Oakmark Global Select Fund: Second Quarter 2021

The Oakmark Global Select Fund returned 6.9% for the period ending June 30, underperforming the MSCI World Index, which returned 7.7%. Year-to-date, the Fund returned 18.5% compared to the benchmark’s return of 13.1%. More importantly, the Fund has returned an average of 9.2% per year since its inception in October 2006, outperforming the MSCI World Index’s annualized gain of 7.6% over the same period.

Alphabet was a top contributor for the quarter as the company’s financial results continued to positively surprise the market. Specifically, the U.S. communication services provider’s first-quarter total revenue, operating income and earnings per share all outpaced expectations. Once again, Alphabet’s revenue grew faster than had been expected across the board and its total revenue advanced 34% from the prior year. In addition, the adjusted operating margin (excluding “other bets”) expanded by 820 basis points. By segment, search revenue grew 30%, YouTube advertising revenue rose 49% and cloud revenue increased 46%. Furthermore, margin trends improved across all segments and underlying operational expenses appear progressively well controlled relative to history. Management repurchased $11.4 billion worth of shares in the quarter and authorized an additional $50 billion to buy back class C shares. Alphabet’s solid fundamental performance and increased share repurchases prompted us to raise our estimate of its value.

Prosus, a Netherlands-based internet company, was a notable detractor for the period. The company’s share price declined in the second quarter following management’s announcement in April that it had reduced its stake in Tencent from 31% to 29%, which raised $14.7 billion in cash, and that it agreed not to sell any additional Tencent shares for three years. The move was in line with our expectations since the increase in Tencent’s valuation made it a good time to sell shares and raise cash. Management indicated the sale proceeds would be used to make additional investments, but investors seemed disappointed that the company did not use the proceeds to increase its share repurchase program. Having met management many times over the years, we are confident in their capital allocation track record and decision-making process. During the quarter, Prosus also made a voluntary exchange offer for up to 45.4% ownership of Naspers shares at a 2.27 exchange ratio to reduce the NAV discount; however, the market appears skeptical of this solution. We are currently evaluating the offer. Overall, we find Prosus attractive because it is deeply discounted to our estimate of intrinsic value and we believe its underlying assets are of extremely high quality.

During the quarter, we initiated positions in Danone (France) and Fiserv (U.S.). We did not eliminate any positions during the period.

Danone, a leader in the food processing industry, operates through divisions, such as fresh dairy products, waters, early life nutrition and medical nutrition. The company enjoys the leading market share position in the vast majority of its markets and earns mid-teens operating margins, an attractive return on capital employed and excellent cash conversion rates, in our opinion. A management change in March 2020 should enable the company to improve its operational performance by prioritizing sound corporate governance principles that align with long-term shareholders.

Following its transformative acquisition of First Data Corporation in 2019, Fiserv is now a top provider of digital banking solutions, core account processing software and merchant acquiring services in the U.S. The company’s mission-critical software and services generate highly recurring revenue and are tied to strong secular growth trends within both digital payments and banking. We expect Fiserv’s revenues to grow in the mid- to high-single-digits over the coming years and believe the company will enjoy significant margin expansion as it realizes cost synergies from the First Data acquisition. Furthermore, with its significant free cash flow generation and excess debt capacity, the company should be able to return about 35% of its market capitalization through dividends and share repurchases over the next five years, in our view. We were able to purchase shares at a near 20% discount to the S&P 500 Index’s earnings multiple, which we believe doesn’t give the company enough credit for its risk-adjusted return profile and the quality of this well-managed business.

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 12% of the Swiss franc exposure was hedged at quarter end.

Geographically, we ended the quarter with 51% of the portfolio in the U.S., 44% in the U.K. and Europe, and 5% in Asia.

We thank you for your continued support.

The securities mentioned above comprise the following percentages of the Oakmark Global Select Fund’s total net assets as of 06/30/21: Alphabet Cl A 11.3%, Danone 2.2%, Fiserv 3.3% 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.

The S&P 500 Total Return Index is a float-adjusted, capitalization-weighted index of 500 U.S. large-capitalization stocks representing all major industries. It is a widely recognized index of broad, U.S. equity market performance. Returns reflect the reinvestment of dividends. 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 06/30/2021 unless otherwise specified.