Oakmark International Fund: Second Quarter 2017
June 30, 2017
The Oakmark International Fund returned 6.2% for the quarter ended June 30, 2017, outperforming the MSCI World ex U.S. Index, which returned 5.6% over the same period. Most importantly, the Fund has returned an average of 10.1% per year since its inception in September 1992, outperforming the MSCI World ex U.S. Index, which has averaged 6.1% per year over the same period.
Intesa Sanpaolo, an Italian retail and commercial bank, was the top contributor to performance for the quarter, returning 22%. Intesa reported good first quarter results that were in line with our expectations. In our view, costs remain well controlled, and asset quality continues to improve as non-performing loans decline. Shares of Intesa rose after the European Central Bank and Italian government announced plans to rescue two Italian banks, putting an end to months of concern that their failures could undermine confidence in the Italian banking system. As part of the deal, Intesa will acquire €26 billion of performing loans and €4 billion of high-risk performing loans from the two banks. While management has not been interested in acquisitions in the past, the assets and terms of this deal were attractive in our view. First, the asset quality of the €26 billion in performing loans is better on average than Intesa’s current portfolio. In addition, Intesa will have the option to return the high-risk performing loans to the government if its asset quality deteriorates. Finally, Intesa paid merely a token price to acquire the portfolio of loans, while the Italian government agreed to contribute nearly €5 billion to maintain Intesa’s high capital ratios and dividend payments. We believe that this transaction will create value for shareholders.
Honda, Japan’s second-largest automaker, was the largest detractor from performance, declining 8% during our holding period. We’ve been a long-term shareholder of Honda, but we have grown increasingly frustrated with management’s inability to explain continued margin weakness in the company’s auto segment. Despite entering the sweet spot of the model cycle, margins remain weak. In addition, there have been multiple missteps by management at a time when North America, the company’s main market, has been booming. Although Honda is still trading at a discount to its intrinsic value, we have lost faith in management’s ability to create long-term shareholder value and sold our position.
During the quarter, we also sold our position in Check Point Software. We purchased one new name during the quarter, Axis Bank, which is the third-largest private sector bank in India. It shows strong prospects due to robust economic growth, increasing loan penetration and market share gains.
Geographically, we ended the quarter with 79% of our holdings in the U.K. and Europe, 6% in Japan and 3% in Australia. The remaining positions are in China, Indonesia, Mexico, the U.S., India, Hong Kong, South Korea and Taiwan.
We continue to believe some currencies are overvalued. As of quarter end, approximately 9% of the Swiss franc exposure was hedged. We no longer hedge the Fund’s Australian dollar exposure because we believe the currency is near fair value.
We would like to thank our shareholders for your continued support!
David G. Herro, CFA
Michael L. Manelli, CFA
Oakmark International Fund – Investor Class
Average Annual Total Returns (06/30/17)
Since Inception (09/30/92) 10.13%
Expense Ratio as of 09/30/16 was 1.00%
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 06/30/17: Intesa Sanpaolo SpA 3.0%, Honda Motor Co., Ltd. 0%, Check Point Software Technologies, Ltd. 0% and Axis Bank, Ltd. 0.8%. 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-weighted index that is designed to measure the equity market performance of developed markets, 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.
All information provided is as of 06/30/17 unless otherwise specified.