Oakmark International Fund: Second Quarter 2019
June 30, 2019
The Oakmark International Fund returned 3.4% for the quarter ended June 30, 2019, slightly underperforming the MSCI World ex U.S. Index, which returned 3.8% over the same period. However, the Fund has returned an average of 9.2% per year since its inception in September 1992, outperforming the MSCI World ex U.S. Index, which has averaged 5.9% per year over the same period.
WPP, a U.K.-based marketing and advertising company, was a top contributor for the quarter, returning 24%. WPP’s first-quarter earnings were in line with our expectations, while the new business the company won during the quarter amounted to an estimated $2 billion in annual billings compared to $4 billion for the full year in 2018. The company’s sale process of its Kantar business is generating solid interest and management indicates they are on plan with the divestment process. In addition, strategic changes and restructuring are progressing according to plan.
Ryanair, headquartered in Ireland and the leading ultra-low-cost air carrier in Europe, was a large detractor from performance for the quarter, returning -14%. During the quarter, the company announced underlying 2019 fiscal-year results that were below expectations on the back of a weaker revenue environment. Passenger revenue was up only 0.6% as passenger growth of 8% was nearly entirely offset by falling yields with pricing down 6%. Unfortunately, fuel prices are up nearly 20%, but price discounting from higher cost competitors has prevented Ryanair from passing on these higher fuel prices to passengers. We believe that increased competition in this industry will result in consolidation, which will bring a more rational pricing environment to the market place. We think Ryanair continues to be extremely well positioned given its structural cost advantage compared to its competitors and it maintains a strong balance sheet that enables the management team to take a long-term approach toward creating value. We support management’s growth aspirations and believe the company can continue to gain market share over its higher cost peers, though in the short term its earnings could remain volatile.
During the quarter, we sold our holding of Experian (Ireland) as it approached our estimate of fair value. We also initiated a position in EssilorLuxottica (France), a designer, manufacturer and retailer of ophthalmic lenses, and Swatch (Switzerland), a global watch designer and 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 13% of the Swiss franc exposure was hedged at quarter end.
Geographically, we ended the quarter with approximately 80.5% of our holdings in Europe and the U.K., 12.2% in Asia, and 2.2% in Australasia. The remaining positions are 2.1% in South Africa, 1.5% in Canada, 0.7% in the U.S. and 0.7% in Mexico.
We thank you for your continued support.
David G. Herro, CFA
Michael L. Manelli, CFA
Oakmark International Fund – Investor Class
Average Annual Total Returns (06/30/19)
Since Inception (09/30/92) 9.19%
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 06/30/19: EssilorLuxottica 0.8%, Experian 0%, Ryanair 2.4%, Swatch 0.5% and WPP 1.6%. 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 06/30/2019 unless otherwise specified.