Oakmark Global Select Fund: Second Quarter 2012
June 30, 2012
The Oakmark Global Select Fund declined 9% for the quarter ended June 30, 2012, underperforming the MSCI World Index’s loss of 5%. More importantly, the Fund has returned an average of 4% per year since inception, outperforming the MSCI World Index, which has remained unchanged over the same period.
A top contributor to performance for the quarter was U.S.-based eBay, which returned 7.6% during its holding period. We continue to believe eBay is an attractive investment. However, we decided to sell eBay and use the proceeds to purchase JPMorgan Chase because it was trading at a larger discount to our estimate of intrinsic value. The market’s overreaction to JPMorgan’s trading loss provided an opportunity to own what we think is one of the best financial services firms in the U.S., with over 5,100 branches in more than 20 states. In May, JPMorgan CEO Jamie Dimon announced that the company’s Chief Investment Office realized a $2 billion trading loss on a series of derivatives transactions involving credit default swaps. Based on our history with JPMorgan, we consider this circumstance to be very uncharacteristic, as the company has a much better history than competitors in terms of risk controls and oversight. Since the initial announcement, potential loss estimates from the swaps have increased and are now estimated to be anywhere from $4 billion to $9 billion. While these losses are large and highlight a lapse in controls, it’s important to keep perspective. JPMorgan reported a first-quarter profit of $5.4 billion and has indicated that, despite the trading losses, it will be profitable in the second quarter. We believe the market has overreacted to the trading loss. In our view the company’s overall health remains strong, and it has sufficient capital to weather this storm, making it a solid investment opportunity for our shareholders, despite the expected losses.
Credit Suisse was one of the worst performers for the quarter due to a weaker investment banking environment and negative comments about the bank in the Swiss National Bank’s (SNB) recent annual Financial Stability report. The SNB indicated that, in order to meet the Basel 3 requirements, Credit Suisse should stop its dividend payments and/or issue equity to more rapidly increase the company’s loss-absorbing capital. We found these comments odd since the SNB is not Credit Suisse’s regulator. FINMA (Credit Suisse’s regulator) is satisfied with Credit Suisse’s financial health. Additionally, Credit Suisse has until 2019 to meet Basel 3 requirements, and the head of the SNB even stated that “Credit Suisse’s plan corresponds to our assessment, but we’d like to see acceleration.” We forecast that Credit Suisse will meet Basel 3 requirements well before 2019. We already know that the Basel 3 requirements for Swiss financial institutions are some of the most stringent in the world, another example of Swiss governmental agencies’ extreme conservatism. We take capital strength and solvency very seriously, as it helps protect downside risk when investing. With little exposure to sovereign debt, excellent liquidity and a strong balance sheet that is growing stronger, we continue to feel comfortable with Credit Suisse’s financial strength.
Another large detractor from Fund performance was Daimler AG, a global automotive manufacturer, which declined 23% in the quarter. We believe the stock suffered due to continued relative underperformance; soft sales in China, as compared to BMW and Audi; investor concerns about the Brazilian and Western European truck business; and worries about the overall global economy. Despite these issues, in its first fiscal quarter Daimler reported higher-than-expected revenue across all business lines except the small buses division. We believe Daimler will benefit over the next few years as it launches new Mercedes models. The Mercedes brand is much later into its model cycle than BMW or Audi, and the company’s plans to ramp up the number of new model launches in 2013 should bring better growth and higher profitability. We remain excited about the future prospects for this high-quality company and believe it is trading at a significant discount to intrinsic value.
Geographically, we ended the quarter with our European and Japanese holdings decreasing slightly to 33% and 16%, respectively. The remainder of the Fund’s investments, excluding cash, are in North America.
Due to the U.S. dollar’s weakness relative to some global currencies, we currently hedge two underlying foreign currencies. At quarter-end, approximately 50% of the Fund’s Japanese yen and 42% of the Swiss franc exposures were hedged.
We believe that the Fund is well-positioned to generate favorable long-term results for our fellow shareholders. We thank you for your continued support and confidence.
William C. Nygren, CFA
David G. Herro, CFA
Average Annual Total Returns (6/30/12)
Since Inception (10/06) 3.99%
Expense Ratio as of 9/30/11 was 1.24%
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. The performance of the Funds does not reflect the 2% redemption fee imposed on shares redeemed within 90 days of purchase. To obtain the most recent month-end performance data, view it here.
As of 6/30/12 eBay, Inc. represented 0%, JPMorgan Chase & Co. 5.0%, Credit Suisse Group 4.9%, Schweizerische Nationalbank 0%, Daimler AG 5.3% Bayerische Motoren Werke (BMW) AG 0%, and Volkswagen AG (Audi) 0% of the Oakmark 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 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.