Oakmark International Small Cap Fund: Second Quarter 2012
June 30, 2012
The Oakmark International Small Cap Fund declined 12% for the quarter ended June 30, 2012, which was greater than the 9% loss for the MSCI World ex U.S. Small Cap Index. For the past 10 years, the Fund has earned an annualized return of 9%, slightly outperforming the annual return for the index over the same period.
The top-performing stock for the quarter was Sugi Holdings, whose 820 stores make it one of the largest drugstore chains in Japan. Sugi Pharmacy is the only drugstore chain in Japan to have prescription drug-dispensing operations in every store. Roughly two-thirds of revenue comes from sales of prescription drugs, over-the-counter medications and cosmetic and beauty products, with the rest coming from baby products, household wares, food and other items.
Sugi has benefited from Japan’s aging society and from an increased percentage of prescriptions being filled away from hospitals. Same-store sales in the prescription business were up more than 24% in the quarter ending February 2012. Sugi also recently announced some restructuring to its pharmacy division, including moving its planning and store development divisions to the holding company in order to increase efficiency. It also launched three separate sales offices run by professional managers in Chubu, Kanto and Kansai, the country’s most populous regions. The managers will be responsible for operations for their regions, which will allow the founder and CEO to focus on strategy, merchandising and new store development. We believe this move helps set the business up for sustained success.
Another contributor to the Fund this quarter was Kansai Paint, one of Japan’s leading paint companies. Kansai’s products are used primarily for automobiles, construction, ships, bridges and residential housing. While Kansai has a strong business in Japan, a significant portion of the company’s earnings come from developing countries, including India and South Africa. Kansai is benefiting from accelerated auto manufacturing in Japan, as the country’s largest automakers have recovered from the natural disasters that curtailed operations last year. Kansai controls 50% of the auto paint industry in the country and has successfully followed the Japanese auto companies overseas. Management is also endeavoring to increase the company’s presence in other parts of the world. For example, the company made two recent acquisitions at attractive prices: Freeworld, a dominant paint company in South Africa and other smaller African countries; and Prakarsa Coatings, an Indonesian paint company that controls 5% of its country’s decorating market.
The bottom-performing stock for the quarter was Myer Holdings, Australia’s largest department-store group. In May, Myer revised down its profit guidance for the current fiscal year ending July 31. The company expects profit to be no more than 15% below (previous guidance was 10% below) what was realized in fiscal 2011. We think the weaker-than-expected results are being driven by the Australian consumer’s continued preference to save and deleverage rather than spend. We do not believe the weak results are due to a Myer-specific issue. We are confident in Myer’s strategy as the company continues to bolster its high-margin exclusive brands, invest in online growth and optimize its store footprint. In spite of the challenging short-term conditions the company faces, we continue to think Myer offers significant value.
This quarter we added Konecranes and Randstad Holding to the portfolio. Konecranes is a Finnish engineering company that specializes in overhead lifting equipment, such as workstation cranes, industrial cranes, cranes for shipyards and ports, forklift trucks, load manipulators and other heavy-duty and light lifting equipment. Konecranes markets its machinery under its own name and other brands such as STAHL, Sanma and Verlinde. It also offers custom-made products. The company sells primarily to industrial companies and to harbors and shipyards around the world. In addition, Konecranes is a global leader in maintenance, inspection and repair services. Located in the Netherlands, Randstad is a global provider of HR services and the second-largest staffing organization in the world, operating in 40 countries. We sold our holdings in Alaska Milk, Neopost, Wincor Nixdorf, Binggrae and Media Prima during the quarter.
Geographically, we ended the quarter with our European holdings comprising 54% of the portfolio and with Pacific Rim holdings decreasing slightly to 42% of the portfolio.
Because we continue to believe that the U.S. dollar remains weak against some currencies, we maintained hedge positions on a few of the Fund’s currency exposures. At the recent quarter-end, approximately 68% of the Fund’s Australian dollar, 59% of the Norwegian krone, 44% of the Swiss franc, 39% of the Japanese yen and 16% of the Swedish krona exposures were hedged.
During these turbulent times we thank you for your patience and support. We will remain steadfast in our pursuit of finding attractive, undervalued foreign companies with management teams dedicated to building shareholder value to add to the Fund.
David G. Herro, CFA
Michael L. Manelli, CFA
Average Annual Total Returns (6/30/12)
Expense Ratio as of 9/30/11 was 1.38%
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 Funds 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.
As of 6/30/12, Sugi Holdings Co., Ltd. represented 2.6%, Kansai Paint Co., Ltd. 2.8%, Freeworld Coatings Limited 0%, PT. Kansai Prakarsa Coatings 0%, Myer Holdings, Ltd. 2.2%, Konecranes Plc 0.8%, Randstad Holding NV 0.2%, Alaska Milk Corp. 0%, Neopost SA 0%, Wincor Nixdorf AG 0%, Binggrae Co., Ltd. 0%, and Media Prima Berhad 0% of the Oakmark International Small Cap Fund's total net assets. Portfolio holdings are subject to change without notice and are not intended as recommendations of individual stocks.
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.
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.