Oakmark International Fund: Fourth Quarter 2014
December 31, 2014
The Oakmark International Fund declined 0.5% for the quarter ended December 31, 2014, outperforming the MSCI World ex U.S. Index, which declined 4% over the same period. The Fund’s calendar-year performance was weak in absolute and relative terms, declining 5% versus the MSCI World ex U.S. Index’s loss of 4%. Most importantly, the Fund has returned an average of 10% 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.
Daimler AG, a leading global vehicle manufacturer, was the quarter’s top contributor, returning 9%. Daimler’s third-quarter results released late in October showed overall revenue growth of 10% from the year-ago period. Additionally, free cash flow reached approximately EUR 3.4 billion, which was nearly twice the EUR 1.8 billion from one year ago. For the full fiscal nine months, revenues in its core Mercedes-Benz division were stronger than our forecast, driven by unit sales increases mainly in China and the U.S. Despite continued weakness in Germany, Western Europe improved in the third quarter. We recently met with CFO Bodo Uebber to discuss details of Daimler’s previously announced long-term strategy, which includes increasing the number of Mercedes-Benz dealerships and unit sales in China and capitalizing on recent dealership improvements (better sales training, new technology systems) to steadily boost division profits, as well as initiatives to strengthen business in other divisions. We think that Daimler’s management team is taking the right steps that will result in continued benefits to shareholders.
Honda Motors, another leading global vehicle manufacturer, was the quarter’s biggest detractor, falling 15%. Honda’s second-quarter operating profit was below investors’ expectations, partially due to costs associated with a vehicle recall in Japan. The company reduced its full-year auto sales volume guidance and lowered its net profit forecast, but left its total operating profit expectations unchanged. Despite lower earnings, management reduced its current capital spending budget and expects free cash flow to improve for the remainder of the year. During the quarter, the National Highway Traffic Safety Administration opened a probe into whether Honda failed to report incidents involving air bag malfunctions that resulted in injuries or deaths. Subsequently, Honda launched its own independent audit of “potential inaccuracies” related to under-reporting. Because an outside company manufactured the airbags, we believe that company may be held partially responsible for any liability claims made against Honda. Based on similar circumstances involving vehicle manufacturer recalls, our assessment is that Honda’s liability should not materially affect its shareholders. Global auto demand remains strong, which we think will benefit Honda, and we expect the company’s performance will improve.
In previous commentaries we discussed the succession of issues faced by Tesco, a U.K. based grocery retailer, and our reassessment of fair value estimates. Typically, when we make an error in judgment on a stock, we have confidence it will overcome any short-term headwinds and recover. However, we recognized this investment was a mistake and thus sold our shares. Tesco was the largest detractor for the calendar year and was a major cause of our underperformance for the year. Although we strive to keep investment errors to a minimum, we do learn from our mistakes.
During the quarter we sold our positions in Givaudan, Novartis and Sanofi as they approached or hit our estimate of intrinsic value. We also sold our shares of Hermes, which we received as part of a corporate action related to our holding of LVMH. We added one new name to the portfolio for the quarter: Continental, one of Europe’s largest manufacturers of tires for cars, trucks, bicycles and agricultural equipment.
Geographically we ended the quarter with 81% of our holdings in Europe, 11% in Japan and 4% in Australia. The remaining positions are in North America (Canada), South Korea, Hong Kong, and the Middle East (Israel).
While the U.S. dollar appreciated versus many foreign currencies during the quarter, we continued to believe some currencies are overvalued. Based on the increased strength of the U.S. dollar, we decreased our defensive currency hedges. As of quarter-end, approximately 25% of the Swiss franc, 23% of the Australian dollar and 14% of the Swedish krona were hedged.
We would like to thank our shareholders for continuing to support us and our value investing philosophy. We wish you all a very happy and prosperous new year!
David G. Herro, CFA
Robert A. Taylor, CFA
Average Annual Total Returns (12/31/14)
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 12/31/14, Daimler AG represented 3.3%, Honda Motor 3.2%, Tesco 0%, Givaudan 0%, Novartis 0%, Sanofi 0%, Hermes 0%, LVMH 1.7% and Continental AG 0.1% 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.