Oakmark Global Fund: First Quarter 2017

Although the Oakmark Global Fund’s 7.6% absolute return this quarter was nearly identical to last quarter’s, the drivers of performance broadened to include more relative contribution from the Fund’s large international weighting and was less driven by the financials sector, though it still contributed nicely. While we are pleased with the back-to-back 7.6% quarterly returns, please understand that high-single-digit quarterly returns are more the exception than the rule. In the meantime, we trust that you appreciate the performance as much as we do, as fellow shareholders in the Fund.

For the quarter ending March 31, as outlined above, the Oakmark Global Fund returned 7.6%, compared to the 6.4% return of the MSCI World Index and 7.0% return of the Lipper Global Fund Index. Since its inception in 1999, the Fund has achieved a compound annual rate of return of 10.2%, which also compares favorably to the 4.3% return of the MSCI World Index and 5.1% return of the Lipper Global Fund Index.

Holdings in the United States, the United Kingdom and Switzerland contributed most to the Fund’s performance while holdings in the Netherlands, Japan and China contributed least to its return. The three strongest individual contributors to the Fund’s performance were CNH Industrial (+11%), Grupo Televisa (+24%) and Allianz (+12%). All of these remain significant holdings due to the still meaningful upside to our estimate of value. The largest detractors for the past quarter were Toyota Motor (-7%), CarMax (-8%) and Itron (-3%).

We initiated two new positions during the quarter (Wirecard and Arconic) and eliminated one (Omron).

Wirecard is a vertically integrated online payment services provider, primarily operating in Europe and South Asia. The majority of the activities are online, which allows for attractive growth opportunities as credit card penetration increases and as e-commerce displaces in-store purchases. As one of the leading players in the industry, Wirecard benefits from significant scale and network effects that allow it to provide an increasingly superior value proposition to its clients (i.e., a virtuous cycle effect). We find Wirecard’s management team has added tremendous value for shareholders via its strategic and operational prowess, and the large insider ownership (CEO owns 7%) creates significant alignment with minority shareholders. Wirecard trades at a meaningful discount to both our fundamentally driven intrinsic value as well as recent private market transactions, and we took advantage of the short-term price weakness to initiate a position.  

We purchased shares of Arconic after it separated from Alcoa and became an independent public company. We believe Arconic represents an attractive investment opportunity given our favorable long-term outlook for many of its end markets, the durability of its underlying business segments, and its discount relative to precedent acquisition activity. Arconic designs and manufactures lightweight metal parts and components that are used within the aerospace, building and construction, transportation, and other industries. Its largest division, Engineered Products and Solutions, accounts for approximately half of the firm’s profits and is considered the “crown jewel” of the company. This segment has a similar product portfolio to Precision Castparts, which was acquired by Warren Buffett’s Berkshire Hathaway in 2016. We believe Arconic’s long-term revenue outlook is bright. It should benefit from the trend toward more lightweight platforms in both the commercial aerospace and automotive industries. Moreover, we expect Arconic’s operating margins to expand considerably as the company reduces overhead and increases plant capacity utilization. 

We eliminated our position in Omron as its share price approached our intrinsic value estimate, and we allocated the capital to investment opportunities that we believe offer superior risk-return profiles. 

The Fund remains significantly underweight the U.S. due to relative valuation, which is probably not much of a surprise given the recent year’s performance. The U.K., Switzerland and Germany remain our largest country overweights relative to the global indexes. As always, this country positioning is driven by our bottom-up stock selection process and can diverge greatly from an index. This is not because we simply believe different is good. Rather, we build portfolios in the same manner we would manage our personal capital. We seek to maximize after-tax returns over a multi-year time horizon by concentrating our investments in the most undervalued businesses with clear paths to growing per share values, managed by capable and properly motivated management teams.

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 11% of the Swiss franc and 10% of the Australian dollar exposures were hedged at quarter end. 

Thank you for being our partners in the Oakmark Global Fund. Please feel free to contact us with your questions or comments.

The securities mentioned above comprise the following percentages of the Oakmark Global Fund’s total net assets as of 03/31/17:  CNH Industrial NV 4.7%, Grupo Televisa SAB 2.5%, Allianz SE 4.4%, Toyota Motor Corp. 3.2%, CarMax, Inc. 1.8%, Itron, Inc. 1.5%, Wirecard AG 1.9%, Arconic Inc. 0.5%, OMRON Corp. 0%, Alcoa Corp 0%, Precision Castparts Corp. 0% and Berkshire Hathaway Inc. 0%. 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 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 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.

The Lipper Global Fund Index measures the performance of the 30 largest mutual funds that invest in securities throughout the world. 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.

Investing in foreign securities presents risks that in some ways may be greater than in 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 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.

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.

All information provided is as of 03/31/17 unless otherwise specified.