As David Herro wrote in his lead letter, it was a difficult quarter for global markets and the Oakmark International Small Cap Fund (MUTF:OAKEX) was not exempt. The Fund declined 38.3% for the quarter ended March 31 compared to the MSCI World ex U.S. Index, which lost 28.4%. Since the Fund’s inception in November 1995, it has returned an average of 6.8% per year. The top contributor for the quarter was Sugi Holdings (Japan), while the largest detractor was Konecranes (OTC:KNCRF) (Finland). Over the course of the past six months, the top contributor was ConvaTec Group (OTC:CNVVF) (U.K.), while the largest detractor was Konecranes.
While we are disappointed with the Fund’s short-term performance, we remain optimistic about its mid- to long-term positioning. Although our holdings’ share prices have fallen 30-50%, we believe the impact to their underlying business values has been much less. When looking at the discount to our estimate of intrinsic value, we believe this is the most attractive our portfolio has been since the depths of the financial crisis. Even though the coming months will likely remain volatile, we believe today’s low share prices could generate attractive rates of return over the mid to long term.
We have been busy using the elevated levels of volatility to reposition the portfolio toward our most compelling investment opportunities. During the quarter, we added to many of our holdings that had experienced share price declines far in excess of the declines in our estimates of their business values. Some of our most significant additions were to Autoliv (NYSE:ALV) (Sweden) and Autogrill (OTCPK:ATGSF) (Italy). Autoliv is a supplier of passive safety equipment to the auto industry. The company’s share price declined over 40% in the quarter. Although auto production shutdowns will cause short-term disruptions at the company, its strong balance sheet and new platform launches should help Autoliv grow revenue well in excess of the growth in light vehicle production in the coming years. Autogrill is a global leader in food-and-beverage retail to the travel sector. Its primary business is operating food retail concessions at airports globally. In the short term, the business will face considerable challenges due to coronavirus-related travel restrictions. However, we believe the recent 60% decline in the company’s share price already accounts for the potential impacts of these near-term disruptions along with mid-term declines in passenger volumes. We cannot predict how long the pandemic will last and we anticipate that the company could experience severe short-term shocks. However, we expect that both leisure and business travelers will eventually return to airports, which will benefit Autogrill’s business.
We also used the market volatility to add three new holdings to the Fund this quarter: Wynn Macau (OTCPK:WYNMF) (China), dormakaba Holding AG (OTC:DRRKF) (Switzerland) and Software AG (Germany). Wynn Macau, which is majority-owned by parent company Wynn Resorts (NASDAQ:WYNN), owns and operates two luxury hotel and casino resorts in the Macau region of China. We believe Wynn owns the some of the most luxurious properties in Macau and is among one of the segment’s most efficient operators. The company’s share price fell following the temporary closure of Macau’s casinos during the coronavirus outbreak, and we used this opportunity to establish a position. Dormakaba is a Swiss-based provider of mechanical and electronic security systems and a long-term holding of the Fund. We exited the position late last year as the share price approached our view of intrinsic value. The recent market downturn gave us the opportunity to reestablish a position in this high-quality and relatively defensive industrial business. German-based Software AG is the largest independent integration software provider, operating in more than 70 countries. The company provides tools that allow applications to communicate and work together even if they are made by different vendors, hail from different generations or use vastly different information architectures. We believe Software AG’s underlying business quality is high, yet the company trades at a significant discount to its software peers.
During the quarter, we exited three positions – Criteo (NASDAQ:CRTO) (France), Ontex Group (OTC:ONXXF) (Belgium) and Wajax (OTC:WJXFF) (Canada) – as we reallocated capital to investments with more favorable risk-return profiles.
Geographically, we ended the quarter with approximately 70% of our holdings in Europe and the U.K., 13% in Asia, and 7% in Australasia. The remaining positions are 5% in Latin America (Mexico) and 5% in North America (Canada).
We continue to believe the Swiss franc is overvalued versus the U.S. dollar and defensively hedged 10% of the Fund’s franc exposure.
During these turbulent times, we thank you for your ongoing patience and support. We will remain steadfast in our pursuit of finding attractive, undervalued companies with management teams dedicated to building shareholder value to add to the Fund.
The securities mentioned above comprise the following preliminary percentages of the Oakmark International Small Cap Fund’s total net assets as of 03/31/20: Autogrill 1.4%, Autoliv 1.9%, ConvaTec Group 2.3%, Criteo 0%, dormakaba Holding 0.4%, Konecranes 3.7%, Ontex Group 0%, Software AG 0.4%, Sugi Holdings 2.2%, Wajax 0% and Wynn Macau 0.5%. Portfolio holdings are subject to change without notice and are not intended as recommendations of individual stocks.
The MSCI World ex USA Small Cap Index (Net) is designed to measure performance of small-cap stocks across 22 of 23 Developed Markets (excluding the United States). The index covers approximately 14% 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 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.
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 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 03/31/2020 unless otherwise specified.
Oakmark International Small Cap Fund – Investor Class
Average Annual Total Returns 03/31/20
Since Inception 11/01/95 6.84%
Net and Gross Expense Ratios as of 09/30/19 were 1.38%
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. To obtain the most recent month-end performance data, view it here.
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