Bill Nygren Oakmark Global Select Fund Letter to Shareholders
The largest contributor to the Fund’s quarterly performance was Toyota Motor, a Japanese automotive manufacturer, which returned 31%. Results for Toyota’s third fiscal quarter were better than expected, and management increased its full-year operating profit projections 35% above original estimates. Management expects to gain market share in the U.S. and is benefiting from a rebound in its Japanese business, where unit sales increased 39% over the same period last year. Toyota’s fundamentals remain very strong, and we expect that a gradually improving economy will add to the company’s rapidly growing business.
Another large contributor was Daimler AG (DAI), a global automotive manufacturer. Daimler’s stock price advanced significantly during the quarter, reversing its declines over the past few quarters. Despite tremendous growth for Daimler’s Mercedes Car Group, its largest division, the company’s performance had lagged behind BMW and Audi. We believe Daimler is poised to rebound over the next couple of years because the company has several competitive advantages. Its new small-car models, which will be rolled out this year, should not only help Mercedes grow and regain competitive status, but should also boost profitability because these new models use the fixed costs of currently idle plants. Also, because the Mercedes brand is much later into its model cycle than BMW or Audi, Daimler plans to ramp up the number of launches in 2013. In February, Daimler released its full-year 2011 results, which included strong revenue numbers in all segments except for Daimler buses. By division, the best performance came from Daimler trucks, where revenue advanced 20%, followed by Mercedes-Benz vans (revenue up just over 17%) and Mercedes-Benz cars (revenue up almost 8%). The company’s finance business also performed well and realized a return-on-equity increase of nearly 26% for the year. Additionally, free cash flow remains strong. We remain excited about the future prospects for this high-quality company and believe the strong results achieved by both Toyota (TM) and Daimler may signal a resurgence in the auto manufacturing industry.
Capital One Financial (COF), a U.S.-based financial services provider, also was a top contributor, returning 32% during the quarter. Capital One completed the acquisition of ING Direct and received approval to purchase HSBC (HBC)'s U.S. credit card business during the first quarter. Together, these two acquisitions are expected to add approximately $1.50 in per-share value and should propel Capital One’s cash earnings per share to nearly $8.00 in 2013. These acquisitions, along with a strong balance sheet and a projected Basel III Tier 1 common ratio over 10% at the end of 2012, should allow management to start returning capital to shareholders in 2013. At 8x 2013 cash earnings per share, Capital One is, in our view, an attractive investment.
We are happy to report that there were no detractors from performance for the quarter.
Geographically, we ended the quarter with our European and Japanese holdings increasing slightly to 34% and 18%, respectively. The remainder of the Fund’s investments, excluding cash, are in North America. We did not add or remove any names from the Fund during the quarter.
Due to the U.S. dollar’s weakness relative to some global currencies, we currently hedge two underlying foreign currencies. At quarter-end, approximately 44% of the Fund’s Japanese yen and 42% of the Swiss franc exposures were hedged. We no longer hedge the euro, as we believe it is approaching its fair value relative to the U.S. dollar.
We have built a Fund of what we feel are undervalued companies that trade at attractive prices and that are run by management teams who focus on building shareholder value. We believe that the Fund is well-positioned to generate favorable long-term results for our fellow shareholders. We thank you for your continued support and confidence.
William C. Nygren, CFA
David G. Herro, CFA
Average Annual Total Returns (3/31/12)
Since Inception (10/06) 5.92%
Expense Ratio as of 9/30/11 was 1.24%
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 3/31/12, Toyota Motor Corp. represented 6.3%, Daimler AG 5.0%, Bayerische Motoren Werke AG 0%, Audi AG 0%, Capital One Financial corp. 5.2%, ING Direct 0%, HSBC Holdings PLC 0% of the Oakmark Global Select 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 Index (Net) is a free float-adjusted market capitalization weighted index that is designed to measure the global equity market performance of developed markets. 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.
Because The Oakmark Global Select Fund is non-diversified, the performance of each holding will have a greater impact on the Fund's total return, and may make the Fund's returns more volatile than a more diversified fund.
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 Funds’ investments and investment strategy (including current investment themes, the portfolio managers' research and investment process, and portfolio characteristics) represents the Funds’ investments and the views of the portfolio managers and Harris Associates L.P., the Funds' investment adviser, at the time of this letter, and are subject to change without notice.