Oakmark Global Select Fund: First Quarter 2015
March 31, 2015
The Oakmark Global Select Fund returned 2% for the quarter ended March 31, 2015, in line with the MSCI World Index. More importantly, the Fund has returned an average of 9% per year since inception, outperforming the MSCI World Index, which has averaged 5% per year over the same period.
The largest contributor to performance for the quarter was Amazon (U.S.), which returned 20% due to a positive fourth-quarter earnings report. Revenues increased nearly 15%, and gross margins improved 300 basis points year-over-year, as a continued shift in business mix proved to be beneficial. Investors also appreciated that earnings were better than expected, and they reacted favorably to management’s plan to disclose detailed segment profitability information going forward. Overall, we believe Amazon continues to improve its operating metrics and is currently trading at a discount to the company’s true worth.
Another large contributor for the quarter was TE Connectivity (Switzerland), a leading electronics manufacturer, which returned 14%. TE Connectivity’s share price rose during the quarter following news of a deal to sell its telecom, enterprise and wireless businesses to CommScope. The company also released a positive first-quarter earnings report with earnings per share and gross margin results that exceeded market expectations. In addition, TE Connectivity announced that it would use proceeds from the CommScope deal to execute additional share repurchases, a move that adds to our confidence in management’s commitment to maximizing shareholder returns.
The largest detractor for the quarter was Bank of America (U.S.), which fell 14%. Bank of America’s shares were pressured by a host of factors this quarter—including the decline in interest rates—but investors were likely most disappointed by regulatory developments. First, regulators informed the company that it may need to modify its capital models in a way that could lower capital ratios. Second, the company received only “conditional” permission from the Federal Reserve to return capital to shareholders this year, as it must address “deficiencies” in its capital planning process. We believe investors’ reactions to these issues were less about the actual impact to value and more about Bank of America’s ability to return capital to shareholders over the next year or two. We continue to believe that Bank of America is significantly undervalued relative to its normalized earning power and believe management is committed to enhancing shareholder value.
Richemont (Switzerland), the world’s second-largest luxury goods company, was the quarter’s biggest detractor, falling 10%. Richemont’s stock price fell after its fiscal nine-month sales update, which indicated a slow third quarter. Thus, even though the company’s organic sales grew 2% for the full period, they still fell short of our forecast. Sales declined most in Hong Kong/Macau and in the company’s specialty watch unit, both of which generate margins greater than the group’s average. Even so, sales in Europe and the Americas increased 9% and 7%, respectively, which we see as encouraging. We expect Richemont’s near-term results will be negatively impacted by the stronger Swiss franc, as most of its watch manufacturing costs are denominated in francs while much of its revenues are not. However, the company’s brands have pricing power, and management has already announced mid-single-digit price increases in Europe. Moves like these should offset some of the currency exchange rate volatility. While Richemont is facing some short-term headwinds, we believe the long-term growth prospects remain intact.
Geographically, we ended the quarter with our European holdings at 49% and Japanese and South Korean holdings at 5% each. The remainder of the Fund’s investments, excluding cash, is in North America.
During the quarter we sold our position in Medtronic (U.S.) as it approached our estimate of intrinsic value. We purchased one new name during the quarter: Holcim (Switzerland), one of the world’s largest cement makers.
While the U.S. dollar appreciated versus many foreign currencies during the quarter, we continued to believe some currencies are overvalued. As of quarter end, approximately 25% of the Swiss franc exposure was hedged.
We thank you, our shareholders, for your continued support and confidence.
William C. Nygren, CFA
David G. Herro, CFA
Average Annual Total Returns (03/31/15)
Since Inception (10/06) 8.60%
Expense Ratio as of 9/30/14 was 1.13%
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.
As of 03/31/15, Amazon, Inc. represented 5.8%, TE Connectivity, Ltd. 5.5%, CommScope, Inc. 0%, Bank of America Corp. 4.7%, Richemont SA 4.7%, Medtronic, Inc. 0%, and Holcim, Ltd. 3.9% of the Oakmark Global Select Fund's total net assets. Portfolio holdings are subject to change without notice and are not intended as recommendations of individual stocks.
Click here to 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 global 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.
Oakmark Global Select 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.
Oakmark Global Select Fund: 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.