The Oakmark International Fund returned 1% for the quarter ended March 31, 2014, slightly outperforming the MSCI World ex U.S. Index. For the first six months of the Fund’s fiscal year, the Fund returned 5%, which underperformed the MSCI World ex U.S. Index’s 6% return. Most importantly, the Fund has returned an average of 11% per year since its inception in September 1992, outperforming the MSCI World ex U.S. Index, which has averaged 7% per year over the same period.
Intesa Sanpaolo (MIL:ISP), an Italian retail and commercial bank, was the top contributor to performance for the quarter, returning 37%. Since September 2013, Intesa has returned 64%. Though we still believe the stock to be undervalued, we trimmed our holdings as the gap between price and our estimation of value significantly narrowed. During the quarter, management released a new 2017 business plan that we found very positive. Management has committed to return EUR 10 billion to shareholders via dividends over the next four years. This constitutes a cumulative payout ratio in excess of 70%. Even with this return of capital to shareholders, Intesa will be over-capitalized compared to Basel III requirements, leaving the door open for additional capital returns. Additionally, management plans to increase investments in fee-based businesses, including asset management and insurance. We believe management has a solid plan and that this investment will continue to provide value for our shareholders.
Another top contributor was AMP (ASX:AMP), the leading independent wealth management company in Australia and New Zealand, which returned 20%. AMP’s fiscal year end results revealed that the growth in assets under management exceeded expectations. Although its Wealth Protection division continues to face challenges, the company’s actions on claims management are beginning to show positive results. Additionally, management remains diligent on cost discipline and has brought controllable costs down 2.6% for the group, despite cost inflation of 2.5-3%. Management continues to return capital to shareholders via dividends and has recently committed to a share repurchase program in order to neutralize its dividend reinvestment program. Finally, we believe AMP is well positioned to benefit from expected increases in retirement savings and wage growth in Australia.
The largest detractor for the quarter was Honda Motor (HMC), the Japanese automobile manufacturer, which fell 14%. Honda has reported weaker than expected operating margins since the Civic redesign mishap. A mere 18 months after it launched a major redesign, Honda rushed a refresh of the Civic in order to address concerns with materials and quality. To ensure that the Accord’s redesign did not suffer the same fate, Honda ordered changes to the new Accord’s power train and engine late in the development cycle, which negatively affected margins. We expect Honda’s mid-term margins to continue to feel pressure but do not believe this will damage the company’s long-term prospects.
During the quarter we sold our positions of FANUC and Signet Jewelers as they approached our estimate of fair value. We did not add any new names to the Fund during the quarter.
Our geographical composition changed slightly over the past quarter. Our European holdings decreased to approximately 77%, and our Japan holdings increased to approximately 14%. The remaining positions are in Australia, North America (Canada), South Korea and the Middle East.
Global currencies were relatively stable during the quarter, but we continue to believe some currencies are overvalued. As a result, we defensively hedged a portion of the Fund’s currency exposure. Approximately 32% of the Australian dollar, 36% of the Swiss franc and 26% of the Swedish krona were hedged at quarter end.
We continue to adhere to a long-term value philosophy that has enabled us to build a portfolio of high quality names trading at discounts to our estimate of intrinsic value. We thank you, our shareholders, for your continued support.
David G. Herro, CFA
Robert A. Taylor, CFA
As of 03/31/14, Intesa Sanpaolo SpA represented 1.8%, AMP, Ltd. 2.2%, Honda Motor Co., Ltd. 2.8%, FANUC Corp. 0%, and Signet Jewelers, Ltd. 0% of the Oakmark International 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 International Fund as of the most recent quarter-end.
The MSCI World ex U.S. Index (Net) is a free float-adjusted market capitalization index that is designed to measure international developed market equity performance, excluding the U.S. 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 Fund’s portfolio tends to be invested in a relatively small number of stocks. As a result, the appreciation or depreciation of any one security held by the Fund will have a greater impact on the Fund’s net asset value than it would if the Fund invested in a larger number of securities. Although that strategy has the potential to generate attractive returns over time, it also increases the Fund’s volatility.
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.