Oakmark Global Select Fund: Fourth Quarter 2018
December 31, 2018
The Oakmark Global Select Fund declined 18.1% for the quarter ended December 31, 2018, underperforming the MSCI World Index’s 13.4% decline. For the calendar year, the Fund declined 21.2%, underperforming the MSCI World Index’s decline of 8.7%. However, the Fund has returned an average of 6.3% per year since its inception in October 2006, outperforming the MSCI World Index’s annualized gain of 4.7% over the same period.
Willis Towers Watson, headquartered in the U.K. and the third-largest insurance broker in the world, was the top contributor for the quarter. The company delivered strong third-quarter earnings results and its organic growth reached 5%. Management now believes full-year organic growth will be closer to 4% after originally projecting a range of 3-4%. In addition, Willis lowered is fiscal-year tax rate guidance and increased earnings per share estimates for the full-year period. In our view, the company is also compelling because of its presence in the insurance brokerage industry, which is an attractive market because it does not bear underwriting risk, requires little capital and generates significant free cash flow. As a result, we continue to believe that Willis is significantly undervalued relative to its normalized earnings power.
Apache, a U.S.-based oil and gas exploration and production company, was the largest detractor for the quarter. Despite exceeding third-quarter production and EBITDA estimates, the company’s share price declined due to falling energy and oil prices. Although commodity prices are intrinsically prone to short-term volatility, the normalized earnings power of individual companies is much more stable. We believe that the decline in Apache’s stock price is purely the result of cyclical factors and will not affect the company’s long-term progress and business value. Management reiterated 2019 guidance and at current price levels plans to return capital to shareholders via stock repurchases. Our investment thesis for Apache remains intact as we believe it is trading at a significant discount to our estimate of intrinsic value.
As of December 31, 43.6% of the Fund’s holdings were invested in U.S.-domiciled companies, while approximately 53.6% were invested in European and U.K. equities and 2.9% were invested in Asian equities.
We continue to find the Swiss franc overvalued versus the U.S. dollar. As a result, we defensively hedged a portion of the Fund’s exposure. Approximately 27% of our Swiss franc exposure was hedged at quarter end.
While 2018 was disappointing in both absolute and relative terms, we like to remind our shareholders during these volatile times that we are long-term investors who remain committed to our investment philosophy. While our performance may lag in the short term, we continue to focus on providing positive, long-term results. We wish you a happy and prosperous 2019!
William C. Nygren, CFA
David G. Herro, CFA
Anthony P. Coniaris, CFA
Eric Liu, CFA
Oakmark Global Select Fund - Investor Class
Average Annual Total Returns (12/31/18)
Since Inception (10/02/06) 6.26%
Gross Expense Ratio as of 09/30/17 was 1.19%
Net Expense Ratio as of 09/30/17 was 1.12%
Past performance is no guarantee of future results. The performance data quoted represents past performance. Current performance may be lower or higher than the performance data quoted. The investment return and principal value vary so that an investor’s shares when redeemed may be worth more or less than the original cost. To obtain the most recent month-end performance data, view it here.
The securities mentioned above comprise the following percentages of the Oakmark Global Select Fund’s total net assets as of 12/31/18: Apache 3.2% and Willis Towers Watson 2.8%. Portfolio holdings are subject to change without notice and are not intended as recommendations of individual stocks.
Access the full list of holdings for the Oakmark Global Select Fund as of the most recent quarter-end.
The net expense ratio reflects a contractual advisory fee waiver agreement through January 28, 2019.
EBITDA refers to Earnings Before the deduction of payments for Interest, Taxes, Depreciation and Amortization which is a measure of operating income.
The MSCI World Index (Net) is a free float-adjusted, market capitalization-weighted index that is designed to measure the global equity market performance of developed markets. The index covers approximately 85% of the free float-adjusted market capitalization in each country. This benchmark calculates reinvested dividends net of withholding taxes. This index is unmanaged and investors cannot invest directly in this index.
Because the Oakmark Global Select Fund is non-diversified, the performance of each holding will have a greater impact on the Fund's total return, and may make the Fund's returns more volatile than a more diversified fund.
The percentages of hedge exposure for each foreign currency are calculated by dividing the market value of all same-currency forward contracts by the market value of the underlying equity exposure to that currency.
Investing in foreign securities presents risks that in some ways 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 Fund’s investments and investment strategy (including current investment themes, the portfolio managers' research and investment process, and portfolio characteristics) represents the Fund’s investments and the views of the portfolio managers and Harris Associates L.P., the Fund’s investment adviser, at the time of this letter, and are subject to change without notice.
All information provided is as of 12/31/2018 unless otherwise specified.