Oakmark Global Select Fund: Fourth Quarter 2016
December 31, 2016
The Oakmark Global Select Fund returned 7% for the quarter ended December 31, 2016, outperforming the MSCI World Index’s 2% return. For the calendar year, the Fund returned 10%, outperforming the MSCI World Index’s return of 8%. The Fund has returned an average of 8% per year since its inception in October 2006, outperforming the MSCI World Index’s annualized gain of 5% over the same period.
Bank of America, one of the biggest U.S. banks, was the largest contributor to performance for the quarter, returning 42%. Bank of America’s share price reacted positively to third-quarter results that showed strong capital market performance and healthy loan and deposit growth. The election of Donald Trump further boosted Bank of America’s stock price amid investors’ expectations that a Trump administration would lead to less regulation. Additionally, the president-elect has promised to boost economic growth, which should allow for interest rates to return to more normalized levels and benefit companies in the financials sector. We believe an improving interest rate environment, along with additional expense reductions and continued share repurchases, will drive strong EPS growth over the next several years. At its current price, we believe Bank of America remains undervalued.
Danone, one of the largest dairy food producers and bottled water suppliers in the world, was the largest detractor for the quarter, declining 14%. Danone’s third-quarter results were weaker than expected given continued destocking in both its Waters and Early Life Nutrition segments. The Waters division is suffering from oversupply as growth normalizes in China. Early Life Nutrition has been hurt by regulatory changes in China since distribution is shifting from indirect to direct. We believe both divisions will continue to be weak in the short term. Additionally, Danone is in the process of acquiring WhiteWave, a U.S.-based dairy food producer, and investors reacted negatively to WhiteWave’s third-quarter results, which fell short of expectations. We continue to believe the strategic rationale behind the WhiteWave acquisition is sound. It will enable Danone to integrate fast-growing brands and gain leverage with retailers, which should lead to improved competitive positioning. In December, Danone amended fiscal-year guidance by lowering organic growth but increasing operating margins. The organic growth shortfall is due to weakness in its European Fresh Dairy division, attributed to a shortfall in the Activia relaunch. Management believes a more tailored approach on a country-by-country basis should remedy the shortfall. Although Danone faces some near-term headwinds, we believe it remains an attractive investment for our shareholders.
During the quarter we sold our positions in Daiwa Securities Group and JPMorgan Chase and purchased two new names: Lloyds Banking Group and Citigroup. We have been following Lloyds for some time, and the U.K.’s recent decision to withdraw from the European Union translated to a decline in Lloyds’ share price. In our estimation, this price drop greatly exceeded any actual loss of intrinsic value of the company, and we believe Lloyds is undervalued relative to its normalized earnings power. Citigroup’s global franchise gives it a unique advantage because it has more than twice as many country banking licenses as its closest competitor. This unique global reach is an attractive asset and difficult to replicate in today’s regulatory environment. We believe Citigroup has substantial excess capital, which—combined with its significant deferred tax assets—should give the management team many opportunities to increase shareholder value.
Geographically, 52% of the Fund’s holdings were invested in U.S.-domiciled companies as of December 31, while approximately 45% were allocated to equities in Europe and 3% in South Korea.
Although the Swiss franc weakened versus the U.S. dollar during the quarter, we continue to believe the currency is overvalued. As a result, approximately 23% of the Swiss franc exposure was hedged at quarter end.
We would like to thank our shareholders for continuing to support us and our value investing philosophy. We wish you all a happy and prosperous new year!
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 (12/31/16)
Since Inception (10/02/06) 8.01%
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 12/31/16: Bank of America Corp 6.8%, Danone SA 2.6%, WhiteWave Foods Co 0%, Daiwa Securities Group, Inc. 0%, JPMorgan Chase & Co. 0%, Lloyds Banking Group PLC 5.0% and Citigroup, Inc. 5.1%. 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.
EPS refers to Earnings Per Share and is calculated by dividing total earnings by the number of shares outstanding.
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 12/31/2016 unless otherwise specified.