The Oakmark Global Select Fund returned 7.7% for the quarter ended December 31, 2013, slightly underperforming the MSCI World Index’s 8% return. For the calendar year, the Fund was up 34%, while the MSCI World Index returned 27%. The Fund has returned an average of 9% per year since its inception in October 2006, outperforming the MSCI World Index’s annualized gain of 5% over the same period.
FedEx (FDX) was the top contributor for the quarter, returning 26%. FedEx reported solid second quarter results; its express division alone generated 140 basis points of year-over-year margin improvement. These results show that their cost-savings plans are continuing to gain traction. The ground division also performed well, producing 8% year-over-year volume growth. This marked the 55th consecutive quarter that the ground division has gained market share – a trend that should continue for many more years. Management also improved profitability and deployed the company’s excess capital into what we believe are value-creating activities. When we initially invested in FedEx, we believed that the company could substantially improve its margins and capital allocation, and we are pleased that management executed on – and the market appropriately recognized – such opportunities for sustained value growth.
The largest contributor for the year was Daiwa Securities Group (TSE:8601), Japan’s second largest broker, which returned 88%. During the quarter Daiwa released its fiscal first-half results, showing its highest pre-tax profits since the company started reporting such figures in 1995. Revenues rose across the board in retail, wholesale and asset management and are on track to meet the company’s full-year estimates. Of special note, the wholesale banking division became profitable for the first time since 2009. We expected wholesale banking revenues to be strong due to equity trading and commission activity, but were surprised by the advance in fixed income revenues which surpassed peers.
The largest detractor for the quarter was CNH Industrial (CNHI), a global agricultural and construction equipment manufacturer, which fell 11%. CNH released its nine-month results, which showed revenue growth of 0.6%, but the company’s margins were adversely affected by Iveco, its trucks and commercial vehicles segment. Iveco’s margins fell short of expectations due to tough pricing, high launch costs, negative mix and increases in bad debt provisions. Management maintains full-year guidance of 3-4% revenue growth. We believe improvements in the Iveco division will help CNH Industrial achieve its long-term margin targets.
Falling 15%, the largest detractor for the year was Canon (CAJ), a Japan-based consumer imaging company. This performance was largely the result of the downgrade of the ILC business (digital SLRs and lenses). This business has lagged enough that management has lowered fiscal-year volume estimates from 9m to 8m. Quarterly data confirms that imaging inventory has decreased year-over-year. Despite falling prices due to uncertain consumer markets in developed markets and from trading down in emerging markets, management indicates pricing is normalizing. The office products division has remained mostly unchanged, generating only slightly lower volumes. In addition, print volumes are growing again, and Canon is taking market share. We continue to believe that Canon is a compelling investment opportunity that will reward shareholders in the long term.
Geographically, 48% of the Fund’s holdings were invested in U.S.-domiciled companies as of December 31, while approximately 42% were allocated to equities in Europe and 10% in Japan.
Global currencies were relatively volatile during the quarter. The Japanese yen depreciated to 105 by the end of the quarter, its lowest level since 2008. We no longer consider the yen to be overvalued and therefore closed our hedge of the underlying currency. As of quarter end we hedged 33% of the Fund’s Swiss franc exposure.
We would like to thank our shareholders for continuing to support us and our value investing philosophy. As we ring in a new year, we believe we have built a portfolio of high quality companies that will provide our shareholders with attractive returns over the long term.
Happy New Year!
William C. Nygren, CFA
David G. Herro, CFA
As of 12/31/13, FedEx Corp. represented 4.5%, Daiwa Securities Group, Inc. 4.7%, CNH Industrial N.V. 5.6%, and Canon, Inc. 4.9% 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.B
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.