,591,360 |
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Banks—0.6% |
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Shinhan Bank (Korea) |
Commercial Bank |
52,540 |
$401,802 |
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Other Financial—11.1% |
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JCG Holdings Ltd. (Hong Kong) |
Investment Holding Company |
9,461,000 |
$3,052,881 |
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Ichiyoshi Securities (Japan) |
Stock Broker |
1,607,000 |
2,146,457 |
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Lambert Fenchurch Group plc (Great Britain) |
Insurance Broker |
1,451,000 |
1,928,560 |
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7,127,898 |
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Computer Software—7.1% |
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Enix Corporation (Japan) |
Entertainment Software |
93,100 |
$3,038,824 |
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Koei (Japan) |
Computer Software |
211,000 |
1,511,809 |
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4,550,633 |
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Computer Systems—4.9% |
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Solution 6 Holdings Limited (Australia), (a) |
Systems Design & Consulting |
4,150,893 |
$3,179,494 |
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Marketing Services—4.0% |
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Cordiant Communications Group plc (Great Britain) |
Advertising Services |
1,428,500 |
$2,539,450 |
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Broadcasting & Publishing—6.4% |
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Matichon Public Company Limited, Foreign Shares (Thailand) |
Newspaper Publisher |
2,038,900 |
$2,524,085 |
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Woongjin Publishing Company (Korea) |
Publisher |
102,796 |
1,589,365 |
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Matichon Public Company Limited (Thailand) |
Newspaper Publisher |
600 |
743 |
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4,114,193 |
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Telecommunications—0.7% |
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SK Telecom Co. Ltd. (Korea) |
Telecommunications |
803 |
$449,226 |
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Chemicals—0.6% |
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European Vinyls Corporation International N.V. (Netherlands) |
PVC Manufacturer |
49,125 |
$389,611 |
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Machinery & Metal Processing—1.5% |
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Denyo Co., Ltd. (Japan) |
Welding Machines & Power Generators |
184,000 |
$992,835 |
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Mining and Building Materials—3.0% |
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Parbury Limited (Australia) |
Building Products |
11,369,712 |
$1,950,805 |
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Other Industrial Goods & Services—10.8% |
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Elevadores Atlas, SA (Brazil) |
Elevator Manufacturer |
253,200 |
$2,724,158 |
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Dongah Tire Industry Company (Korea), (a) |
Tire Manufacturer |
43,900 |
1,755,270 |
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Yip's Hang Cheung Ltd. (Hong Kong) |
Paint & Solvent Manufacturer |
28,502,000 |
1,250,797 |
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Nishio Rent All Company (Japan) |
Construction Equipment Rental |
147,700 |
999,474 |
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Polifarb Cieszyn- Wroclaw S.A. (Poland) |
Paint & Varnish Manufacturer |
100,000 |
237,892 |
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6,967,591 |
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Production Equipment—2.2% |
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NSC Groupe (France) |
Manufacturer of Textile Equipment |
11,532 |
$1,423,194 |
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Steel—4.3% |
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Steel & Tube Holdings Ltd. (New Zealand) |
Produces and Distributes Steel |
2,944,400 |
$2,788,845 |
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Diversified Conglomerates—5.4% |
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Haw Par Corporation Ltd. (Singapore) |
Healthcare and Leisure Products |
3,113,000 |
$3,488,219 |
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Total Common Stocks (Cost: $75,745,144) |
62,913,283 |
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Description |
Principal |
Market Value |
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Short Term Investments—2.2% |
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Repurchase Agreements—2.2% |
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State Street Repurchase Agreement, 4.50% due 1/4/1999 |
$1,415,000 |
$1,415,000 |
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Total Repurchase Agreements (Cost: $1,415,000) |
1,415,000 |
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Total Short Term Investments (Cost: $1,415,000) |
1,415,000 |
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Total Investments (Cost $77,160,144)—99.9% |
$64,328,283 |
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Foreign Currencies (Proceeds $75,720)—0.1% |
75,412 |
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Other Assets In Excess Of Other Liabilities—0.0% (c) |
19,111 |
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Total Net Assets—100% |
$64,422,806 |
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(a) Non-income producing security.
(b) Represents an American Depositary Receipt.
(c) Includes portfolio and transaction hedges.
