The Oakmark International Small Cap Fund returned 10% for the quarter ended March 31, 2017, outperforming the MSCI World ex U.S. Small Cap Index, which returned 8% for the same period. Since the Fund’s inception in November 1995, it has returned an average of 10%, annualized.
The top-performing stock for the quarter was IWG (TSXV:IWG, Financial) (formerly known as Regus). IWG is a global flexible workplace provider whose network includes almost 3,000 locations across 900 cities in over 100 countries. IWG’s share price reacted favorably after the release of the company’s fiscal year 2016 earnings results in late February. The company reported 5% constant currency revenue growth, which was admittedly a little bit weaker than we had expected, but was more than offset by a 13% constant currency decline in overhead expense. This cost cutting was achieved even as the company expanded its network by 6%—a further illustration of IWG’s excellent progress in restructuring its cost base. The company’s strong operating leverage produced robust free cash flow and a material improvement in return on invested capital. We expect these trends to continue as management further rationalizes its overhead expenses while it increases the mix of capital contributions from third parties. These partnering relationships enable IWG to grow in a capital light manner while further reinforcing its significant scale advantage. (IWG has almost 20 times as many locations as the number two player in the industry.) While IWG’s shares performed quite strongly in the first quarter, we see substantial upside from current levels and the company remains a significant holding in the portfolio.
The Fund’s largest detractor for the quarter was SKY Network Television (ASX:SKT, Financial). Based in New Zealand, SKY Network Television provides pay-television services, with content ranging from news and sports to movies and pay-per-view events. SKY Network Television’s fiscal first-half earnings were largely in line with analysts’ expectations. However, news that the New Zealand Commerce Commission would not clear the company’s proposed merger with Vodafone New Zealand weighed on SKY’s share price in February and disappointed investors, including us, who believed the merger would benefit shareholders. Although we have reduced our estimate of SKY’s intrinsic value, we continue to remain shareholders, as we believe its standalone business is still trading at a large discount to the company’s true worth.
We initiated three new positions in the Fund this quarter: Megacable Holdings (MEX:MEGA CPO), Wirecard and Howden Joinery Group. Megacable Holdings is the second-largest cable provider in Mexico and the last remaining independent cable company of its size in the country. Based in Germany, Wirecard provides outsourcing and white label solutions for electronic payment transactions. Howden Joinery Group is the leading supplier of kitchens in the U.K., controlling 25% of the total market share. We eliminated our positions in Ferrari (Italy) and Interpump Group (Italy) during the quarter.
Geographically, we ended the quarter with 21% of our holdings in Asia, 60% in Europe and the U.K., and 11% in Australasia. The remaining positions are 5% in North America (Canada and the U.S.) and 3% in Latin America (Brazil and Mexico).
We still maintain hedge positions on two of the Fund’s currency exposures. As of the quarter end, the Australian dollar hedge was 9% and the Swiss franc exposure was hedged 10%.
Thank you for your continued confidence and support.
David G. Herro, CFA
Portfolio Manager
Michael L. Manelli, CFA
Portfolio Manager
Justin D. Hance, CFA
Portfolio Manager
The securities mentioned above comprise the following percentages of the Oakmark International Small Cap Fund’s total net assets as of 03/31/17: IWG PLC 4.4%, SKY Network Television, Ltd. 1.7%, Vodafone Group Plc 0%, Megacable Holdings SAB 0.7%, Wirecard AG 1.4%, Howden Joinery Group PLC 0.9%, Ferrari N.V. 0% and Interpump Group SpA 0%. Portfolio holdings are subject to change without notice and are not intended as recommendations of individual stocks.
