From (Near) Worst to (Near) First in 90 Days
In the prior quarter’s letter, we discussed how the fundamental performance of the companies in the Global Fund was inconsistent with the decline in share prices. These sorts of opportunities don’t tend to last long, but one never knows exactly when stock prices will begin to more accurately reflect business value. With virtually no change in the headlines, political climate or underlying business fundamentals, global stocks have recovered significantly from last quarter’s decline. Over the last two quarters, we’ve seen a bottom fifth percentile return (Q4 2018) for the MSCI World Index, followed by a top tenth percentile return (Q1 2019).1 Yet not much has changed fundamentally. Although such short-term, schizophrenic behavior is not unusual for stocks, it is quite difficult to predict. So we stay fully invested in stocks, focusing on quality businesses that sell for significant discounts to intrinsic value and are run by capable managers. Bill Nygren’s letter explains the benefits of owning equities for decades (not quarters) and how maintaining an asset allocation profile that fits one’s risk tolerance and rebalancing in a disciplined way greatly increases one’s odds for success. We manage your global equity portfolio similarly. However, instead of rebalancing between different asset classes, we rebalance into the companies that present the best risk-adjusted values and we rebalance out of the companies where that valuation is less attractive, all while staying fully invested with the goal of maximizing long-term, after-tax returns.
The Global Fund gained 12.6% in the first calendar quarter of 2019, which roughly matched the MSCI World Index gain of 12.5%. Since inception, the Fund has returned 9.6% annually, compared to 4.7% for the MSCI World Index.
For the quarter, our holdings in the U.K., U.S. and South Africa contributed the most to returns, while Mexico and Australia detracted the most. Individually, Mastercard (U.S.), Lloyds Banking Group (U.K.) and Travis Perkins (U.K.) were the largest contributors to performance. After our in-depth discussion of Lloyds in last quarter’s letter, we were gratified but not surprised that it was a significant contributor this quarter. The largest detractors were Bayer (Germany), Grupo Televisa (Mexico) and Incitec Pivot (Australia). While we are disappointed with the recent legal judgements related to the herbicide Roundup, Bayer’s share price fell well in excess of our estimated liability, and given that the company had already been trading at an attractive price, we added to our Bayer holdings during the quarter.
We initiated one new position in the quarter, Booking Holdings (U.S.), and sold Multichoice Group (South Africa), which was spun out of Naspers, to pursue more attractive opportunities.
Booking Holdings (formerly known as Priceline) is a pioneer and global leader in the online travel industry. The company’s strong brands, significant investment expenditures and scale advantages have given it a formidable network effect. Add to that the company’s geographic exposures, revenue mix and superior online traffic conversion, and it is clear that Booking has one of the best operating models in the industry. Yet the share price fell after the company issued weaker than expected quarterly guidance due to rising macroeconomic pressures in Europe and the company’s increased investment expenditures. Booking has been investing heavily in alternative accommodations, payments, business travel and other ancillary businesses, and we believe this approach will further enhance the company’s competitive position and allow it to exceed market growth rates over the long term. The company’s highly regarded management team also has a long history of growing per share business value. We expect Booking to repurchase nearly 10% of its total share base over the two-year period, ending at the close of 2019, and that it will grow earnings at above-average rates while maintaining its pristine balance sheet. On our one-year forward estimate, Booking trades at a discount to the market’s P/E ratio (excluding its net cash and investments), despite a superior growth outlook and well above-average return profile, which should earn it a premium valuation.
We defensively hedge a portion of the Fund’s exposure to currencies that we believe to be overvalued versus the U.S. dollar. As of quarter end, we found only the Swiss franc to be overvalued and have hedged approximately 18% of the Fund’s franc exposure.
Thank you for being our partners in the Oakmark Global Fund. Please feel free to contact us with your questions or comments.
David G. Herro, CFA
Clyde S. McGregor, CFA
Anthony P. Coniaris, CFA
Jason E. Long, CFA