Oakmark Global Select Fund: Third Quarter 2022 and Fiscal Year-End

The Oakmark Global Select Fund returned -29.7% for the fiscal year ended September 30, 2022, underperforming the MSCI World Index, which returned -19.6%. For the most recent quarter, the Fund returned -11.3%, compared to the benchmark’s return of -6.2%. More importantly, the Fund has returned an average of 6.0% per year since its inception on October 2, 2006, outperforming the MSCI World Index’s annualized gain of 5.5% over the same period.

A top contributor to performance for the one-year period was Humana (U.S.), a leader and near pure play in the fastest growing sector of managed care, Medicare Advantage. In its first-quarter earnings report, the company generally beat consensus estimates and raised guidance. Encouragingly, the issues that had caused this year’s Medicare Advantage enrollment shortfall seem to have stabilized, and during the most recent open enrollment period, member retention appears in line or even slightly better than expectations. In addition, Humana reaffirmed its full-year guidance for $24.50 adjusted earnings per common share. The company’s second-quarter earnings results also beat consensus expectations due to lower than expected medical expenses, which stemmed from a decline in Covid-19-related medical costs that was not fully offset by all other medical costs returning to normal levels. Management also indicated that the company is tracking well against achieving its $1 billion cost-savings plan by the end of 2023, and it intends to reinvest the majority of those savings into improved member benefits. Ultimately, Humana’s share price reached our sell target, and we opted to eliminate the position.

Netflix (U.S.), a subscription streaming service and production company, was a top contributor for the quarter. Netflix’s share price reacted positively in response to second-quarter results that were strong, in our assessment, and largely better than investors expected. Although the company lost roughly one million global streaming subscribers, the loss was only about half of what management projected. Revenue in constant currency, excluding foreign currency impacts, rose 13% year-over-year, and management is projecting that third-quarter revenue will rise by 12% in constant currency. While currency exchange rates also affected earnings, margins are tracking slightly ahead of prior guidance when adjusted for currency impacts. Importantly, viewer engagement, which we see as a key metric, remains strong. In the U.S., Netflix had as much viewing time in the 2021-22 season as the top two cable networks combined (CBS and NBC), and total share of TV time reached a record in June, according to Nielsen. Along with the earnings release, management stated that the company is making progress on its advertising and password-sharing initiatives. Cash content costs for the next two to three years are expected to be unchanged at roughly $17 billion as Netflix continues to invest in high-quality content creation. Management is forecasting the net addition of one million global streaming subscribers in the third quarter, and we remain pleased with the company’s fundamental performance.

Charter Communications (U.S.), a telecommunications and mass media company, was a top detractor for both the quarter and year ending September 30. The company reported second-quarter revenue of $13.6 billion and adjusted earnings of $5.5 billion, both of which outpaced market expectations. Revenue rose 6.2% from a year earlier, and adjusted earnings grew 9.7%. However, investors may have focused on the company’s broadband subscriber net loss of 21,000 (which included the reduction of 59,000 government subsidy customers). Management attributes the weak broadband results largely to low residential relocation activity and the return of college seasonality. In addition, while capital expenses were 5% higher than the market predicted, capital expenses from core cable operations continue to decline and are trending well below our maintenance forecast. Furthermore, just prior to the company’s earnings release, a Texas jury awarded $7 billion in damages to the family of a customer who was murdered by an off-duty technician. Later, a judge reduced the settlement to $1.15 billion. Charter plans to appeal and has stated that a criminal background check conducted on the employee showed no arrests, convictions or other criminal behavior. We are following the situation closely and will adjust our metrics as appropriate. We believe part of subscriber results from recent quarters can be attributed to a combination of increased competition and lingering effects from the amount of subscribers that were pulled forward due to the Covid-19 pandemic and subsequent lockdowns. That said, we find that the business is still growing at a healthy rate and expect the company to continue buying back more than 10% of its shares outstanding each year. We also believe that incumbent cable companies are positioned for continued growth due to the increases in broadband average revenue per user and in bundled wireless services. The company remains undervalued relative to our perception of its normalized earnings power.

We purchased a new position in Richemont (Switzerland) during the third quarter. Richemont is one of the world’s largest luxury goods firms and maintains a portfolio of brands that range from Cartier and Van Cleef & Arpels in jewelry to Piaget and Baume & Mercier in watches to Dunhill in leather goods and Montblanc in high-performance pens. In our view, this is one of the most attractive portfolios of luxury goods brands in the world. We find the company’s exposure to the jewelry market via the largest (Cartier) and third-largest (Van Cleef & Arpels) brands especially appealing given our expectations for the category to achieve strong levels of growth and profitability. Moreover, demand for luxury goods is closely tied to wealth creation, and considering that the number of new millionaires is growing by about 6% globally per year, we are pleased with Richemont’s exposure to this fast-growing demographic. Finally, Richemont’s management team has a strong track record of impressive decision-making and creating long-term value for shareholders.

During the quarter, we sold our Daimler Truck Holding (Germany) position in favor of names that, in our opinion, offer more potential upside.

Geographically, we ended the quarter and fiscal year with approximately 57% of the Fund’s investments in the U.S., 34% in the U.K. and Europe, and 9% 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 09/30/2022: Charter Communications Cl A 3.9%, Daimler Truck Holding 0%, Humana 0%, Netflix 4.1% and Cie Financiere Richemont 1.6%. 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 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 09/30/2022 unless otherwise specified.