Oakmark International Fund: Fourth Quarter 2018
December 31, 2018
The Oakmark International Fund declined 16.3% for the quarter ended December 31, 2018, compared to the MSCI World ex U.S. Index, which declined 12.8% over the same period. The Fund’s calendar-year performance was weak in both absolute and relative returns, declining 23.4%, versus the MSCI World ex U.S. Index’s decline of 14.1%. However, the Fund has returned an average of 8.9% per year since its inception in September 1992, outperforming the MSCI World ex U.S. Index, which has averaged 5.5% per year over the same period.
Bank Mandiri, an Indonesian bank with the country’s largest branch and deposit franchise, was the top contributor for the quarter, returning 13.6%. Despite a difficult macroeconomic environment driven by inflationary fears, Mandiri reported strong loan growth in the third quarter, tracking ahead of full-year estimates. The company’s stock price increased due to a rally in the Indonesian stock market as well as improved outlook on the Indonesian banking sector as a whole. We believe Mandiri continues to be well positioned to benefit from consumer-led, structural macroeconomic growth and that it maintains a cost of funding advantage over its smaller competitors. We continue to have confidence that the company will be a rewarding investment for our shareholders into the future.
BNP Paribas, headquartered in France and one of the largest banking franchises in Europe, was the largest detractor for the quarter. BNP’s stock price has been pressured by fears about European politics, although these headlines have not reduced our assessment of the long-term intrinsic value for the company. BNP possesses a dominant retail banking franchise as well as a diversified business base, which allows for cost of funding, liquidity and scale advantages versus its smaller peers. The firm also improved its risk profile by exiting riskier business lines and increasing its capital level; this has worked to further strengthen its balance sheet. BNP has been focused on a cost transformation project that is front-end loaded, so we believe the company should start generating greater net savings in 2019 and 2020. Management has reiterated a cost-to-income target of 63% for 2020, which is in line with our expectations. As a result, we believe BNP is well positioned for improved performance.
We added two new names to the Fund during the quarter: Ctrip.com International, the largest online retail travel agency in China with gross bookings five times its nearest peers; and NAVER, the largest internet company in South Korea and the dominant player in search with over 75% market share.
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 18% of the Swiss franc exposure was hedged at quarter end.
While 2018 was disappointing in both absolute and relative terms, we remain committed to our value investing philosophy. We believe our long-term focus allows us to take advantage of short-term price dislocations. We would like to thank our shareholders for your confidence and support in this difficult environment. We wish our shareholders a happy and prosperous 2019!
David G. Herro, CFA
Michael L. Manelli, CFA
Oakmark International Fund – Investor Class
Average Annual Total Returns (12/31/18)
Since Inception (09/30/92) 8.87%
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 12/31/18: Bank Mandiri 2.1%, BNP Paribas 4.0%, Ctrip.com International 0.1% and NAVER 1.1%. 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.
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 12/31/2018 unless otherwise specified.