Oakmark International Fund: Third Quarter 2016
September 30, 2016
The Oakmark International Fund returned 7% for the fiscal year ended September 30, 2016, nearly matching the MSCI World ex U.S. Index, which returned just over 7%. For the most recent quarter, the Fund outperformed the MSCI World ex U.S. Index, returning 13% versus 6%. Additionally, the Fund has performed well versus the MSCI World ex U.S. Index since its September 1992 inception, returning an average of 9% versus 6% over the same period.
Glencore, one of the world’s largest mining companies and commodities traders, was the top contributor to performance for the fiscal period and the most recent quarter. Last year, concerns about weaker-than-expected demand for copper and other industrial metals in China drove down the price of the commodity and, along with it, Glencore’s share price. Investors also doubted the company’s ability to service its debt. However, we believed that the market was overreacting, and we used the opportunity to buy shares at what we found to be attractive prices. In the interim, Glencore’s management responded to the weakening share price by announcing an aggressive plan to reduce debt and capital expenditures as well as to sell non-core assets. In 2016, investors have reacted positively to the company’s progress in deleveraging its balance sheet and the sale of its non-core assets, as well as to price increases in three of Glencore’s four core commodities: zinc, coal and nickel. Our investment thesis for this company is intact, as we believe Glencore’s management team is working to enhance shareholder value.
Credit Suisse, a Swiss financial services group, was the largest detractor from performance for the fiscal year. Credit Suisse’s share price has been weak over the past year for multiple reasons. The company’s investment banking results have struggled, although we recognize that the underperformance is partially due to restructuring activity and we expect performance to strengthen once restructuring is complete. One-off expenses related to litigation, pension true-up charges and write-downs on certain credit assets also hurt performance. Additionally, the U.K.’s decision to leave the European Union negatively impacted the share price. Credit Suisse’s management has responded to these challenges with a series of restructuring measures. Its management has made progress expanding its wealth management franchise, which we believe is a good move since that business is fee based, requires little capital and has very good secular growth trends. Additionally, Credit Suisse has reduced its exposure to the global markets business, which has enabled it to de-risk its balance sheet and operate with a more efficient cost structure. Credit Suisse’s management has confirmed the restructuring of its global markets business is nearing completion and should improve profitability over the coming quarters. Credit Suisse’s common equity Tier 1 ratio of 11.8%, above the 10% minimum requirement, should increase even more on the back of higher consolidated profitability.
We initiated a position in Royal Bank of Scotland (RBS), a U.K.-based commercial and retail bank, during the quarter after the share price plummeted on news that the U.K. had voted to leave the European Union. We believed the market had overreacted as shares of RBS fell nearly 40% in the two weeks following the announcement. We used the opportunity to purchase shares of the company at a significant discount to our estimate of intrinsic value. We believe RBS has a strong competitive position and a solid management team that has made tremendous strides in de-risking the business. The company’s historical earnings have been hurt by restructuring, litigation and other non-permanent items. While RBS was the quarter’s largest detractor, we expect a significant improvement in profitability and free cash flow in the quarters ahead. We also initiated a position in Olympus, the Japanese camera and endoscopes company, during the quarter. We owned Olympus in the past and most recently sold our shares in February 2016 as it approached our estimate of intrinsic value. However, by mid-August the share price had fallen over 30%, and since our investment thesis was intact, we repurchased the name into the Fund. We sold our investment in Sumitomo Mitsui Financial during the quarter.
We continue to believe some global currencies are overvalued versus the U.S. dollar. We maintained our defensive currency hedges and ended the quarter with approximately 25% of the Swiss franc and 11% of the Australian dollar hedged.
We thank you for your continued confidence and support.
David G. Herro, CFA
Robert A. Taylor, CFA
Average Annual Total Returns (09/30/16)
Since Inception (09/30/92) 9.49%
Expense Ratio as of 09/30/15 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 09/30/16: Glencore PLC 5.1%, Credit Suisse Group 5.1%, Royal Bank of Scotland 1.4%, Olympus Corporation 0.3% and Sumitomo Mitsui Financial Group, Inc. 0%. 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.