Oakmark Global Select Fund: Third Quarter 2018
September 30, 2018
The Oakmark Global Select Fund declined 0.9% for the fiscal year ended September 30, 2018, underperforming the MSCI World Index, which returned 11.2%. For the most recent quarter, the Fund returned 1.8%, compared to the MSCI World Index’s return of 5.0%. However, the Fund has returned an average of 8.2% per year since its inception in October 2006, outperforming the MSCI World Index’s annualized gain of 6.1% over the same period.
You should know that, as fellow shareholders, we recognize our results have recently disappointed and we, too, are not pleased. Our recent performance has been driven primarily by short-term, macroeconomic fears that are not at all indicative of the long-term underlying value we see at the company level. We believe the market will eventually recognize the inherent strength we see in these franchises, which should result in higher stock prices and better performance. As a reflection of our confidence, we have been adding significant amounts of personal capital to the Funds over the past several months. Here are some specific details on the portfolio’s performance drivers.
Mastercard, the second largest payment system in the U.S., was the largest contributor for the fiscal year. The conversion of paper-based to electronic forms of payments continues to benefit the company. We believe Mastercard is a great business with years of secular growth ahead, but sold our shares in August as the price approached our estimate of intrinsic value.
CNH Industrial, a U.K.-based global agricultural and construction equipment manufacturer, was the largest contributor for the quarter. Earnings increased by double-digit rates across all divisions in the second quarter, led by agriculture equipment (up 52%) and construction equipment, with strong demand across all regions. Due to the company’s increased second-quarter profitability, combined with the expectations of a lower tax rate, management upgraded earnings guidance, albeit a bit cautiously. Management indicated that the trade wars have not meaningfully affected demand, but the company’s guidance includes an undisclosed buffer in case this occurs. The improved earnings and guidance upgrades are particularly reassuring given the recent management changes and broader macroeconomic concerns. We continue to believe CNH remains attractively priced, adding to our confidence in the upside potential of this investment.
General Electric (GE), a U.S.-based global producer of industrial, household and medical goods, was the largest detractor for the quarter and for the fiscal year. Plainly said, our investment in GE has been a disappointment. Over the past year, the company has announced a large legacy insurance reserve charge, had significant problems in its Power division and has replaced many executives. Management has been adjusting the portfolio of businesses, spinning off and selling a number of assets in order to achieve appropriate capital returns and cash flows. Although these changes take time, we believe this approach will ultimately benefit shareholders. On October 1, GE announced the immediate departure of CEO John Flannery, replacing him with former Danaher CEO Larry Culp. In the announcement, the company also withdrew 2018 guidance due to underperformance in the Power division, writing down nearly all of the division’s $24 billion in goodwill. Despite the reduced guidance and goodwill write-down, the stock was up 7%. We believe that investors reacted favorably to Culp’s appointment because of his extensive experience in the industrial sector and his credibility among long-time analysts. GE has been a very frustrating holding. However, we continue to remain shareholders because we believe the stock has declined more than warranted and that its intrinsic value is well above the current quote.
During the quarter, we sold our shares in Mastercard and used the proceeds to purchase Fiat Chrysler Automobiles (U.S.), the worldwide manufacturer of passenger cars and light commercial vehicles. Recent weakness in the automotive sector combined with disappointing second-quarter earnings provided us an opportunity to purchase Fiat at very compelling prices.
Geographically, 47% of the Fund’s holdings were invested in U.S. companies as of September 30, while approximately 53% were allocated to equities in Europe and the U.K.
We continue to believe the Swiss franc is overvalued versus the U.S. dollar. As a result, we defensively hedged a portion of the Fund’s exposure. Approximately 19% of the Swiss franc exposure was hedged at quarter end.
We thank you, our shareholders, for your continued support and confidence.
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 (09/30/18)
Since Inception (10/02/06) 8.18%
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 09/30/18: Mastercard 0%, CNH Industrial 6.4%, General Electric 3.0%, Danaher 0% and Fiat Chrysler 5.3%. 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.
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 09/30/2018 unless otherwise specified.