The Oakmark International Fund returned 9% for the quarter ended March 31, 2017, outperforming the MSCI World ex U.S. Index, which returned 7% over the same period. Most importantly, the Fund has returned an average of 10% per year since its inception in September 1992, outperforming the MSCI World ex U.S. Index, which has averaged 6% per year over the same period.
Glencore (LSE:GLEN, Financial), one of the world’s largest mining companies and commodities traders, was the top contributor to performance again this quarter, returning 14%. Glencore reported full-year 2016 operating profit of $10.3 billion, which exceeded our estimates by approximately 5%. Improved profitability was driven by solid performance in both the Industrial and Marketing segments. In January, we met with CEO Ivan Glasenberg, who remains optimistic about copper prices given steady demand and deteriorating supply. In addition, Glencore officially completed its debt reduction plan in 2016, and its net debt declined by $14.1 billion over the last 18 months—a remarkable achievement that reflects management’s decisive action. As the company’s balance sheet health has improved, so has its generation of free cash flow, which will largely be returned to shareholders. Management plans to return at least $1 billion to shareholders in 2017 via dividends. We believe management is working to enhance shareholder value, and our investment thesis remains intact.
H&M (OSTO:HM B), a global fashion designer and retailer, was the largest detractor for the quarter, declining 8%. As we anticipated, higher-than-normal inventory levels in the first quarter led to increased markdowns and lower margins. While H&M has started to see an improvement in a number of markets, including China, its performance in the U.S. and Central/Southern Europe remains weak. However, the company is taking definitive steps to improve results and increase its profitability. Last year, a new management team revised the company’s growth targets to focus more on comparable and profitable growth. Also it recently announced the launch of the Arket brand, a higher priced concept that will offer classic garments for women, men and children, as well as home furnishings. We support this move as the company has been successful with its other lines, including & Other Stories and COS. We believe that H&M’s substantial investments over the past few years will soon bear fruit and that the gross margin headwinds facing the company will also abate. For these reasons, we continue to believe that H&M provides good investment value and that it will reward shareholders in the long term.
During the quarter, we sold our position in Nomura Holdings (NMR, Financial) and added two new names to the portfolio: Publicis Group (XPAR:PUB, Financial) (France), a leading global advertising and media services company, and Volvo (OSTO:VOLV B) (Sweden), the world’s second-largest truck manufacturer.
Geographically, we ended the quarter with 77% of our holdings in Europe, 8% in Japan and 4% in Australia. The remaining positions are in Mexico, the U.S., Indonesia, China, India, Hong Kong, South Korea, Taiwan and Israel.
We continue to believe the Swiss franc and Australian dollar are overvalued versus the U.S. dollar. As a result, we defensively hedged a portion of the Fund’s exposure. Approximately 10% of the Swiss franc and 10% of the Australian dollar exposures were hedged at quarter end.
We continue to focus on finding what we believe are attractive, undervalued international companies with management teams focused on building shareholder value. We thank you for your support.
David G. Herro, CFA
Portfolio Manager
[email protected]
Michael L. Manelli, CFA
Portfolio Manager
[email protected]
The securities mentioned above comprise the following percentages of the Oakmark International Fund’s total net assets as of 03/31/17: Glencore PLC 3.9%, Hennes & Mauritz AB (H&M) - Class B 2.8%, Nomura Holdings, Inc. 0%, Publicis Groupe SA 1.3% and Volvo AB 1.3%. Portfolio holdings are subject to change without notice and are not intended as recommendations of individual stocks.
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