Oakmark Global Fund: Second Quarter 2013
June 30, 2013
The June quarter was a fascinating period for investors in global equities. Several countries’ stock markets entered corrections (i.e., declines in excess of 10%), and Japan’s energetic bull market quickly became a bear market (down 20% from the peak). Despite extreme volatility, Japan still finished the quarter with a positive return. The U.S. experience was more muted, but statements from Federal Reserve officials discomfited investors, causing stocks to sell off from their interim high. The Oakmark Global Fund had a strong quarter in relative terms, gaining 5%. The MSCI World Index was up 1% in the period while the Lipper Global Fund Index returned 1%.
For the calendar year to date, the returns are 14% for the Oakmark Global Fund, 8% for the MSCI World Index and 8% for the Lipper Global Fund Index. For the Fund’s fiscal year to date (beginning October 1, 2012), the returns are 25% for the Fund, 11% for the MSCI and 13% for the Lipper Global Fund Index. As always, we are most pleased to report the Fund’s 11% compound annualized rate of return since its inception in 1999.
For the quarter the countries that contributed most to the Global Fund’s return were Japan, the U.S. and Switzerland. Stocks from Australia, the Netherlands and the U.K. generated losses in the quarter. For the calendar six months holdings located in Australia, Spain and Netherlands suffered price declines. Calendar-year and fiscal-year-to-date return contributions were highest in the U.S., Japan and Switzerland. Australia and the Netherlands were the only detractors for the fiscal year.
The Fund holdings with the highest individual contribution to return for the quarter were Daiwa Securities (Japan), Daimler (Germany), Live Nation Entertainment (U.S.), OMRON (Japan) and Toyota Motor (Japan). The primary detractors were Incitec Pivot (Australia), Cimarex Energy (U.S.), Oracle (U.S.), Devon Energy (U.S.) and Canon (Japan). Daiwa also led for the calendar year to date followed by Tenet Healthcare (U.S.), Live Nation, TE Connectivity (Switzerland) and Toyota Motor. Incitec Pivot again led the detractors list with negative results also from Canon, Oracle, Akzo Nobel (Netherlands) and Kuehne + Nagel (Switzerland). For the fiscal year the contribution list is almost the same, except that Toyota moves up to third place and Credit Suisse (Switzerland) edges out TE Connectivity for the fifth position. The nine-month detractors were Square Enix (Japan), Incitec Pivot, Devon Energy, Apache (U.S.—sold) and Philips (Netherlands—a new purchase described later in this report).
The June quarter’s stock market volatility, which was generally positive, provided opportunities to harvest gains in holdings that approached our price targets. We eliminated three holdings and initiated four new positions. Perhaps the most surprising addition is General Motors. For decades Harris Associates had no interest in General Motors because of the company’s difficult union relations and enormous underfunded post-retirement benefit liabilities. Times change, however, and GM today is a leaner, better-managed concern with considerable market opportunity. GM has rationalized its manufacturing footprint, reduced its cost structure and breakeven point, simplified its product portfolio and shifted investment to emerging markets. Nevertheless, the stock still suffers with the “Government Motors” taint, and the overhang of U.S. Treasury shares is not to be dismissed. We estimate that GM trades for less than the value of its much improved North American business, meaning that we obtain the impressive collection of international business and other net assets for free.
We also initiated a position in National Oilwell Varco, one of the world’s largest providers of equipment for oil and gas drilling. About half of its business is drill rig equipment, and the other half is a diverse assortment of pipes, pumps, tools, consumables and a distribution business. The company has leading market shares across its various businesses, especially deepwater drilling equipment, which has led to strong growth and very high returns on invested capital. This growth has recently stalled as weak natural gas prices have led to a decline in the North American rig count. We expect the North American rig count to increase this fall. We also believe that deepwater rig equipment orders may remain strong for many more years as about one-third of the fleet is over 20 years old and will be retired over the next decade. Given our positive view on the demand for rig equipment, the sustainability of the company’s competitive position and its discounted valuation, we believe the stock to be undervalued.
Philips was added mid-quarter, but the stock has been on and off our approved list numerous times since the late 1990s. Today, a new management team is cutting costs. It is also transitioning the company away from traditional light bulb production and towards LED lighting, and it is using the company’s prodigious cashflows to repurchase shares and generate solid dividends. Although the LED transition does not come without risks, we feel that those risks are limited given that Philips holds the number one position in lighting and around 60% of the company’s value comes from its strong medical business.
The last name we added during the quarter was Travis Perkins, a builder’s merchant and DIY retailer in the U.K. The challenging economic climate enables us to own this quality business at a compelling price. The company should begin to benefit from improved housing demand in the U.K., where the residential new building sector has been growing due to the older age of available housing.
We eliminated two long-time U.S. holdings that achieved our price targets. The Global Fund purchased its first Discovery Communications shares 11 years ago. This company, a portfolio of cable television channels and other properties, has proven to be an ideal example of our methodology. To review, our value investing approach demands that we invest in companies at a substantial discount to their current intrinsic value per share, that holdings persistently grow that intrinsic value per share and that the company’s management thinks and acts as business owners and treats their shareholders as their partners. With Discovery we found a stock that fully met all of these requirements. We thank the Discovery management team for their stewardship of our shareholders’ capital. We also eliminated Equifax, an important data provider to employers and the consumer finance industry. This was our Fund’s second successful experience with Equifax. In 2006 we feared that excesses had developed in the consumer finance and mortgage sectors, so we sold our Equifax holding. In 2009 we perceived a second opportunity in the stock as the economy emerged from its severe recession. We believe that the share price now reflects that opportunity, so we exited the position.
Unfortunately, our last elimination did not meet our expectations. During the quarter we sold our position in Banco Santander (Spain). After the announcement of the new CEO and resignation of a leading independent board member, we became increasingly concerned about corporate governance. We believe management is more focused on maintaining control of the bank rather than creating shareholder value, and therefore we liquidated our position.
Japan - Seven Short Months
From mid-November through mid-May the Japanese market, measured by the TOPIX, increased roughly 80% based on the new prime minister’s economic plan, called Abenomics. This plan aims to end deflation and resume economic growth via quantitative easing and structural reforms. While Abenomics is in its early days and nothing long-lasting has changed as of yet, we are encouraged by what we hear and hope the lost decades will finally pass. Having said this, our investment thesis for owning Japanese companies was never based on these macro trends. Instead, it was based on finding well managed companies with good long-term fundamentals at extremely low valuations. This combination of price and value led to a weighting in Japan in excess of 22% as of September 30, 2012. Today this weighting has dropped to around 15%, despite the strong price appreciation of most of our holdings. Some may wonder why we would sell when things are seemingly getting better in Japan. The simple answer is price. Our disciplined, repeatable and fundamentally-based approach to value investing means that we buy when things are cheap and sell when they are dear. We neither have changed our opinion on our companies nor have we lost hope in economic change. We just no longer see as much margin of safety today, based on price, as we did back in September.
Although some global currencies have weakened compared to the U.S. dollar, we continue to believe they are overvalued, so we defensively hedge the Fund’s currency exposure. The Japanese yen continued to depreciate during the quarter, and we decreased our hedge to 16% of our yen exposure. The Australian dollar depreciated to levels not seen since 2010, and we decreased our hedge to 42% of the underlying exposure. Additionally, 20% of the Swiss franc exposure was hedged at quarter end.
As always, we thank you for being our shareholders and partners in the Oakmark Global Fund. We look forward to your questions and comments.
Clyde S. McGregor, CFA
Robert A. Taylor, CFA
As of 6/30/13, Daiwa Securities Group, Inc. represented 2.6%, Daimler AG 3.8%, Live Nation, Inc. 2.1%, OMRON Corp. 1.6%, Toyota Motor Corp. 1.1%, Incitec Pivot, Ltd. 3.2%, Cimarex Energy Co. 1.7%, Oracle Corp. 4.2%, Devon Energy Corp. 2.7%, Canon, Inc. 2.0%, Tenet Healthcare Corp. 3.5%, TE Connectivity, Ltd. 3.2%, Akzo Nobel NV 1.9%, Kuehne + Nagel International AG 2.2%, Credit Suisse Group 4.1%, Square Enix Holdings Co., Ltd. 1.9%, Apache Corp. 0%, Koninklijke (Royal) Philips Electronics NV 1.9%, General Motors Co. 3.2%, National Oilwell Varco 2.3%, Travis Perkins PLC 1.0%, Discovery Communications, Inc., Class C 0%, Equifax, Inc. 0%, and Banco Santander SA 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.
For a full list of The Oakmark Global Fund's holdings as of 6/30/13, click here.
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.
The Japanese TOPIX Index is an index that measures stock prices on the Tokyo Stock Exchange (TSE). This capitalization-weighted index lists all firms that are considered to be under the ‘first section’ on the TSE, which groups all of the large firms on the exchange into one pool. This index is unmanaged and investors cannot actually make investments in this index.
The 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.
Investing in value stocks presents the risk that value stocks may fall out of favor with investors and underperform growth stocks during given periods.
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 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.