Oakmark International Small Cap Fund: First Quarter 2016
March 31, 2016
The Oakmark International Small Cap Fund declined 1% for the quarter ended March 31, 2016, underperforming the MSCI World ex U.S. Small Cap Index, which returned 1% for the same period. Since the Fund’s inception in November 1995, it has returned an average of 9% per year.
The top-performing stock for the quarter was Primary Health Care. Primary operates more than 70 health care clinics in Australia and is also one of the largest providers of pathology and diagnostic imaging services in the country. During the quarter, Primary reported its fiscal year 2016 first-half earnings, which met analysts’ outlook for the reporting period and showed that the company’s medical centers business demonstrated stronger growth and margin development despite a lower number of doctors for the year and fee index freezes. On a recent trip to Australia, we met with CEO Peter Gregg and CFO Malcolm Ashcroft, and we continue to believe that management at the company has improved significantly. We believe the company is taking necessary actions including moving to a more sustainable doctor recruitment model, increasing the level of talent within the organization and reducing financial leverage. Furthermore, we like that management is focused on recycling capital from non-core assets, such as the recent sale of the company’s software business for general practitioners in order to fund organic growth and improve returns on capital in the company’s core medical center, pathology and imaging businesses.
The Fund’s largest detractor for the quarter was a Swiss private bank holding company, EFG International. During the quarter, EFG International announced a proposed acquisition of one of the oldest private Swiss banks, BSI. BSI’s assets under management are similar in size to EFG’s and the combined entity would become the fifth-largest private bank in Switzerland. Due to the size of the deal, EFG will need to issue equity to finance the transaction; this news hurt EFG’s share price during the quarter. However, in our view, the longer-term synergy opportunities are significant and if the merger is executed properly, we believe that the combined entity’s earnings power should be materially higher than EFG as a stand-alone entity.
We initiated five new positions in the Fund this quarter: Aberdeen Asset Management, Azimut Holding, Ferrari, Interpump Group and Regus. Aberdeen Asset Management is based in the U.K. and is one of the world’s largest asset management firms, with operations in over 20 countries. Azimut Holding is an Italy-based investment management company that offers asset management and financial services products to private and institutional clients. Ferrari is an Italian luxury sports car manufacturer. Interpump is an Italian manufacturer and marketer of high-pressure pumps, hydraulics and cleaning equipment that provides products to clients in over 60 countries. Lastly, based in the U.K., Regus is a global flexible workplace provider that serves more than two million customers in 2,600 locations across 900 cities in 106 countries. We eliminated our positions in Fugro (Netherlands), MLP (Germany), Treasury Wine Estates (Australia) and Schoeller-Bleckmann Oilfield Equipment (Austria) during the quarter.
Geographically, we ended the quarter with 20% of our holdings in Asia, 61% in Europe and 12% in Australasia. The remaining positions are in North America (Canada and the U.S.), Latin America (Brazil) and the Middle East (Israel).
We still maintain hedge positions on two of the Fund’s currency exposures, and as of the quarter end, 11% of the Australian dollar and 26% of the Swiss franc exposures were hedged.
Thank you for your continued confidence and support.
David G. Herro, CFA
Michael L. Manelli, CFA
Average Annual Total Returns (03/31/16)
Since Inception (11/95) 9.16%
Expense Ratio as of 9/30/15 was 1.35%
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 performance of the Fund does not reflect the 2% redemption fee imposed on shares redeemed within 90 days of purchase. To obtain the most recent month-end performance data, view it here.
The holdings mentioned above comprise the following percentages of the Oakmark International Small Cap Fund’s total net assets as of 3/31/16: Primary Health Care, Ltd. 2.3%, EFG International AG 1.6%, BSI SA 0%, BTG Pactual 0%, Aberdeen Asset Management PLC 1.1%, Azimut Holding SpA 2.3%, Ferrari N.V. 0.8%, Interpump Group SpA 0.1%, Regus PLC 1.6%, Fugro N.V. 0%, MLP AG 0%, Treasury Wine Estates, Ltd. 0%, and Schoeller-Bleckmann Oilfield Equipment AG 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 Small Cap Fund as of the most recent quarter-end.
The MSCI World ex U.S. Small Cap Index (Net) is a free float-adjusted market capitalization index that is designed to measure global developed market equity performance, excluding the U.S. The MSCI Small Cap Indices target 40% of the eligible Small Cap universe within each industry group, within each country. MSCI defines the Small Cap universe as all listed securities that have a market capitalization in the range of USD200-1,500 million. 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 stocks of smaller companies often involve more risk than the stocks of larger companies. Stocks of small companies tend to be more volatile and have a smaller public market than stocks of larger companies. Small companies may have a shorter history of operations than larger companies, may not have as great an ability to raise additional capital and may have a less diversified product line, making them more susceptible to market pressure.
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.