Oakmark International Small Cap Fund: Second Quarter 2016
June 30, 2016
The Oakmark International Small Cap Fund declined 2% for the quarter ended June 30, 2016, underperforming the MSCI World ex U.S. Small Cap Index, which declined 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 Saft Groupe. Headquartered in France, Saft Groupe is a leading designer, developer and manufacturer of batteries for industrial use by companies in areas such as telecommunication, transport and defense. Shares of Saft Groupe rose in early May after news that it received a friendly tender offer from French energy operator Total. The offer price came in at an approximately 38% premium to its prior day’s closing price and remained at that level as we ended the second quarter. Total has indicated that the acquisition is part of its plan to accelerate development in the fields of renewable energy and electricity. We believe the offer should face few regulatory hurdles. However, in order to pass, the transaction needs more than 50% shareholder approval. We will evaluate how to proceed, but in the interim we have welcomed the closing of the gap between Saft’s share price and our estimate of its intrinsic value.
Bid activity was not limited to Saft Groupe, as Premier Farnell (U.K.) and Gategroup (Switzerland) also received cash tender offers at valuations near our estimate of intrinsic value. In addition, ALS Ltd. (Australia) received a potential private equity bid at an indicative price of AUD$5.30 per share, which was rejected by ALS’ board as they deemed the offer too low. We agree with the board’s assessment; our estimate of intrinsic value is well ahead of the indicative offer price as well. Finally, New Zealand based pay-TV operator Sky Network Television announced its plans to merge with Vodafone NZ, the New Zealand unit of telecommunications operator Vodafone Group (U.K.). We find this merger compelling because it will enable the group to offer a bundled solution of pay-TV, broadband and phone, which has proven successful in many other markets. The financial considerations are also compelling since the deal values Sky’s equity at more than a 20% premium to its trading price prior to the announcement of the merger.
As referenced in the International lead letter this quarter, businesses with exposure to the U.K. real estate market detracted from Fund performance. In line with this, the largest detractor to performance was Countrywide, U.K.’s largest property services group. Following the Brexit vote, Countrywide shares fell by 30% by the close of the quarter. We believe Countrywide is a high-quality business, but U.K. real estate transactions are likely to decline since consumers will probably be reluctant to make large, life-changing decisions in such an uncertain environment. A recovery in the U.K. housing market will benefit Countrywide significantly, but this looks unlikely in the near term. We will continue to monitor the developments in the U.K. and adjust our estimate of intrinsic value if warranted.
We initiated four new positions in the Fund this quarter: Ansell, Tower Bersama Infrastructure, Cosmo Lady and Otsuka Corporation. Headquartered in Australia, Ansell designs, develops and manufactures health and safety protection solutions made from latex. Tower Bersama Infrastructure, one of the largest independent tower companies in Indonesia, provides telecommunication infrastructure services to Indonesian wireless carriers. Cosmo Lady researches, develops and sells female intimate wear. It is the largest branded intimate wear company in China. Japan-based Otuska Corporation provides information services, system devices such as computers and copy machines, and the service and support covering implementation, education and maintenance. We eliminated our positions in Altran Technologies (France), Electrocomponents (U.K.) and Orbotech (Israel) during the quarter.
Geographically, we ended the quarter with 19% of our holdings in Asia, 59% in Europe and the U.K., and 13% in Australasia. The remaining positions are in North America (Canada and the U.S.) and Latin America (Brazil).
We still maintain hedge positions on two of the Fund’s currency exposures, and as of the quarter end, 10% of the Australian dollar and 30% of the Swiss franc exposures were hedged.
As we navigate these times, we thank you for your confidence and support.
David G. Herro, CFA
Michael L. Manelli, CFA
Average Annual Total Returns (06/30/16)
Since Inception (11/95) 8.92%
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 6/30/16: Saft Groupe SA 0.7%, Total SA 0%, Premier Farnell PLC 1.5%, gategroup Holding AG 0.3%, ALS, Ltd. 2.6%, SKY Network Television, Ltd. 1.9%, Vodafone Group Plc 0%, Countrywide PLC 1.6%, Ansell Ltd. 0.5%, Tower Bersama Infrastructure 0.3%, Cosmo Lady (China) Holdings Company Limited 0.02%, OTSUKA Corp. 0.1%, Altran Technologies, SA 0%, Electrocomponents PLC 0%, and Orbotech Ltd 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.