As David Herro wrote in his lead letter, it was a difficult quarter for global markets and the Oakmark Global Select Fund (MUTF:OAKWX) was not exempt. The Fund declined 30.7% for the quarter ended March 31 compared to the MSCI World ex U.S. Index, which lost 21.1%. Since the Fund’s inception in October 2006, it has returned an average of 4.8% per year. The top contributor for both the quarter and the past six months was Regeneron Pharmaceuticals (NASDAQ:REGN) (U.S.), while the largest detractor for the same time periods was CNH Industrial (NYSE:CNHI) (U.K.).
While we are disappointed in our performance results, we believe our Fund is well positioned and continues to offer value for our long-term shareholders. Although our holdings’ share prices have fallen 30-50%, we consider the impact on their underlying business values to be much less. We believe current market conditions provide opportunities to buy high-quality companies at low prices, the cornerstone of value investing.
As market prices have fluctuated much more than our estimate of intrinsic value, our trading activity has picked up as we reposition the portfolio for the long term. The market volatility provided an opportunity to add two new holdings to the Fund this quarter: Booking Holdings (NASDAQ:BKNG) (U.S.) and NAVER (OTCPK:NHNCF) (South Korea).
Booking Holdings is a provider of online travel services, including airline tickets, hotels, rental cars, cruises and vacation packages along with restaurant reservations. The company conducts its operations via several brands, including Priceline.com, Booking.com, KAYAK and OpenTable, among others. In our view, Booking is a high-quality company that maintains a healthy market share, strong brands and scale advantages in the online travel agency industry. Booking benefits from an increasingly powerful network effect, an overall transition to booking travel online and a generational spending shift that appears to favor “experiences” over “material possessions.” The company enjoys broad geographic reach and, unlike its peers, it derives a large majority of its profits from Europe, where it focuses on lodging. Contrary to the U.S., European lodging supply is mostly owned and operated by independent hoteliers who rely on Booking to match excess inventory with demand. Only about 40% of global travel and leisure tourism arrangements are now conducted online, with a historical growth rate of one to two percentage points per year. We think this provides Booking with ample potential to increase its market share of total global accommodations (which is currently estimated to be 10%). During the quarter, Booking’s share price fell in conjunction with several other travel-related companies due to concerns about the spreading coronavirus. We initiated a position during the quarter as the decline in valuation led to an attractive risk-reward proposition.
NAVER holds the dominant market share in South Korea’s search engine space for both PCs and mobile. In our view, the company’s dominance stems from its high-quality search results as NAVER is better equipped than Google (NASDAQ:GOOG) (NASDAQ:GOOGL) to process Korean syntax, so it tends to produce more relevant results for its users. In addition, Koreans’ preference for a portal experience (as opposed to a strictly search engine-based website) and the incorporation of other services/assets make the company even more attractive, in our view. We also believe NAVER should benefit significantly from further e-commerce growth in Korea, most notably from additional advertising revenue, as inventory and pricing increase with display and video ads. Furthermore, the company holds a significant ownership stake in LINE, the most popular messaging app in Japan, Thailand and Taiwan. We initiated a position during the quarter as the decline in valuation led to an attractive risk-reward profile.
Geographically, we ended the quarter with approximately 50% of our holdings in the U.S., 45% in Europe and the U.K., and 5% in Asia.
We continue to believe the Swiss franc is overvalued versus the U.S. dollar and we defensively hedged 10% of the Fund’s franc exposure.
We are reminded that these difficult economic times can create compelling buying opportunities. Our long-term focus allows us to attempt to take advantage of these short-term price dislocations. We believe the portfolio consists of high-quality companies that can provide our shareholders with attractive returns in the years to come. We thank you for your continued confidence.
The securities mentioned above comprise the following preliminary percentages of the Oakmark Global Select Fund’s total net assets as of 03/31/20: Alphabet Cl A 11.1%, Booking Holdings 3.2%, CNH Industrial 5.6%, Fiat Chrysler 0%, NAVER 2.6%, Regeneron Pharmaceuticals 8.0% and Taiwan Semiconductor 0%. Portfolio holdings are subject to change without notice and are not intended as recommendations of individual stocks.
The net expense ratio reflects a contractual advisory fee waiver agreement through January 27, 2021.
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 03/31/2020 unless otherwise specified.
Oakmark Global Select Fund – Investor Class
Average Annual Total Returns 03/31/20
Since Inception 10/02/06 4.84%
Gross Expense Ratio as of 09/30/19 was 1.25%
Net Expense Ratio as of 09/30/19 was 1.18%
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.
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.