Oakmark Global Fund: Fourth Quarter 2020

Remarkable Quarter Ends a Remarkable Year

As 2020 ended, many saluted the turn of the calendar with relief and gratitude. Speaking only as managers of the Global Fund, however, we were sorry to see the December quarter come to a close given the Fund’s strong three-month return. Many factors combined to create a positive market environment in the period, especially the approval of several vaccines to prevent the spread of Covid-19. Also, after months of arduous negotiations, the U.K. and European Union finally reached an agreement that eliminated the possibility of a “hard Brexit” outcome. In the U.S., the four-year presidential election cycle produced a more balanced outcome than many had expected. And central banks continued their aggressive monetary expansion policies. These fundamentals helped to propel equity prices higher, and the Global Fund achieved one of its best three-month outcomes, closing out a year that had earlier experienced a sharp bear market.

For the quarter, the Oakmark Global Fund gained 29.5%, which compares to the MSCI World Index’s 14.0% return in the period and the Lipper Global Fund Index’s gain of 16.2%. For all of calendar 2020, the Fund returned 9.0%, which contrasts to 15.9% for the MSCI World Index and 18.9% for the Lipper Global Fund Index. Since inception in 1999, the Fund has achieved a compound annual rate of return of 9.9%, which compares to 5.7% for the MSCI World Index and 6.2% for the Lipper Global Fund Index.

For the quarter, the countries that contributed the most to the Fund’s return were the U.S., the U.K. and Germany, while China was the only country to detract from returns. The five largest equity contributors to the Fund’s return in the quarter were Lloyds Banking Group (U.K.), CNH Industrial (U.K.), General Motors (U.S.), Tenet Healthcare (U.S.) and Pinterest (U.S.). The only issues to detract from return were Alibaba (China) and Bayer (Germany). As noted above, the U.K. negotiated a Brexit settlement with the European Union during the quarter, which boosted the Fund’s U.K. holdings.

For all of 2020, the U.S., Germany and South Africa contributed most to investment returns, while the U.K., Mexico and Australia detracted the most. Leading return contributors for the year were Pinterest (U.S.), Alphabet (U.S.), Daimler (Germany), TE Connectivity (U.S.) and Mastercard (U.S.). Rolls-Royce Holdings (U.K.), Citigroup (U.S.), Lloyds Banking Group, Southwest Airlines (U.S.) and Grupo Televisa (Mexico) detracted most from return.

Portfolio Activity
We were fairly active in the quarter, adding two new holdings to the portfolio while eliminating three, all U.S.-domiciled, which reduced the U.S. allocation in the portfolio by approximately 3%. Our new purchases were Swiss pharmaceutical company Novartis and U.S.-based Keurig Dr Pepper.

Novartis is one of Europe’s largest pharmaceutical companies and possesses a highly diversified portfolio of innovative products. Its share price underperformed both the broader market and its pharma peers during 2020, largely due to a few disappointing late-stage trials and the company’s lack of Covid-19-related therapeutics or vaccines. These short-term issues provided us with an attractive entry point to invest in a leading pharmaceutical franchise with compelling economics. We estimate that the market is currently ascribing almost no value to Novartis’ pipeline despite the company’s excellent track record in new drug development. We expect that Novartis will deliver mid-single-digit, top-line growth and expand margins over the next five years as a result of its cost-savings plan. The company possesses one of the most diversified product portfolios in the pharma industry with 15 $1b+ compounds, which reduces its reliance on any single compound.

Keurig Dr Pepper is one of North America’s leading beverage companies and commands dominant positions in single-serve coffee and flavored sodas. We believe single-serve coffee pods will capture almost all of the incremental growth in at-home coffee consumption. Many consumers find that K-Cups offer better convenience, quality, variety and value, compared to drip brewing. Keurig’s competitive advantages (low-cost production, the largest installed base of brewers, exclusive brand partnerships) allow it to collect a toll on most pods sold in North America. The company’s soda franchises remain highly profitable, and we do not expect health-related concerns about sugar to materially impact consumption trends. We believe that Keurig’s brands should deliver steady growth, consistent market share gains and significant excess cash. We think the company is an above-average business trading at a meaningful discount to the broader market, its beverage peers and historical private market transactions.

Our three sales were Southwest Airlines, Live Nation and Pinterest. Southwest’s share price had recovered a considerable amount of its pandemic-caused losses, and we chose to move on from the holding given the continued uncertainties surrounding commercial air travel. Live Nation and Pinterest were happier stories, having attained their respective sell targets. However, their individual histories in the Fund are quite different and warrant further discussion.

In 2006, we initiated our position in Live Nation, the global entertainment company that handles promotion, venue management and ticket sales for live events. Live Nation was spun out of the former Clear Channel Communications in late 2005. In our view, spinoffs often represent attractive opportunities because investors frequently undervalue the new company. We believed this was the case with Live Nation, especially given its initially small market capitalization. As well, when spinoffs are freed from their parents, they typically benefit from intensified management focus and more flexible capital allocation policies. In Live Nation’s case, the spinoff helped make possible the merger with Ticketmaster in 2010, which materially improved the business franchise. Although these factors alone might have made Live Nation a good holding for the Fund, an unexpected technology helped to boost the company’s fortunes: streaming. As the advantages of streaming convinced consumers to reduce or even eliminate their purchases of media, such as CDs and DVDs, artists began to tour more, thereby providing a tailwind to Live Nation’s operations. This accelerated growth in the company’s intrinsic value per share, which in turn generated numerous increases in our sell target for the holding, enabling us to continue to own the shares in the Fund for 14 years. We typically target a three- to five-year holding period for our equity investments, but we love opportunities like Live Nation, which achieve unanticipated intrinsic value growth.

In contrast, we have only held Pinterest since February 2020; the company did not even go public until 2019. Pinterest operates a website where users can get ideas and information about personal interests. Users actively seek relevant commercial content, meaning that they are fundamentally aligned with advertisers, a factor not generally seen in other media platforms. Around the time of the company’s IPO, we met with the management team and found them to be impressive, but the stock price at inception did not tempt us. This changed early in 2020, however, as investor sentiment toward internet platform companies waned (very temporarily). When we wrote our March quarterly report, we noted that “the current pandemic has less effect on Pinterest than many other companies, and it may even be seen to be a beneficiary of lockdowns.” We had no idea how prophetic that sentence would become as Pinterest proved to be a pandemic winner, eventually increasing in price more than seven times its March low.

Both Pinterest and Live Nation benefited from important changes in their operating environments—changes that we had no ability to predict when initially purchased—and both companies have capitalized effectively on the opportunities these changes presented. Both holdings demonstrate the value of well-priced purchases when an unanticipated change in business dynamics leads to rapid growth in business value. As we have often written, we are always sad to exit a holding that has been successfully compounding value for the Fund’s shareholders. Nevertheless, our investment philosophy requires the discipline to move on once a holding’s share price nears our calculation of its intrinsic value. We thank the management teams at Live Nation and Pinterest for their successful stewardship of our shareholders’ capital.

Currency Hedges
We defensively hedge a portion of the Fund’s exposure to currencies that we believe to be overvalued versus the U.S. dollar. As of quarter end, we found the Swiss franc to be overvalued and have hedged approximately 14% of the Fund’s franc exposure.

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 12/31/20: Alibaba Group 0.3%, Alibaba Group ADR 0.4%, Alphabet Cl C 5.2%, Bayer 4.1%, Citigroup 0.8%, CNH Industrial 4.4%, Daimler 3.7%, General Motors 4.5%, Grupo Televisa ADR 0.7%, Keurig Dr Pepper 1.0%, Live Nation 0%, Lloyds Banking Group 5.0%, Mastercard Cl A 4.9%, Novartis 0.8%, Pinterest 0%, Rolls-Royce Holdings 0.0%, Southwest Airlines 0%, TE Connectivity 4.9% and Tenet Healthcare 2.7%. Portfolio holdings are subject to change without notice and are not intended as recommendations of individual stocks.

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 global equity market performance of developed markets. The index covers approximately 85% of the free float-adjusted market capitalization in each country. This benchmark calculates reinvested dividends net of withholding taxes. This index is unmanaged and investors cannot invest directly in this index.

The Lipper Global Fund Index measures the equal-weighted performance of the 30 largest global equity funds as defined by Lipper. 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 compound return is the rate of return, usually expressed as a percentage that represents the cumulative effect that a series of gains or losses has on an original amount of capital over a period of time. Compound returns are usually expressed in annual terms, meaning that the percentage number that is reported represents the annualized rate at which capital has compounded over time.

The percentages of hedge exposure of 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 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 12/31/2020 unless otherwise specified.