Oakmark Global Fund: Fourth Quarter 2014
December 31, 2014
The Year of Global Divergence
U.S. investors enjoyed another year of double-digit equity market returns in 2014. Unfortunately, only a few small country markets, such as Israel and Ireland, could also make that positive double-digit claim. From the perspective of a dollar-based investor, many foreign markets declined in the year, and three—Portugal, Austria and Norway—lost more than 20%! All in all, it was a challenging year to be a U.S.-domiciled, diversified global investor.
For the quarter the Oakmark Global Fund gained 3%, which compares to the MSCI World Index’s 1% return in the period and the Lipper Global Funds Index’s gain of 1%. For all of calendar 2014 the Fund returned 4%, which contrasts to 5% for the MSCI World Index, and 4% for the Lipper Global Funds Index. Since inception in 1999, the Fund has achieved a compound annual rate of return of 11%, which compares to 4% for the MSCI World Index and 5% for the Lipper Global Funds Index.
For the quarter the countries that contributed the most to the Fund’s return were the U.S., Switzerland and Australia, while the leading detractors were the Netherlands, France and the United Kingdom. The five largest contributors to Fund return in the quarter were Oracle (U.S.), TE Connectivity (Switzerland), MasterCard (U.S.), Interpublic Group (U.S.) and Health Net (U.S.). The Fund holdings that detracted most were Credit Suisse (Switzerland), Fugro (Netherlands), Tenet Healthcare (U.S.), National Oilwell Varco (U.S.) and BNP Paribas (France). Given the remarkable collapse in the price of oil in the quarter, it followed that the Fund’s two oil service holdings were on the detractors’ list, but European bank stocks also languished in the period.
For all of 2014 the U.S., Australia and Switzerland contributed most to investment return, while the Netherlands, the United Kingdom and France detracted most. By this point it comes as no surprise that five U.S. holdings were the leading return contributors for the year: Health Net, Union Pacific, Oracle, Applied Materials and Intel. Fugro, CNH Industrial (Netherlands), Credit Suisse, Daiwa (Japan) and General Motors (U.S.) detracted most from return.
Does domicile really matter?
In 2014 the issue of inequality became important in academic circles and political debate. Although most discussions focused on differences in personal income, inequality in national prosperity has great importance for us as investors. Clearly our U.S. equity holdings have benefited from a comparatively strong home economy. One must be careful, however, not to think narrowly concerning any individual company’s nation of domicile. For example, Intel may be based in Santa Clara, California, but the vast majority of its revenues originate outside the U.S. Similarly, CNH is headquartered in the Netherlands, but its single largest market for sales—about 25%—is the U.S. and its second largest is Brazil at 14%. Fugro and National Oilwell Varco were both disappointing holdings for us in 2014 despite one being domiciled in the economically stronger U.S. When we analyze a company as a potential investment, its home base is relevant primarily for us to understand the laws and accounting conventions under which it must operate. Once a company has passed the criteria screens (which includes a domicile screen), the key for us is to analyze properly the economics of the business, which includes understanding the company’s ownership structure and evaluating the alignment of management with shareholders. In 2014 it appeared that U.S. domicile trumped all other characteristics, but we’ve found that the investing world has a history of restoring equilibrium to such imbalances. Withal, we will continue to seek out value wherever we may find it.
At the end of the year we often read quotes such as this from the December 31 New York Times: “Trading was slow [on December 30] as most investors have closed their books for 2014.” We find such statements totally perplexing, if not absurd. Every hour that equity markets are open for trading we look to improve the performance of the Fund, whether by tactical adjustments to Fund holdings or by taking advantage of new opportunities that the markets provide. This does not, however, mean that our process typically involves heavy trading, as the Fund’s 31% turnover ratio for the past 12 months attests.
Nevertheless, the December quarter was an active one for the Fund as we initiated two new holdings, both U.S.-domiciled, and eliminated five from the portfolio. Overall activity left the U.S. portfolio weight stable at 45%. Both new purchases may surprise Fund shareholders at first glance, but we believe that they demonstrate how companies and their valuations evolve over time. Chesapeake Energy attracted us because of a change in management. We often state the importance we ascribe to the alignment of management and shareholder interests for a potential investment. In Chesapeake’s case, for years we viewed the company as owning an attractive portfolio of assets, but we were unconvinced that management’s interests were appropriately aligned with shareholders. This changed in 2013 when a new CEO and board of directors took control. This new team has simplified the company, sold off low-priority assets, paid down debt and installed “return on invested capital” compensation structures. Despite these improvements, the stock, in our opinion, trades very cheaply because of the recent rout in oil and natural gas prices. We have no forecast for short-term energy prices, but we believe that Chesapeake’s improved internal dynamics should enable it to adjust to a new pricing environment.
The second new holding is Google, a company whose services are probably well-known to Fund shareholders. For us, Google is an example of a wonderful company that has grown into its valuation. Despite the U.S. stock market’s 2014 strength, Google’s share price eroded over the year because of a combination of new regulatory threats, particularly in Europe, and decelerating revenue growth. While other investors may fret over revenue deceleration, we find Google’s current growth rate to be extraordinary for such a large company and believe that it amply demonstrates the strength of the business model. Intrusive regulation remains a possibility, but we believe that the current stock price adequately discounts that possibility.
Turning to the portfolio eliminations, Laboratory Corporation of America (U.S.) was the Fund’s longest-held U.S. investment. In our view, the company successfully grew its intrinsic value per share over the holding period, and we thank LabCorp’s management team for its contribution to the Fund’s success.
Given the strength of the Japanese market over the past couple of years, it should come as no surprise that three of our four non-U.S. eliminations came from Japan—Kansai Paint, Canon and Yamaha Motors. The extremely cheap valuations we found in Japanese-listed companies in 2011 and 2012 appear to have been corrected. As such, our significant weighting there has moved from a high of 24%, versus the MSCI World weighting of (11%), to our current weighting of 6.4% (whereas MSCI World is at 8%). We also sold Akzo Nobel (Netherlands) because of its diminished relative attractiveness.
Although the U.S. dollar appreciated versus many foreign currencies during the quarter, we continued to believe some currencies are overvalued. Based on the increased strength of the U.S. dollar, we decreased our defensive currency hedges. As of quarter end, approximately 25% of the Swiss franc and 23% of the Australian dollar were hedged.
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
As of 12/31/14, Oracle Corp. represented 3.7%, TE Connectivity 4.0%, Mastercard, Inc., Class A 3.5%, Interpublic Group 3.4%, Health Net, Inc. 3.0%, Credit Suisse Group 4.9%, Fugro NV 1.0%, Tenet Healthcare Corp. 2.3%, National Oilwell Varco, Inc. 2.2%, BNP Paribas SA 3.1%, Union Pacific Corp. 3.7%, Applied Materials, Inc. 2.7%, Intel Corp. 2.4%, CNH Industrial N.V. 3.3%, Daiwa Securities Group, Inc. 2.3%, General Motors Co. 3.5%, Chesapeake Energy 1.0%, Google ClC 1.8%, Laboratory Corporation of America 0% , Kansai Paint 0%, Canon 0%, Yamaha Motors 0% and Akzo Nobel 0% 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.
Click here to access the full list of holdings for The Oakmark Global 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.
The Lipper Global Funds 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.
The Oakmark Global Fund’s portfolio tends to be invested in a relatively small number of stocks. As a result, the appreciation or depreciation of any one security held by the Fund will have a greater impact on the Fund’s net asset value than it would if the Fund invested in a larger number of securities. Although that strategy has the potential to generate attractive returns over time, it also increases the Fund’s volatility.
Oakmark Global and Oakmark International Funds: 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.
Oakmark Global 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.
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.