Oakmark Global Select Fund: Second Quarter 2011
June 30, 2011
The Oakmark Global Select Fund returned 2% for the quarter ended June 30, 2011, compared to the MSCI World Index, which had a fractional gain for the same period. Since inception, the Fund has returned an average of 6% per year, outperforming the MSCI World Index, which has averaged 1% per year over the same period.
The top contributor to performance was Groupe Danone, one of the largest dairy food and water producers in the world, which returned 17% during the time we held it this quarter. Share prices continued their climb after the company released its 2010 fiscal-year results, which surpassed our estimates. Although we continue to believe that Danone is a strong business that will generate positive returns, the recent appreciation brought the price close to our estimate of fair value. We subsequently sold shares of Danone and used the proceeds to purchase Nestlé, a similar consumer-products company trading at a larger discount to our estimate of fair value. This was the only change in portfolio holdings during the quarter. Nestlé is a name we know well; it has been on our Firm’s approved list for over 14 years. Nestlé leads all food companies in sales, and it is also leads in global coffee sales (Nescafé). It is one of the world’s largest bottled-water makers (Perrier) and is a top producer of pet food (Purina). Its most well-known global food brands include Buitoni, Friskies, Maggi, Nescafé, Nestea and Nestlé. The company also owns Gerber Products and Jenny Craig. In addition to its own products, Nestlé owns almost 30% of cosmetics giant L'Oréal. We believe Nestlé is among the highest quality consumer-product companies in the world, due mainly to its favorable product mix and geographic exposure. We also believe that the company has a best-in-class management team on both an operational and capital-allocation basis. Nestlé generated more than CHF 50 billion from selling Alcon to Novartis. It then invested CHF 15 billion of these proceeds into the acquisitions of Gerber, Nestlé Medical Nutrition and Kraft frozen pizza--all good transactions in our view. It used CHF 25 billion of remaining proceeds to repurchase shares, and it then paid more than CHF 15 billion to shareholders via dividends. Although Nestlé’s share price has decreased 1% since our initial purchase on June 20, we believe it will provide our shareholders positive returns in the long run.
Another top contributor to performance was Dell, a U.S.-based computer and electronics manufacturer, which returned 15% for the quarter. Just a few quarters ago we discussed Dell in our shareholder letter because it detracted substantially from the portfolio. At that time, despite its strong revenue growth, Dell’s margins had failed to meet market expectations, and many investors became concerned that Dell was trading margin for sales. To the contrary, Dell reported first-quarter 2011 EBITA margins of 9.2%, spurring a favorable reaction in the markets. This margin report beat analysts’ expectations and is nearly 200 basis points higher than the company’s long-term target. Management attributed the high margins to several factors, including product-mix shift, structural changes in the business, component costs and pricing. We believe that the most important single factor was pricing in the PC business; the average selling price for PCs remained flat year-over-year, as opposed to experiencing the typical mid-single-digit decline. Finally, Dell’s direct relationships with its business consumers and its strategy of providing open products and services, as compared to its peers’ increasingly closed or proprietary offerings, could help Dell provide solid returns for our shareholders in the long term.
A top detractor from performance during the quarter was ROHM, a Japanese-based semiconductor manufacturer, which fell 9%. In May, the company released 2010 fiscal-year results that were below company guidance, which depressed the stock price. The strong yen and the aftereffects of the earthquake and tsunami dampened ROHM’s 2011 fiscal-year outlook. ROHM has faced challenges from internal production stoppages and also from disruptions at Japan’s automakers and disruptions within the mobile-phone industry supply chain. The strong yen not only slows dollar-generated sales, it also damages operating margins since most of ROHM’s production is based in Japan. We expect the negative consequences from the yen to dissipate as the currency weakens and approaches purchasing-power parity. The strengthening economic recovery occurring in other regions around the world should also help bolster ROHM’s stock price over the longer term.
Another top detractor for the quarter was Texas Instruments (TI), one of the world’s oldest and largest semiconductor makers and the market leader in digital signal processors (DSPs), which fell 5%. TI’s DSPs are used by various technologies, including wireless phones, DVD players, automotive systems and computer modems. TI also makes logic chips, microprocessors, microcontrollers, display components and calculators. In early April, shares were down on news that the company planned to acquire National Semiconductor at what appeared to be full price. However, the market apparently did not take into account that the acquisition of National Semiconductor could enhance TI’s design team, grow its customer base, increase earnings per share and further broaden its scope in the analog market. We viewed this acquisition positively. The market also reacted negatively to decreased earnings guidance announced during the quarter. The decreased guidance was mainly attributed to weakness at Nokia, particularly its baseband business, which is being discontinued. TI’s baseband business accounts for very little of its value, and we remain confident about this company’s long-term risk-reward profile.
Geographically, we ended the quarter with our U.S. holdings slightly increasing to approximately 41% of investments, our European holdings slightly decreasing to approximately 36%, and our Pacific Rim holdings remaining at 19%.
We continue to defensively hedge the Fund’s currency exposures. We initiated a hedge of the Fund’s euro exposure during the quarter. Approximately 71% of the Fund’s Swiss franc, 51% of the Japanese yen and 26% of the euro exposures were hedged.
We thank you for your continued confidence and support.
William C. Nygren, CFA
David G. Herro, CFA
As of 6/30/11, Danone represented 0%, Nestlé SA 4.3%, L'Oreal SA 0%, Alcon Inc. 0%, Novartis AG 0%, Dell Inc. 4.7%, ROHM Ltd. 6.4%, Texas Instruments Inc. 4.1%, National Semiconductor Corp. 0%, and Nokia 0% 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.
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.
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 Funds’ investments and investment strategy (including current investment themes, the portfolio managers' research and investment process, and portfolio characteristics) represents the Funds’ investments and the views of the portfolio managers and Harris Associates L.P., the Funds' investment adviser, at the time of this letter, and are subject to change without notice.