Oakmark Global Fund: Fourth Quarter 2011
December 31, 2011
Stock markets across the globe achieved widely diverse outcomes during the quarter ended December 31, 2011. These outcomes ranged from a positive 12% return for the U.S. S&P 500 Index to a 4% loss for the MSCI Japan Equity Index. Such results obviously pulled the Oakmark Global Fund in both directions. The Fund’s return for the quarter was 6%, which lagged behind the MSCI World Index’s 8% return and the Lipper Global Fund Index’s 7% gain. The quarter’s gain was insufficient to repair the losses suffered in the first nine months of the year. For the calendar year, the Fund lost 12%. This contrasts to a 6% decline for the MSCI World Index and a 10% decline for the Lipper Global Fund Index. As always, we are most pleased to report the Fund’s 10% compound annualized rate of return since inception.
Although the spread of returns across world equity markets was wide, most did report positive results for the quarter. The countries whose stocks generated the highest total return for the Fund in the quarter were Sweden, the United Kingdom, the U.S., Italy and Australia. In terms of contribution to the Fund’s results, the U.S. was by far the highest because of its very large weight. The countries whose stocks produced losses for the Fund were Spain, Japan and Germany, and given the Fund’s large Japan commitment (more than twice that of the MSCI World Index), the performance shortfall is easily understood.
The holdings with the highest positive contributions to the Fund in the quarter were Equifax, Snap-on, Union Pacific, MasterCard and Julius Baer. The first four companies in the list are all U.S.-domiciled, while Baer is located in Switzerland. The top detractors included Oracle (U.S.), Credit Suisse ( Switzerland) and three Japanese concerns: Daiwa, Rohm and Hirose Electric.
For all of 2011, holdings in only two countries generated positive rates of return: Italy and the United Kingdom. Unfortunately, the Fund had small weightings in those two countries. On the other hand, the Fund’s holdings in Germany, Spain, Switzerland, Australia and Japan all registered double-digit percentage losses in 2011. The stocks with the highest contribution to Fund return for the year were MasterCard, Intel (U.S.), Bulgari ( Italy, sold early in 2011), Equifax and Diageo ( United Kingdom). The largest detractors from return were Daiwa, Credit Suisse, Rheinmetall ( Germany), Adecco ( Switzerland) and Rohm.
Our trading was fairly balanced in the quarter. We initiated two new positions, FedEx (U.S.) and Fiat Industrial ( Italy), and eliminated Holcim ( Switzerland) and Primary Health ( Australia). Having just gone through the holiday season, readers of this letter are probably familiar with FedEx, especially its overnight package delivery service. Yet, the company’s growth is coming from its domestic ground shipment service, as well as its trans-Pacific parcel delivery. We believe that FedEx’s enormous investment in infrastructure over the past decade will pay off in higher returns for shareholders, particularly should fuel prices decline. FedEx still offers an earnings growth rate that is high for large companies, yet we were able to purchase shares at prices that were first seen in 2003, even though earnings per share have more than doubled over the period.
Fiat Industrial was spun off from Fiat SpA in January 2011 and consists of three main divisions: Case New Holland Global (CNH), Iveco and FPT Industrial. CNH is second in the world among agricultural equipment companies, behind Deere, and the fifth-largest construction equipment company. Interestingly, just over 10% of CNH is listed in the U.S. due to historical funding needs, but Fiat Industrial owns and fully consolidates the business. Iveco makes trucks and commercial vehicles, mostly in Western Europe and Latin America. FPT Industrial is an engine manufacturer for CNH, Iveco and other non-captive clients.
We own the stock for three primary reasons. First, we believe CNH is a strong company that is well-positioned to benefit from global food consumption growth. Second, as an independent company from Fiat SpA, Fiat Industrial’s management can now focus on restructuring Iveco and FPT, divisions that have overcapacity and are under-earning. Third, the economic distress enveloping Italy has depressed the stock prices of many choice companies domiciled there, enabling us to purchase shares of Fiat Industrial at what we view as an extreme discount. Fiat Industrial is an internationally diversified company that generates only a fraction of its sales and profits in Italy and less than 25% of its sales in Western Europe.
We sold our holdings in Holcim and Primary Healthcare to help fund these new investments. Both companies are still on our approved lists and are names we would consider owning for our global shareholders. However, their discount to intrinsic value is not as attractive as our other holdings.
The U.S. weight within the Fund grew by nearly 4% in the quarter. However, since the market indices had similar relative growth, the Fund is still underweight the U.S. If you add back the two companies that are domiciled outside the U.S. for tax reasons (Covidien and TE Connectivity), the U.S. weight is just under 50%. As we have often written, we construct the portfolio based on our perception of individual investment opportunities, paying little attention to corporate domicile as long as we are within the Fund’s prospectus limits. We continue to be overweight both Switzerland and Japan. All of our holdings from those two countries meet our requirements for quality and value, but they also have the potential advantage of an eventual correction in currency imbalances. We believe that the Swiss franc and the Japanese yen are significantly overvalued relative to other currencies. If we are correct and these currency imbalances stabilize, this movement would benefit our holdings.
We continue to believe that the U.S. dollar is undervalued relative to other global currencies. As of quarter-end, approximately 73% of the Fund’s Australian dollar, 68% of the Swiss franc, 69% of the Japanese yen, 20% of the Swedish krona and 13% of the euro exposures were hedged. Of note, our euro hedges have decreased as the euro has weakened versus the U.S. dollar.
Thank you for being our partners in the Oakmark Global Fund. Please feel free to contact us with your questions or comments.
Clyde S. McGregor, CFA
Robert A. Taylor, CFA
Average Annual Total Returns (12/31/11)
Expense Ratio as of 9/30/10 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. 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 12/31/11, Equifax, Inc. represented 3.7%, Snap-on Inc. 4.5%, Union Pacific Corp. 2.3%, Mastercard, Inc., Class A 3.9%, Julius Baer Group, Ltd. 3.7%, Oracle Corp. 4.6%, Credit Suisse Group 2.7%, Daiwa Securities Group, Inc. 3.4%, ROHM Co., Ltd. 2.7%, Hirose Electric Co., Ltd. 3.1%, Intel Corp. 3.1%, Bulgari SpA 0%, Diageo PLC 1.8%, Rheinmetall AG 2.5%, Adecco SA 2.8%, FedEx Corp. 2.9%, Fiat Industrial 0.5%, Holcim, Ltd. 0%, Primary Health Care, Ltd. 0%, Fiat SpA 0%, CNH Global NV 0%, Iveco SpA 0%, FPT Industrial 0%, Deere & Company 0%, Covidien PLC 1.4%, and TE Connectivity, Ltd. 2.7% of the Oakmark Global Fund’s total net assets. Portfolio holdings are subject to change without notice and are not intended as recommendations of individual stocks.
The S&P 500 Index is a broad market-weighted average of U.S. blue-chip companies. This index is unmanaged and investors cannot actually make investments in this index.
The MSCI Japan Index (Net) is a free float-adjusted market capitalization index that is designed to measure Japan developed market equity performance. The Total Return Index (Net) includes reinvested dividends net of foreign withholding tax using Luxembourg withholding tax rates. This index is unmanaged and investors cannot invest directly in this index.
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.
The Lipper Global Fund Index measures the performance of the 30 largest mutual funds that invest in securities throughout the world. This index is unmanaged and investors cannot invest directly in this index.
Investing in foreign securities presents risks that in some ways may be greater than in 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.