Bill Nygren and David Herro - Oakmark Global Select Fund Q3 Commentary
Daiwa Securities Group (HKSE:01037), Japan’s second-largest broker, was the top contributor to performance over the past 12 months, returning 139%. As discussed in previous letters, Daiwa has benefitted from the Japanese stock market rally and the weakened yen that followed talks of economic reform. Daiwa’s fiscal 2012 results were very strong: net operating revenues increased by 24% while operating costs decreased by 7%. The most recent quarterly numbers also exceeded our expectations. The retail business achieved operating margins around 50%, and the quarter’s EBIT was more than half of what we estimated for Daiwa’s entire fiscal year. Although Daiwa’s stock price has almost tripled over the past year, we continue to believe the company’s stock has significant upside and will remain a good investment for our shareholders.
Another top contributor for the year was Daimler (XTER:DAI), the global auto manufacturer of the Mercedes brand, which returned 67%. Shares reacted positively to the company’s 2012 results, which included higher profits than we expected for the company’s Mercedes-Benz Car and Truck divisions. More recently Daimler announced significantly improved earnings and net profits for the second quarter of 2013. In addition, sales of Mercedes-Benz cars increased in all markets, driving unit sales to a new record. Although Mercedes continues to underperform Audi and BMW in China, we expect an increase in growth from its new model launches, new organizational structure, and 75 new dealerships by year end. The Trucks division has also performed well, led by a significant rebound in Latin American unit sales, which increased by 57%. Daimler management remains upbeat about global operations and reiterated the full-year guidance for all divisions.
The biggest detractor from performance for the year was Cenovus (CVE), a Canadian-based oil company, which declined 17% before we sold our position in August of this year. Our business value estimate for Cenovus fell more than the stock price after we incorporated a lower futures oil price into our model. At the same time, the share price of DirecTV (DTV), a U.S. digital television entertainment provider, fell in response to weak quarterly results, which did not affect our estimate of intrinsic value. The divergence between the two stocks was enough to tip the balance in favor of owning DirecTV, and we harvested a small tax loss by selling Cenovus. In our view, DirecTV’s shift in focus to higher-end customers has led to slower but more profitable growth. Management is focused on building shareholder value by returning cash to shareholders. Over the past five years DirecTV has aggressively repurchased shares and has reduced its outstanding shares by almost 50%. We are happy to see growth in value per share whether it comes from a growing numerator or a shrinking denominator.
In addition to the sale mentioned above we sold our shares of Toyota Motor during the quarter. You will see a new security held in the Fund, CNH Industrial (CNH). This is a result of a merger between Fiat Industrial, which was owned by the Fund, and CNH Global. Fiat owned 88% of publicly listed CNH, and to simplify the shareholder structure, it decided to fully consolidate and merge the two companies. The merger is expected to result in financial, cost and tax savings. CNH Industrial is now domiciled in the Netherlands rather than Italy.
Geographically, we ended the quarter with our European and Japanese holdings comprising 42% and 12% of the Fund, respectively. North America accounts for the remainder of the Fund’s holdings.
We continue to believe some global currencies are overvalued, and we are defensively hedging the Fund’s currency exposure. As of quarter end, approximately 25% of the Swiss franc and 7% of the Japanese yen exposures were hedged.
We thank you, our shareholders, for your continued support and confidence.
William C. Nygren, CFA
David G. Herro, CFA
As of 9/30/13, Daiwa Securities Group, Inc. represented 5.0%, Daimler AG 6.4%, Cenovus Energy, Inc. 0%, DIRECTV 4.4%, Toyota Motor Corp. 0%, and CNH Industrial N.V. 5.6% 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.
Click here to access the full list of holdings for The Oakmark Global Select Fund as of the most recent quarter-end.
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.
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.