Oakmark International Fund: Fourth Quarter 2015
December 31, 2015
The Oakmark International Fund returned 5% for the quarter ended December 31, 2015, outperforming the MSCI World ex U.S. Index, which returned 4% over the same period. The Fund’s calendar year performance was weak in absolute and relative terms, declining 4% versus the MSCI World ex U.S. Index’s loss of 3%. 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.
Baidu, China’s largest Internet search engine that commands over 70% market share, was the top contributor for the quarter, returning 38%. Shares reacted positively to the company’s nine-month earnings release in October and to the company’s plans to combine their majority-controlled travel business Qunar with Ctrip. This important deal will combine the top two online travel sites in China and should lead to significantly lower subsidies and higher profitability. Additionally, the shareholder-focused management team announced a new $2 billion share repurchase program during the quarter. Finally, we believe that management’s significant investments in new businesses, such as online-to-offline services (e.g., food delivery, ride sharing, etc.), are masking the strength of the core search business, which continues to grow at a healthy rate and generates significant profits. For these reasons, we believe today’s valuation neither reflects the fair value of the company’s search business nor gives any credit for its many non-search businesses; therefore, the stock price underestimates the company’s true value.
Prada, the Italian fashion and luxury goods brand, was a top detractor for the quarter, declining 19%. The company reported fiscal third-quarter results that disappointed investors, as revenue and earnings figures fell short of analysts’ expectations. Sales in China, particularly of leather goods, continued to decline, and the company has struggled to find the right product offering to generate top-line growth. Management believes that Chinese customers are transitioning from just wanting global products found in the West to wanting bespoke products. The company’s plans to tailor clothing by geographic region should appeal to Chinese consumers, whose propensity toward travel should help them be aware that these products are exclusive to them. Prada’s lean and efficient distribution network will enable the company to move new product offerings from the design stage to the retail floor quickly—approximately four to five weeks’ time. We think that while Prada may face some short-term obstacles, its long-term outlook is promising and it is trading at a meaningful discount to its intrinsic value.
During the quarter we sold our positions in Meitec, SAP and adidas as they approached or hit our estimates of intrinsic value. We added a few new names to the portfolio for the quarter: Grupo Televisa, a Mexican media company and the most dominant producer of Spanish-language content in the world; SMFG (Sumitomo Mitsui Financial Group), the third largest bank in Japan; and Wolseley, the world’s largest traded distributor of plumbing and heating products and leading supplier of building materials based in the U.K.
Geographically, we ended the quarter with 66% of our holdings in Europe, 20% in Japan and 3% in Australia. The remaining positions are in North America (United States), South Korea, China, Hong Kong, Indonesia, Mexico and the Middle East (Israel).
We continue to believe some currencies are overvalued versus the U.S. dollar. We maintained our defensive currency hedges and ended the quarter with approximately 22% of the Swiss franc and 10% of the Australian dollar 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 (12/31/15)
Expense Ratio as of 9/30/15 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.
The holdings mentioned above comprise the following percentages of the Oakmark International Fund’s total net assets as of 12/31/15: Baidu, Inc. 1.3%, Qunar 0%, Ctrip.com 0%, Prada SPA 1.5%, Meitec, Inc. 0%, SAP SE 0%, Adidas AG 0%, Grupo Televisa S.A. 1.0%, Sumitomo Mitsui Financial Group, Inc (SMFG) 1.0%, and Wolseley PLC 0.1%. 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 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.