Oakmark International Fund: First Quarter 2015
March 31, 2015
The Oakmark International Fund returned 7% for the quarter ended March 31, 2015, outperforming the MSCI World ex U.S. Index, which returned 4% over the same period. Most importantly, the Fund has returned an average of 11% per year since its inception in September 1992, outperforming the MSCI World ex U.S. Index, which has averaged 6% per year over the same period.
Intesa Sanpaolo, an Italian retail and commercial bank, was the top contributor for the quarter, returning 16%. Intesa’s fiscal-year results showed core revenue growth of 7%. We found these results impressive for an Italian bank, given that Italian GDP hasn’t been growing, there is low banking penetration and the household savings rate is high. We believe Intesa’s performance reflects management’s focus on growing fee-based businesses. Asset quality continues to improve with non-performing loan formation at its lowest level since 2011, down 22% year-over-year, and management expects it to fall even further in 2015. Intesa’s balance sheet remains very strong with a leverage ratio around 7%, one of the best in Europe, and its liquidity far exceeds requirements. Management has also announced a dividend increase, which will return additional capital to shareholders in 2015. We believe Intesa has a strong position and will continue to provide value for our shareholders.
Another top contributor for the quarter was Daimler (Germany), the global auto manufacturer of the Mercedes brand, which returned 15%. Daimler reported full-year 2014 unit sales of 2.5 million vehicles (its best unit-sales year ever), which resulted in a 10% revenue increase and a 38% increase in underlying Industrial earnings. The company’s largest division, Mercedes-Benz, continued its strong performance (14% revenue growth and 10% unit growth year-over-year along with improved margins), driven by strong performance in China, robust S-Class model sales and the launch of the new C-Class model. Overall, the results were as we expected, and management predicts these positive trends will continue in 2015.
Richemont (Switzerland), the world’s second-largest luxury goods company, was the quarter’s biggest detractor, falling 10%. Richemont’s stock price fell after its fiscal nine-month sales update, which indicated a slow third quarter. Thus, even though the company’s organic sales grew 2% for the full period, they still fell short of our forecast. Sales declined most in Hong Kong/Macau and in the company’s specialty watch unit, both of which generate margins greater than the group’s average. Even so, sales in Europe and the Americas increased 9% and 7%, respectively, which we see as encouraging. We expect Richemont’s near-term results will be negatively impacted by the stronger Swiss franc, as most of its watch manufacturing costs are denominated in francs while much of its revenues are not. However, the company’s brands have pricing power, and management has already announced mid-single-digit price increases in Europe. Moves like these should offset some of the currency exchange rate volatility. While Richemont is facing some short-term headwinds, we believe the long-term growth prospects remain intact.
An additional detractor for the quarter was Melco Crown Entertainment (Hong Kong), which is a developer and owner of casino gaming and entertainment resort facilities in Asia. Casino revenues in Macau were weak due to China’s anti-corruption campaign, difficult year-over-year comparisons and a weaker macro environment. Although we continue to monitor the market, we remain optimistic about Macau’s long-term prospects, given low penetration of Chinese visitors, continued wealth creation of Chinese citizens and large infrastructure projects, which should help facilitate the growth of Macau.
During the quarter we sold our positions in Ahold (Netherlands), Canon (Japan), Continental (Germany) and Thomson Reuters (Canada) as they approached or hit our estimate of intrinsic value. We purchased two new names during the quarter: Komatsu (Japan), a global construction and mining equipment manufacturer; and adidas, a German-based athletic footwear, apparel and equipment company.
Geographically, we ended the quarter with 80% of our holdings in Europe, 11% in Japan and 4% in Australia. The remaining positions are in South Korea, Hong Kong and the Middle East (Israel).
While the U.S. dollar appreciated versus many foreign currencies during the quarter, we continue to believe some currencies are overvalued. As of quarter end, approximately 31% of the Swiss franc and 21% of the Australian dollar were hedged.
We would like to thank you for your continued support!
David G. Herro, CFA
Robert A. Taylor, CFA
Average Annual Total Returns (03/31/15)
Expense Ratio as of 9/30/14 was 0.95%
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.
As of 03/31/15, Intesa Sanpaolo SpA represented 3.0%, Daimler AG 2.9%, Richemont SA 3.4%, Melco Crown Entertainment, Ltd. 1.4%, Koninklijke Ahold NV 0%, Canon, Inc. 0%, Continental AG 0%, Thomson Reuters Corp. 0%, Komatsu Ltd. 0.03%, and Adidas AG 0.3% of the Oakmark International 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 International Fund as of the most recent quarter-end.
The MSCI World ex U.S. Index (Net) is a free float-adjusted market capitalization index that is designed to measure international developed market equity performance, excluding the U.S. 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 Oakmark International 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 International 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.
Oakmark International Fund: 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.