Oakmark International Fund: First Quarter 2019
March 31, 2019
The Oakmark International Fund returned 9.0% for the quarter ended March 31, 2019, underperforming the MSCI World ex U.S. Index, which returned 10.5% over the same period. However, the Fund has returned an average of 9.1% per year since its inception in September 1992, outperforming the MSCI World ex U.S. Index, which has averaged 5.8% per year over the same period.
Lloyds Banking Group, the dominant retail bank in the U.K., was the top contributor for the quarter, returning 23%. During the quarter, Lloyds announced underlying 2018 fiscal-year results that were largely in line with our expectations. The group also announced a new GBP 1.75 billion share repurchase program for 2019, which was larger than expected and an increase from its GBP 1 billion of repurchases in 2018. Additionally, Lloyds has guided for 14-15% return on tangible equity and promised further operating expenditure reductions for 2019. While the U.K.’s decision to withdraw from the European Union has caused an outsized share price decline in previous periods, we believe the most recent results and share price gains support our investment thesis and believe that the bank’s intrinsic value remains largely intact.
The largest detractor for the quarter, thyssenkrupp, a German-based industrials conglomerate, returned -19%. As we had expected, thyssenkrupp reported weak first-quarter results due to reduced demand from the auto industry, raw material pressure and operational issues. EBIT was flat to down in all divisions, but management has maintained guidance that calls for a meaningful increase year over year. As reported last year, the board recommended to split the company in two: thyssenkrupp industrials and thyssenkrupp materials. During the quarter, the company announced further details on the split, which will target improved efficiency and simplification. The new companies will give full profit and loss responsibility to the business and consolidate central functions. The goal is to reduce selling, general and administrative (SG&A) costs by roughly €80 million. We view this incremental detail positively. Although the most recent quarter’s results were disappointing, we have confidence that management has a solid plan to improve operations and simplify the business, and we believe the company is trading at a significant discount to our estimate of intrinsic value.
During the quarter, we sold our holdings in Ctrip.com and Pernod Ricard as they approached our estimate of fair value. We also sold our shares of MultiChoice Group, which we received as part of a corporate action related to our holding of Naspers. During the quarter, we initiated a position in Rolls Royce, a U.K.-based gas turbine engine manufacturer.
We continue to believe the Swiss franc is overvalued versus the U.S. dollar. As a result, we defensively hedged a portion of the Fund’s exposure. Approximately 20% of the Swiss franc exposure was hedged at quarter end.
Geographically, we ended the quarter with approximately 79.2% of our holdings in Europe and the U.K., 12.6% in Asia, and 2.1% in Australasia. The remaining positions are 2.2% in South Africa, 1.7% in North America (Canada) and 0.9% in Latin America (Mexico).
We continue to focus on finding attractive, undervalued international companies with management teams focused on building shareholder value. We thank you for your continued support.
David G. Herro, CFA
Michael L. Manelli, CFA
Oakmark International Fund – Investor Class
Average Annual Total Returns (03/31/19)
Since Inception (09/30/92) 9.14%
Gross Expense Ratio as of 09/30/18 was 1.01%
Net Expense Ratio as of 09/30/18 was 0.96%
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 To obtain the most recent month-end performance data, view it here.
The securities mentioned above comprise the following percentages of the Oakmark International Fund’s total net assets as of 03/31/19: Ctrip.com 0%, Lloyds Banking Group 2.9%, MultiChoice Group 0%, Naspers 2.1%, Pernod Ricard 0%, Rolls-Royce Holdings 1.0% and thyssenkrupp 1.5%. Portfolio holdings are subject to change without notice and are not intended as recommendations of individual stocks.
Access the full list of holdings for the Oakmark International Fund as of the most recent quarter-end.
The net expense ratio reflects a contractual advisory fee waiver agreement through January 27, 2020.
EBIT is a measure of a firm's profit that includes all expenses except interest and income tax expenses. It is the difference between operating revenues and operating expenses.
The MSCI World ex U.S. Index (Net) is a free float-adjusted, market capitalization-weighted index that is designed to measure international developed market equity performance, excluding the U.S. The index covers approximately 85% of the free float-adjusted market capitalization in each country. This benchmark calculates reinvested dividends net of withholding taxes. This index is unmanaged and investors cannot invest directly 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.
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.
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.
All information provided is as of 03/31/2019 unless otherwise specified.