David Herro Market Commentary | 4Q19

December 31, 2019

Fellow Shareholders,
The year 2019 experienced some of the same volatility that began in early 2018, but with a significant difference in annual performances. In 2019, both the Oakmark International and International Small Cap Funds delivered strong absolute performance numbers and outperformed their respective benchmarks, with the Oakmark International Small Cap Fund delivering even stronger results. The Oakmark Global and Global Select Funds also had strong absolute and relative performances*. (See the Oakmark Global and Oakmark Global Select Fund letters for more detail.)

Headline News Continues to Dictate Stock Prices
During 2019, extreme price movements were again the flavor of the day as stock prices around the globe were continually impacted by the latest news on trade, Brexit, European Union (EU) political instability and even a political conflict between South Korea and Japan dating back to World War II! For example, the markets performed strongly during the first four months, excluding March, then a few tweets fueled fear of trade wars, which contributed to a drop of over 10% in the International Fund and 8% in the International Small Cap Fund during May. August also saw measurable declines until markets began to recover and rebound, partially based on better geopolitical headlines.  

One huge fear that weighed on the markets was the possibility of a Jeremy Corbyn victory in the U.K. general election along with continued Brexit uncertainty. With a historical, large victory by the Conservative Party, the fear of a Corbyn socialist government has been smashed for the medium term. The Johnson government moved quickly to move its Brexit bill through Parliament and hopefully will take the right steps to ensure a smooth exit from the EU. Meanwhile, China and the U.S. have de-escalated their trade dispute with an agreement of a “Phase One” trade deal. These events have helped global equity market sentiment going into 2020.

It’s All About VALUE
Despite the recovery in 2019, I still believe our portfolios offer good value for three reasons. First, the European financials sector has performed well in 2019 but is still well below where it was in early 2018. Many of the headwinds faced by this sector in the last few years should begin to subside or even reverse as the European Central Bank has shifted to tiered deposit rates. In addition, all of our holdings are currently at or above their mandated capital levels, which allows for more capital returns to shareholders. Meanwhile, this sector still offers high dividend yields, which are especially attractive at this time since many long-term government yields are still negative.

Second, the consumer discretionary and industrials sectors—auto, industrial and agriculture equipment, etc.—also recovered from 2018’s downturn, but were not as strong as the financials sector. Specifically, we believe the auto-related names still offer value as end markets appear to have bottomed, spending on research and development has generally peaked, and almost all of the companies we are invested in have undertaken serious cost-cutting plans. With any help from rising demand, the benefits of these actions should be reflected in improved bottom-line results. 

Third, besides being able to buy companies at attractive valuations in Europe and the U.K., these countries’ home currencies are undervalued based on purchasing power parity. The strong dollar has been a big drag on foreign equity returns where, in five years, the dollar has gone from being undervalued to being overvalued compared to most major currencies. This has negatively impacted returns of overseas investing and, at some point, may also provide a tailwind to international investing. We believe that the combination of these three ingredients creates value for our shareholders. 

We wish you a prosperous 2020 and are thankful for your continued support!

*Average Annual Total Returns (12/31/19):

As of 12/31/19, the Oakmark International Fund’s (Investor Class) average annual returns for 3-months, 1-year, 3-years, 5-years, 10-years, and since inception (09/30/92) were 11.07%, 24.21%, 5.07%, 7.30% and 9.40% respectively. As of 9/30/19, the gross expense ratio for the Oakmark International Fund (Investor Class) was 1.03%; the net expense ratio was 0.98%.

As of 12/31/19, the Oakmark International Small Cap Fund’s (Investor Class) average annual returns for 3-months, 1-year, 3-years, 5-years, 10-years, and since inception (11/01/95) were 12.49%, 31.90%, 6.32%, 6.76% and 9.07% respectively. As of 9/30/19, the net and gross expense ratios for the Oakmark International Small Cap Fund (Investor Class) were 1.38%.

As of 12/31/19, the Oakmark Global Fund’s (Investor Class) average annual returns for 3-months, 1-year, 3-years, 5-years, 10-years, and since inception (08/04/99) were 10.77%, 29.60%, 5.96%, 8.60% and 9.94% respectively. As of 9/30/19, the gross expense ratio for the Oakmark Global Fund (Investor Class) was 1.23%; the net expense ratio was 1.17%.

As of 12/31/19, the Oakmark Global Select Fund’s (Investor Class) average annual returns for 3-months, 1-year, 3-years, 5-years, 10-years, and since inception (10/02/06) were 11.73%, 29.80%, 6.78%, 9.46% and 7.88% respectively. As of 9/30/19, the gross expense ratio for the Oakmark Global Select Fund (Investor Class) was 1.25%; the net expense ratio was 1.18%.

Past performance is no guarantee of future results. The performance data quoted represents past performance. Current performance may be lower or higher than the performance data quoted. The investment return and principal value vary so that an investor’s shares when redeemed may be worth more or less than the original cost. The To obtain the most recent month-end performance data, view it here.

The net expense ratio reflects a contractual advisory fee waiver agreement through January 27, 2020.

The funds’ portfolios tend 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 Funds’ 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 Funds’ volatility.

Because the Oakmark Global Select Fund is non-diversified, the performance of each holding will have a greater impact on the Fund’s total return, and may make the Fund’s returns more volatile than a more diversified fund.

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 discussion of the Funds’ investments and investment strategy (including current investment themes, the portfolio managers’ research and investment process, and portfolio characteristics) represents the Funds’ investments and the views of the portfolio managers and Harris Associates L.P., the Funds’ investment adviser, at the time of this letter, and are subject to change without notice.

All information provided is as of 12/31/2019 unless otherwise specified.