Oakmark Global Select Fund: Third Quarter 2017
September 30, 2017
The Oakmark Global Select Fund returned 26.4% for the fiscal year, ended September 30, 2017, outperforming the MSCI World Index, which returned 18.2% for the same period. For the most recent quarter, the Fund returned 4.7%, underperforming the MSCI World Index, which returned 4.8%. The Fund has performed well versus the MSCI World Index since inception, returning on average 9.0% versus 5.6% for the benchmark.
CNH Industrial, a global agricultural and construction equipment manufacturer, was the top contributor for the fiscal year. Quarterly earnings reports have shown an ongoing improvement over the past 12 months. During the most recent quarter, CNH Industrial achieved earnings per share of $0.19, exceeding expectations. Total revenues for the fiscal first half exceeded our estimates and advanced 4.5% over last year. While revenue grew across all four industrial divisions, the company’s core agricultural equipment portfolio also showed improving operating margins as industry demand increased and destocking activity wound down. Recently, CNH Industrial’s long-term corporate debt was upgraded to an investment-grade rating, which should allow the company to improve its balance sheet efficiency, refinance debt at lower rates and improve shareholder returns. We are confident CNH Industrial’s fundamental performance will continue to strengthen.
Daimler, a global vehicle manufacturer best known for its Mercedes-Benz brand, was the top contributor for the quarter. Daimler’s second-quarter revenues and earnings outpaced market forecasts. Mercedes had another strong quarter with 7% revenue growth and 10% unit growth, driven primarily by sales in China. Daimler’s trucking division showed signs of stabilizing, despite a 9% sales drop in the U.S. and an 11% drop in Latin America. However, orders were up 22% year over year, supporting our view that the trucking division’s results will improve in the second half of 2017. Concerns about Daimler’s diesel exposure and its impacts on earnings have proven to be less significant than feared. During the quarter, Daimler also announced that it would explore changes to its corporate structure, including separating the trucks and buses divisions from the Mercedes-Benz cars and vans divisions. We believe that this has the potential to create significant shareholder value.
Apache, a global oil and gas exploration company, was the largest detractor for the fiscal year. Apache’s results have fallen short of expectations in recent quarters, primarily due to long-term investments that are hurting short-term results. During the most recent quarter, oil production was lower than estimated primarily due to weak production in the Permian Basin, which declined despite a meaningful increase in capital allocation. Management indicated that the high level of spending in the area was specific to the development of the new Alpine High oil and gas field. Management is optimistic about future Alpine High production, and their testing and delineation efforts continue to yield promising results. We expect to see meaningful production growth from these investments in the Alpine High and the Permian Basin over the next 18 months. We believe that Apache’s management team remains focused on maximizing shareholder value and that the company will be a solid long-term investment for our shareholders.
General Electric (GE), a global producer of industrial, household and medical goods, was the largest detractor for the quarter. Although the company’s second-quarter earnings were in line with expectations, the vague and downbeat nature of the company’s recent earnings call concerned investors and caused share price weakness. We have since met with the new CEO and are confident he’ll generate improved results over time. Management plans to focus on cost-cutting efforts and improved efficiencies with an emphasis on return on invested capital. We applaud the focus on return on invested capital and believe the stock remains quite undervalued.
During the quarter, we sold our position in Kering and added one new name, WPP. We have followed WPP for some time, and due to its recent share price weakness, we were able to initiate a position at a discount to our estimate of the company’s underlying value. We believe WPP is a leading advertising agency with best-in-class emerging-market exposure.
As of quarter end, 48% of the Fund’s holdings were invested in U.S.-domiciled companies, while 52% were allocated to equities in Europe.
We continue to believe some currencies are overvalued versus the U.S. dollar. We maintained our defensive currency hedge and ended the quarter with approximately 15% of the Swiss franc exposure hedged.
We thank you for your continued support.
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 (09/30/17)
Since Inception (10/02/06) 9.05%
Expense Ratio as of 09/30/16 was 1.15%
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 09/30/17: CNH Industrial 7.6%, Daimler 8.0%, Apache 3.5%, General Electric 4.1%, Kering 0%, and WPP 5.0%. 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 MSCI World Index (Net) is a free float-adjusted, market capitalization-weighted index that is designed to measure the equity market performance of developed markets. This benchmark calculates reinvested dividends net of withholding taxes using Luxembourg tax rates. 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 09/30/2017 unless otherwise specified.