Oakmark International’s David Herro Sells IRE, Buys Samsung and WPP; Up 41% for fiscal year ended Sep 2013

David Herro Sells IRE, Buys Samsung and WPP; Up 41% in 2013

by ValueWalk StaffOctober 8, 2013

David Herro from The Oakmark International Fund Q3 letter to shareholders (see Herro comments’s in Oakmark Select Global Fund).

The Oakmark International Fund returned 41% for the fiscal year ended September 30, 2013, comparing favorably to the MSCI World ex U.S. Index, which returned 21%. For the most recent quarter the Fund outperformed the MSCI World ex U.S. Index, returning 13% versus 11%. The Fund has returned an average of 11% per year since its inception in September 1992, outperforming the MSCI World ex U.S. Index, which has averaged 7% per year over the same period.Daiwa Securities Group, Japan’s second-largest broker, was the top contributor to performance over the past 12 months, returning 139%. As discussed in previous letters, Daiwa has benefitted from the Japanese stock market rally and the weakened yen that followed talks of economic reform. Daiwa’s fiscal 2012 results were very strong: net operating revenues increased by 24% while operating costs decreased by 7%. The most recent quarterly numbers also exceeded our expectations. The retail business achieved operating margins around 50%, and the quarter’s EBIT was more than half of what we estimated for Daiwa’s entire fiscal year. Although Daiwa’s stock price has almost tripled over the past year, we continue to believe the company’s stock has significant upside and will remain a good investment for our shareholders.

Another top contributor was Lloyd’s Banking Group, the dominant retail bank in the U.K., which returned 90% over the past twelve months. Over the past year Lloyd’s has removed substantial amounts of risk from its balance sheet, and it is disposing of its non-core assets ahead of expectations. Lloyd’s is projected to have less than 70 billion pounds in non-core assets and a Core Tier 1 of greater than 10% by the end of 2013, a year ahead of previous guidance. During the first half of 2013, Lloyd’s core expenses were down 3%, compared to the first half of 2012, and management anticipates further cost savings. Lloyd’s loan book quality has also improved due to a decline in non-performing loans. We are encouraged by Lloyd’s strengthening balance sheet and believe it is well positioned for the future.

The largest detractor from performance over the past twelve months was Orica, an Australian mining-services company, which declined 24%. Shares reacted negatively to the news that the company’s net profit in fiscal year 2013 would not meet expectations. Much of this was due to macro weakness and a weaker commodity environment, but numerous isolated incidents also contributed. Minova, the company’s ground support business, which generated A$109m in EBIT last year, is only expected to breakeven on an EBIT basis due to restructuring, two isolated customer issues and a dispute with a supplier. Indonesia operations will suffer due to two large customers temporarily suspending operations, as well as a more difficult competitive environment. Finally, slower than expected growth will impact the Australian business. We believe many of these issues are one-off in nature and are likely to reverse next year. Synergy gains from integrating Minova with the rest of the business, continued growth in Australia, and weakening of the Australian dollar should significantly boost Orica’s earnings growth in fiscal year 2014.

There was a lot of portfolio activity during the past quarter–we sold our positions in ASSA ABLOY, Amcor, Bank of Ireland, Grupo Televisa and Roche. We added four new names to the Fund: Pernod Ricard, the second largest worldwide producer of spirits; Samsung Electronics, a consumer and industrial electronics manufacturer; Sanofi, a pharmaceutical company; and WPP, a leading advertising and communications services company.

Geographically we ended the quarter with 78% of our holdings in Europe, 14% in Japan and 5% in Australia. The remaining positions are in North America (Canada), South Korea and the Middle East (Israel).

We continue to believe some global currencies are overvalued. As a result, we defensively hedge a portion of the Fund’s currency exposure. Approximately 35% of the Australian dollar, 29% of the Swedish krona, 24% of the Swiss franc and 7% of the Japanese yen were hedged at quarter-end.

We continue to adhere to a long-term value philosophy that has enabled us to build a portfolio of high quality names trading at discounts to our estimate of intrinsic value. We thank you, our shareholders, for your continued support.

David G. Herro, CFA
Portfolio Manager
oakix@oakmark.com

 

David Herro Profits from Daiwa, German Luxury Cars

by ValueWalk StaffOctober 8, 2013

David Herro and Bill Nygren commentary from Oakmark Global Select Fund

The Oakmark Global Select Fund returned 9% for the quarter ended September 30, 2013, outperforming the 8% return from the MSCI World Index. For the fiscal year ended September 30, 2013, the Fund returned 38%, significantly outperforming the MSCI World Index, which returned 20%.

Daiwa Securities Group (HKSE:01037), Japan’s second-largest broker, was the top contributor to performance over the past 12 months, returning 139%. As discussed in previous letters, Daiwa has benefitted from the Japanese stock market rally and the weakened yen that followed talks of economic reform. Daiwa’s fiscal 2012 results were very strong: net operating revenues increased by 24% while operating costs decreased by 7%. The most recent quarterly numbers also exceeded our expectations. The retail business achieved operating margins around 50%, and the quarter’s EBIT was more than half of what we estimated for Daiwa’s entire fiscal year. Although Daiwa’s stock price has almost tripled over the past year, we continue to believe the company’s stock has significant upside and will remain a good investment for our shareholders.

Another top contributor for the year was Daimler (XTER:DAI), the global auto manufacturer of the Mercedes brand, which returned 67%. Shares reacted positively to the company’s 2012 results, which included higher profits than we expected for the company’s Mercedes-Benz Car and Truck divisions. More recently Daimler announced significantly improved earnings and net profits for the second quarter of 2013. In addition, sales of Mercedes-Benz cars increased in all markets, driving unit sales to a new record. Although Mercedes continues to underperform Audi and BMW in China, we expect an increase in growth from its new model launches, new organizational structure, and 75 new dealerships by year end. The Trucks division has also performed well, led by a significant rebound in Latin American unit sales, which increased by 57%. Daimler management remains upbeat about global operations and reiterated the full-year guidance for all divisions.

The biggest detractor from performance for the year was Cenovus (CVE), a Canadian-based oil company, which declined 17% before we sold our position in August of this year. Our business value estimate for Cenovus fell more than the stock price after we incorporated a lower futures oil price into our model. At the same time, the share price of DirecTV (DTV), a U.S. digital television entertainment provider, fell in response to weak quarterly results, which did not affect our estimate of intrinsic value. The divergence between the two stocks was enough to tip the balance in favor of owning DirecTV, and we harvested a small tax loss by selling Cenovus. In our view, DirecTV’s shift in focus to higher-end customers has led to slower but more profitable growth. Management is focused on building shareholder value by returning cash to shareholders. Over the past five years DirecTV has aggressively repurchased shares and has reduced its outstanding shares by almost 50%. We are happy to see growth in value per share whether it comes from a growing numerator or a shrinking denominator.

In addition to the sale mentioned above we sold our shares of Toyota Motor during the quarter. You will see a new security held in the Fund, CNH Industrial (CNH). This is a result of a merger between Fiat Industrial, which was owned by the Fund, and CNH Global. Fiat owned 88% of publicly listed CNH, and to simplify the shareholder structure, it decided to fully consolidate and merge the two companies. The merger is expected to result in financial, cost and tax savings. CNH Industrial is now domiciled in the Netherlands rather than Italy.

Geographically, we ended the quarter with our European and Japanese holdings comprising 42% and 12% of the Fund, respectively. North America accounts for the remainder of the Fund’s holdings.

We continue to believe some global currencies are overvalued, and we are defensively hedging the Fund’s currency exposure. As of quarter end, approximately 25% of the Swiss franc and 7% of the Japanese yen exposures were hedged.

We thank you, our shareholders, for your continued support and confidence.

William C. Nygren, CFA
Portfolio Manager
oakwx@oakmark.com

David G. Herro, CFA
Portfolio Manager
oakwx@oakmark.com

As of 9/30/13, Daiwa Securities Group, Inc. represented 5.0%, Daimler AG 6.4%, Cenovus Energy, Inc. 0%, DIRECTV 4.4%, Toyota Motor Corp. 0%, and CNH Industrial N.V. 5.6% of the Oakmark Global Select Fund’s total net assets. Portfolio holdings are subject to change without notice and are not intended as recommendations of individual stocks.