THE OAKMARK
INTERNATIONAL AND
OAKMARK INTERNATIONAL SMALL CAP FUNDS |
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Fellow Shareholders,
For the quarter
ending June 30, 2005, The Oak-mark
International Fund was flat and The Oakmark International Small Cap Fund had a
3% loss, compared to the MSCI World ex U.S. Index17 with a 1% loss.
More importantly, both Funds have performed very strongly since inception with
The Oakmark International Fund achieving 12% and The Oak-mark International
Small Cap Fund achieving 13%. This compares very favorably with the MSCI World
ex U.S. Index.
Whither Europe?
Much negative news has come from Europe lately,
casting doubt on true European economic unification. First—a very important
development that has received little attention here—France and Germany prevented
liberalization of EU Services, which would have allowed service trades to
perform work throughout Europe as long as the
trades were approved in their home country. The French and German trade unions
feared competition from lower priced service providers from Eastern Europe and slammed
the brakes on this important step toward economic unification.
This news seems minor in comparison to the French and Dutch
voters' rejection of the new EU Constitution. This rather opaque document seems
to have been attacked from both the left and the right, and it is effectively
finished.
These setbacks
reflect a great deal of soul-searching in Europe. Old Europe, unable to
adapt to any type of effective free market reforms, is being smothered by low
growth and double-digit unemployment. Little, if any, new capital has been
invested in countries like France, Germany, and Italy because
private investors sense an uncomfortable business environment that is in dire
need of change. Adding fuel to the fire are hostile remarks made towards
"capital" by German and French politicians. Sadly, this situation is preventing
economic vibrancy in places in Europe that have not
undertaken reform. Against this backdrop, the fall of the Euro is very
understandable.
Uncertainty Means
Value
Because the economic environment (both macro and micro) in Western
Europe is dire, it has caused a fire sale of blue chip share prices.
Many firms, though based in Old Europe, have revenues from all over the world,
and they can provide excellent value. This is how we, as bottom up, value-oriented
investors, can profit from patience. Companies like Nestle, Diageo, and Henkel—despite
their struggling "home" continent—represent excellent value because they sell
at low prices, earn good returns, and have worldwide revenues. And, on a positive
note, maybe a new government in Germany
(elections will occur this fall) will brighten real reform prospects in Western
Europe.
