Oakmark International Fund: Second Quarter 2013
June 30, 2013
The Oakmark International Fund returned 4% for the quarter ended June 30, 2013, outperforming the MSCI World ex U.S. Index, which lost 2% over the same period. Since its inception in September 1992, the Fund has returned an average of 11% per year, outperforming the MSCI World ex U.S. Index, which has averaged 6% per year over the same period.
Lloyds Banking Group, one of the dominant retail banks in the U.K., was the top contributor to performance for the quarter, returning 30%. Lloyds continues to make very good progress de-risking its balance sheet, and its funding, liquidity and capital generation are also improving. During the quarter Lloyds announced several divestitures within its non-core bank, including the sale of U.S. RMBS securities and its International Private Banking operation. The increased pace of divesting of non-core assets primarily reflects attractive pricing caused by an increase in demand from investors searching for yield. The price Lloyd’s received for the RMBS securities, 79% of par, was materially higher than what the bank expected to receive only a few months ago and significantly more than the security was worth at the end of 2010, when it was priced at approximately 55% of par. Additionally, the core bank profitability is improving despite the difficult macro environment and interest rate headwinds.
Another top contributor for the quarter was Daimler, the global auto manufacturer of the Mercedes brand. Even though Daimler’s first-quarter results were below expectations, investors remained upbeat, and Daimler’s stock price continued to climb due to improving sales trends in the auto industry. The company’s Mercedes-Benz deliveries increased nearly 12% in April, and since the beginning of the year unit sales increased about 6%. Mercedes-Benz sales in the U.S. grew just over 4% during the past quarter, and year-to-date sales were up 10% versus the year-ago period. In addition, Daimler announced that it may sell four company-owned Mercedes-Benz dealerships in Germany to reduce costs and better align its profitability with its close competitors, BMW and Audi.
The largest detractor from performance for the quarter was Orica, an Australian mining services company, which fell 25%. North American explosives demand has been weak, but it is showing early signs of improvement driven by coal and aggregates. Meanwhile, volume continues to grow in both Australasia and Latin America. Importantly, explosives demand is tied to mine production and extraction, rather than the mining industry’s capital expenditures, which are now in decline. Though Orica’s Ground Support business continues to underperform, the company has recognized the issue and is thoroughly restructuring the business, which will cut costs and promote cross-selling of the company’s products. Finally, in late June Orica announced that, due to health issues, CFO Noel Meehan will leave the company in October and will be replaced by an internal successor. Because Meehan’s health issues were well known and the company has built in a long transition period, we do not find this departure to be concerning. We believe Orica’s performance this quarter is an example of when the stock price movement in a quarter does not reflect the fundamentals of the business. We continue to view Orica as an attractive long-term investment.
Another detractor was AMP, the leading independent wealth management company in Australia and New Zealand, which fell 28%. In late June AMP preannounced their results, including A$32 mm of losses in its Contemporary Wealth Protection (CWP) business during the first five months of the year. This news sent the share price tumbling by nearly 13%. In May, the company noted that investor sentiment, market performance and the economic climate were particularly bad in Australia and had driven up claims and lapse rates. Although these problems were well-known, the magnitude of their persistence was surprising. To address the problems in the CWP division, the company is raising its claims assumptions, believing some of its problems are structural. Management also indicated that it will initiate a cost cutting plan. This is encouraging because AMP has successfully cut costs in the past. Finally, the wealth protection division has a new leader, which should help implement further improvements.
We traded actively during the past quarter. We added four names to the portfolio, including three old favorites: BMW, a luxury automotive company; Continental, a German tire manufacturer; and LVMH, a luxury goods manufacturer. SKF, the top premium bearings manufacturer with 20% market share, was also added to the portfolio. The premium bearings market grows faster than industrial production as premium continues to take share and pricing continues to improve. SKF is also one of the global market leaders in lubrication systems and a leading player in seals and mechatronics. These offerings will soon allow SKF to offer a complete solution to the customer, which we believe is very valuable. During the quarter we sold our position in Banco Santander. After the announcement of the new CEO and resignation of a leading independent board member, we became increasingly concerned about corporate governance. We believe management is more focused on maintaining control of the bank rather than creating shareholder value, so we liquidated our position.
Our geographical composition has shifted since last quarter. After the large appreciation of our Japanese names we reduced our exposure to 15%, with the remaining Pacific Rim exposure invested in Australia. Our European holdings increased to 75%, and our Latin America and North America (Canada) exposure decreased to 2%, with the remainder of the portfolio invested in the Middle East.
Although many global currencies have weakened compared to the U.S. dollar, we continue to believe some are overvalued. As a result, we continue to defensively hedge a portion of the Fund’s currency exposure. The depreciation of the Japanese yen continued during the quarter, and we therefore reduced our hedge to 10% of the exposure as of quarter end. Approximately 46% of the Australian dollar, 21% of the Swiss franc and 23% of the Swedish krona exposures were hedged at quarter-end
We continue to focus on finding what we believe are attractive, undervalued international companies with management teams focused on building shareholder value. We thank you for your support.
David G. Herro, CFA
Robert A. Taylor, CFA
Average Annual Total Returns (06/30/13)
Expense Ratio as of 9/30/12 was 1.06%
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 6/30/13, Lloyds Banking Group PLC represented 3.0%, Daimler AG 4.1%, Orica, Ltd. 2.6%, AMP, Ltd. 2.0%, Bayerische Motoren Werke (BMW) AG 2.6%, Continental AG 0.9%, LVMH Moët Hennessy • Louis Vuitton (LVMH) SA 1.2%, Svenska Kullagerfabriken (SKF) AB 1.2%, and Banco Santander SA 0% 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.
For a full list of The Oakmark International Fund's holdings as of 6/30/13, click here.
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.
Investing in value stocks presents the risk that value stocks may fall out of favor with investors and underperform growth stocks during given periods.
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.