For the quarter ended June 30, 2020, the Oakmark International Small Cap Fund returned 24.7%, comparing favorably to the MSCI World ex U.S. Small Cap Index, which returned 21.7% for the same period. Since the Fund’s inception in November 1995, it has returned an average of 7.7% per year.
Following significant share price declines across equities during the first quarter, the second quarter proved a much better environment. All but three of our holdings generated positive returns. Many of our largest contributors this quarter were companies that significantly detracted from returns a quarter ago, including Konecranes (OHEL:KCR, Financial), Duerr (XTER:DUE, Financial), Dometic Group (OSTO:DOM, Financial), Travis Perkins (LSE:TPK, Financial) and Autoliv (ALV, Financial). As we discussed last quarter, the steep decline in many of our holdings’ share prices was the result of short-term macro uncertainty, rather than declines in inherent business values. Now, as global reopening efforts have begun, the share prices of many “economically sensitive” businesses have rebounded. This benefitted Fund performance due to our significant overweight in industrials, many of which are deemed economically sensitive.
Konecranes, a Finnish engineering company that specializes in the manufacture and service of overhead cranes and lifting equipment, was the largest contributor to the Fund’s performance in the quarter. The company’s first-quarter earnings report revealed better than expected revenues, particularly within its high-margin services division. While management expects that the coronavirus will slow the company’s second-quarter sales and orders across all divisions, it also believes that cost-cutting efforts and improved execution will drive earnings’ margins higher quarter over quarter. Because Konecranes provides essential services, its technicians have been making most of their planned customer maintenance visits throughout the pandemic. In addition, some customers have asked the company to perform significant maintenance overhauls during temporary plant shutdowns, which has provided further support for Konecranes during this very difficult economic environment. We believe the company is undervalued and remains an attractive investment.
Babcock International (LSE:BAB, Financial), a U.K. engineering firm that operates and manages critical infrastructure for the U.K. government, was the largest detractor to the Fund’s performance this quarter. The company’s share price fell in June after management announced it would defer its final dividend and that its fiscal-year earnings were lower than expected. Babcock’s primary weakness has been its oil and gas aviation business. The global oil and gas market has become even more competitive and the significant fall in the price of oil, coupled with coronavirus-related restrictions, has made transport to offshore oil rigs more challenging and has hurt demand. Babcock recently announced that David Lockwood would become its new CEO in September, replacing Archie Bethel, who announced his retirement earlier this year. Lockwood was previously CEO of another large U.K. defense company, and we look forward to meeting with him in the coming months. Despite the company’s recent stock price weakness, we believe it is well positioned and trading at a large discount to our estimate of its intrinsic value.
Portfolio trading was active this quarter as we continued to use the volatility to reposition the portfolio, adding to our most compelling investment opportunities and trimming holdings to fund these additions. We also initiated four new positions during the quarter: ALS Limited (ASX:ALQ), Elekta (OSTO:EKTA B), St. James’s Place (LSE:STJ) and Equiniti (LSE:EQN). ALS Limited, a former Fund holding, is an Australia-based company, which provides testing, inspection, certification and verification services in the life sciences, industrial and commodities fields. Swedish-based Elekta, a medical technology company, produces and sells products centered on the treatment of neurological disorders and radiation of cancer. St. James’s Place, a financial services holding company based in the U.K., offers investment, retirement and intergenerational wealth management services, along with banking and mortgage services. Lastly, Equiniti Group, also domiciled in the U.K., is a business services firm, primarily operating in the areas of share registry and corporate actions, employee and executive share plan administration, and remediation outsourcing.
We exited one position, Dignity (LSE:DTY) (U.K.), during the quarter and deployed the proceeds into other holdings.
Geographically, we ended the quarter with approximately 71% of our holdings in Europe and the U.K., 10% in Asia, and 8% in Australasia. The remaining positions are 5% in Latin America (Mexico) and 6% in North America (Canada).
We thank you for your ongoing patience and support. We remain steadfast in our pursuit of finding attractive, undervalued companies with management teams dedicated to building shareholder value.
The securities mentioned above comprise the following preliminary percentages of the Oakmark International Small Cap Fund’s total net assets as of 06/30/20: ALS Limited 0.1%, Autoliv 1.9%, Babcock International 1.5%, Dignity 0%, Dometic Group 1.2%, Duerr 4.0%, Elekta Cl B 1.4%, Equiniti Group 0.2%, Konecranes 4.3%, St James’s Place 1.1% and Travis Perkins 2.9%. Portfolio holdings are subject to change without notice and are not intended as recommendations of individual stocks.
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 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.
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 information, data, analyses, and opinions presented herein (including current investment themes, the portfolio managers’ research and investment process, and portfolio characteristics) are for informational purposes only and represent the investments and views of the portfolio managers and Harris Associates L.P. as of the date written and are subject to change and may change based on market and other conditions and without notice. This content is not a recommendation of or an offer to buy or sell a security and is not warranted to be correct, complete or accurate.
Certain comments herein are based on current expectations and are considered “forward-looking statements”. These forward looking statements reflect assumptions and analyses made by the portfolio managers and Harris Associates L.P. based on their experience and perception of historical trends, current conditions, expected future developments, and other factors they believe are relevant. Actual future results are subject to a number of investment and other risks and may prove to be different from expectations. Readers are cautioned not to place undue reliance on the forward-looking statements.
All information provided is as of 06/30/2020 unless otherwise specified.
