Oakmark Global Select Fund: First Quarter 2022

The Oakmark Global Select Fund declined 7.1% for the quarter ended March 31, 2022, underperforming the MSCI World Index, which returned -5.2%. However, the Fund has returned an average of 8.3% per year since its inception in October 2006, outperforming the MSCI World Index’s annualized gain of 7.4% over the same period.

Bayer (Germany), a life science company with pharmaceuticals, consumer health and crop science divisions, was a top contributor to the Fund’s performance for the quarter. The company reported strong earnings results for 2021, in our view, with growth exceeding expectations across divisions. Notably, the crop science division delivered 11% growth, staging a robust recovery following two years of an agriculture downcycle and competitive challenges. Management’s increased guidance for crop science in 2022 calls for 7% organic growth and a 25-26% margin, which we believe is a key positive for the segment as it signals a long-awaited favorable transition toward profitable growth. In the pharmaceuticals division, revenue growth of more than 7% also bested expectations, supported by a strong recovery of Eylea, the continued growth of Xarelto and the slate of new products. Moreover, Bayer’s pipeline enjoyed notable successes in the period, including a favorable read-out for the cancer drug Nubeqa. We spoke with Bayer CFO Wolfgang Nickl during the quarter, who noted that tailwinds are robust in the business today. Notably, he expressed confidence in both the pricing and competitive backdrop in the crop science business as rate increases are layering into sales growth and cost cuts begin to come through. Nickl also reiterated Bayer’s expectations for continued growth in pharmaceuticals, driven largely by new launches and technologies.

Prosus (Netherlands), owing to its 29% stake in Tencent and the impact of the Russian invasion of Ukraine, was a notable detractor for the first quarter. Tencent was negatively impacted by fears of increased regulation and a poor macro backdrop that have negatively impacted fundamentals. We have spoken with numerous contacts on the changing regulatory landscape in China. Although we believe structural growth at Tencent will be lower in the future as a result of the new regulatory environment, it remains an excellent business with a high degree of innovation. Later during the quarter, Russia’s invasion of Ukraine weighed on companies with exposure to Russia. In Prosus’ case, its two Russian assets, Avito (the largest online classifieds company in Russia) and Mail.ru (the largest social media company in Russia), are now valueless, in our estimation, and resulted in a small reduction of our estimate of Prosus’ intrinsic value. While we are monitoring any new developments closely, we continue to believe Prosus remains extremely undervalued relative to its sum of the parts.

In addition, we initiated the following position during the quarter:

• Netflix (U.S.) is the leading streaming entertainment service with 222 million subscribers and $30 billion of revenue. This scale creates a valuable moat, which allows the company to buy more content than its competitors in aggregate but pay less per subscriber. This dynamic has created a more valuable customer proposition as the business has grown, which we expect to manifest in a larger subscriber base over time. Netflix stock declined significantly over the past several months as market participants reacted to slowing subscriber growth and margin pressure. We believe it is likely that both of these issues are temporary. Growth decelerated as the economy reopened, but this occurred on the heels of a rapid acceleration period earlier in the pandemic. Margin pressure is mostly related to foreign currency exchanges. Netflix’s cost base is primarily dollar-denominated, meaning that declining foreign currency values pressure profit margins. After the pullback in the stock, Netflix trades for 5.5x consensus 2022 revenue and 34x consensus EPS, which is compelling in the context of our expectations for future growth and profitability. We greatly admire Netflix’s management team and the company’s unique corporate culture. We are excited to invest alongside them as they capitalize on the enormous opportunity in streamed entertainment.

We continue to believe the Swiss franc is overvalued versus the U.S. dollar. As a result, we defensively hedged a portion of the Fund’s exposure. Approximately 15% of the Swiss franc exposure was hedged at quarter end.

Geographically, we ended the quarter with 55% of the portfolio in the U.S., 37% in the U.K. and Europe, and 8% in Asia.

We thank you for your continued support.

The securities mentioned above comprise the following preliminary percentages of the Oakmark Global Select Fund’s total net assets as of 03/31/22: Bayer 4.5%, Netflix 4.1% and Prosus 3.9%. 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 Select 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.

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.

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 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 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 03/31/2022 unless otherwise specified.