miniseries
It might be remiss of us to not thank Clyde McGregor for his great contribution to our shoppers and in flip the agency. Clyde can be the primary to level out this was a staff effort and the final to say that he has been an exemplary teammate at Harris Associates for the final 42 years. Congratulations in your retirement Clyde! We want you all the most effective as you proceed to endeavor to enhance the lives of these round you.
Efficiency overview
The fourth quarter mirrored robust absolute returns for the Oakmark International Fund (OAKGX)(“the Fund”). The Fund generated a 7.56% return within the fourth quarter, in comparison with a 11.42% return for the MSCI World Index. For the calendar 12 months ending 2023, the Fund elevated 17.25% in comparison with 23.79% for the MSCI World Index. Since inception, the Fund has returned 9.29% in comparison with 5.87% for the MSCI World Index.
Probably the most vital particular person inventory contributors for the quarter have been Capital One Monetary (U.S.)(COF), KKR (U.S.)(KKR) and Ryanair Holdings (Eire)(RYAAY, OTCPK:RYAOF). The most important detractors have been Bayer (Germany) (OTCPK:BAYRY), Constitution Communications (U.S.) (CHTR) and Julius Baer (Switzerland) (JBPCF). Probably the most vital particular person inventory contributors for the calendar 12 months have been Alphabet (U.S.)(GOOG, GOOGL), Ryanair Holdings and Amazon (U.S.) (AMZN). The most important detractors over the identical interval have been St. James’s Place (U.Ok.) (OTCPK:STJPF), Bayer and CNH Industrial (U.Ok.) (CNHI).
Capital One Monetary (U.S.), which focuses on shopper finance, was the highest contributor for the quarter as a result of robust third-quarter outcomes. The corporate’s earnings per share of $4.45 was about 37% above consensus estimates, and its mortgage progress, internet curiosity margin, non-interest earnings, working bills and charge-offs have been all higher than consensus estimates. In regard to credit score high quality, administration famous that whereas portfolio-wide month-to-month delinquency and charge-off charges barely exceeded 2019 ranges, these traits have been stabilizing. As well as, Capital One maintains sizeable capital and liquidity buffers. General, we admire the corporate’s value-focused administration staff, constant reinvestment in know-how improvement and steady deposit base.
Bayer (Germany), a life science firm with prescription drugs, shopper well being and crop science divisions, was the quarter’s prime detractor. Throughout the quarter, the corporate introduced its resolution to cease its OCEANIC-AF trial for asudenxian early as a result of lack of efficacy. The corporate was ordered to pay $1.5 billion to 3 plaintiffs in a current RoundUp case. Whereas each occasions have been disappointments, the asundexian information is extra related to us as a result of we anticipated each wins and losses within the RoundUp authorized saga and anticipate this current verdict will possible be decreased considerably on attraction. Asundexian was Bayer’s largest late-stage pharma pipeline alternative and had potential to be a next-generation Xarelto, however the trial was riskier than common as a result of its knowledge profile in earlier levels. We now have modestly decreased our estimate of Bayer’s intrinsic worth, however we nonetheless consider the inventory is attractively priced, buying and selling at round 6 occasions 2024 earnings. We proceed to observe the state of affairs and can modify our evaluation, if needed. We met with new CEO Invoice Anderson after the information, and we’re impressed by his thoughtfulness, robust background in pharma, and pressing need to enhance the areas of the corporate which have held it again from its full incomes potential.
Portfolio Exercise
Via the fourth quarter, we bought new positions in Agilent Applied sciences (A), Kroger (KR) and Roche Holding (OTCQX:RHHBY). We bought positions in Oracle (U.S.)(ORCL); Sandoz (Switzerland)(OTC:SDZNY), a spin-off from Novartis (NVS); and Veralto (U.S.)(VLTO), a spin-off from Danaher (DHR), in favor of names that we consider provide extra upside potential.
Agilent Applied sciences (U.S.) sells analytical devices primarily utilized by analysis scientists and high quality management labs. Agilent’s portfolio has reworked dramatically for the reason that firm was spun off from Hewlett Packard (HPE) in 1999. Since then, the corporate has pared again cyclical enterprise traces in semiconductors, digital measurement and communications. Agilent is now a pure-play centered on life science and diagnostics. Most of its present gross sales are derived from recurring sources, reminiscent of consumables, providers and software program, that are extra worthwhile and fewer unstable than capital tools orders. Since slimming the corporate down, Agilent’s administration has delivered constant market share features, strong natural progress and strong margin enlargement. We additionally like that the corporate competes in giant, consolidated finish markets that possess engaging progress charges, strong profitability and resiliency. Firm executives are proficient operators, pushed by a long-term mindset and a dedication to construct shareholder worth by means of balanced capital allocation, which provides to our confidence in our funding. We consider the market is overlooking the corporate’s transformation and nonetheless sees Agilent as a cyclical enterprise. The share value has been damage by short-term issues about tender capital tools orders following a strong post-pandemic promoting interval. This has allowed us to buy shares of this high-quality enterprise at a reduction to its life science friends and to related non-public market transactions.
Kroger (U.S.) is the second-largest grocery retailer in America, behind solely Walmart (WMT). Though the grocery trade is extremely aggressive, Kroger’s scale benefits enable it to supply a extra compelling worth proposition than smaller friends and earn larger returns on capital. Lately, the market has assigned Kroger a decrease a number of as a result of issues that e-commerce would disrupt conventional brick-and-mortar grocery companies. Nonetheless, we consider Kroger’s efficiency by means of the pandemic highlighted that its retailer footprint, distribution infrastructure, know-how investments and powerful model all place the corporate properly for a world with larger on-line grocery adoption. The inventory trades for simply 10x our estimate of subsequent 12 months’s EPS, which we consider is engaging given Kroger’s aggressive positioning and earnings progress outlook. The pending merger with Albertsons (ACI) might speed up the corporate’s earnings progress and produce extra scale benefits. If the merger is just not authorised, the corporate could have the capability to return over 25% of its market cap to shareholders.
Roche Holding (Switzerland) is a well being care firm centered on prescription drugs and diagnostics. Roche is an above-average innovator in pharma with a strong observe document of recent drug improvement underpinned by a market-leading finances each in absolute phrases and relative to its gross sales base. Its shares are buying and selling at a reduction to the online current worth of the corporate’s on-market portfolio after a handful of unfortunate misses in late-stage improvement, which means that this innovation engine is free. Furthermore, the on-market portfolio gives a strong mid-term progress and money era outlook, which ought to give the corporate’s pipeline time to ship and will present the monetary capability for the corporate to pursue selective, accretive bolt-on acquisitions.
We bought the rest of our long-time holding in Oracle (U.S.) through the quarter. The Fund first bought shares within the firm in 2006, again when it had formidable plans to combine all of its enterprise software program purposes right into a easy answer named Fusion. Now Fusion is the perennial market chief, and administration’s stewardship has significantly benefitted shareholders. Extra not too long ago, the corporate loved successes by means of its merger with Cerner and the acceleration of its cloud infrastructure enterprise. We exited our place because it approached our estimate of intrinsic worth.
Geographically, we ended the quarter with 49.9% of the portfolio within the U.S., 31.5% in Europe, 14.5% within the U.Ok. and 4.1% in Asia as a % of fairness. Within the fourth quarter, Eire, South Korea and Belgium have been the highest contributors to relative efficiency of nations owned. Germany, the U.Ok. and Switzerland detracted probably the most from relative efficiency. For the calendar 12 months, the U.S., Eire and South Korea have been the biggest nation contributors to relative efficiency of nations owned. The U.Ok., Germany and France have been the biggest detractors.
The Fund didn’t have any foreign money hedges in place at quarter’s finish. We defensively hedge a portion of the Fund’s publicity to currencies once we consider they’re overvalued versus the U.S. greenback, however don’t discover such overvaluation as we speak.
As all the time, we thanks in your partnership with the Oakmark International Fund. We invite you to ship us your feedback and questions.
David G. Herro, CFA | Tony Coniaris, CFA | Jason E. Lengthy, CFA | M. Colin Hudson, CFA | John A. Sitarz, CFA, CPA | Clyde S. McGregor, CFA
The securities talked about above comprise the next preliminary percentages of the Oakmark International Fund’s complete internet belongings as of 12/31/2023: Agilent Applied sciences 1.2%, Albertsons 0%, Alphabet Cl A 3.5%, Amazon.com 1.5%, Bayer 2.6%, Capital One Monetary 3.0%, Constitution Communications Cl A 2.4%, CNH Industrial 3.9%, Danaher 1.3%, Hewlett Packard 0%, Julius Baer Group 2.7%, KKR 2.1%, Kroger 1.2%, Novartis 0.9%, Oracle 0%, Roche Holding 1.1%, Ryanair Holdings ADR 1.9%, Sandoz 0%, St. James’s Place 2.1%, Veralto 0% and Walmart 0%. Portfolio holdings are topic to alter with out discover and aren’t meant as suggestions of particular person shares.
Entry the total listing of holdings for the Oakmark International Fund right here.
The data, knowledge, analyses, and opinions offered herein (together with present funding themes, the portfolio managers’ analysis and funding course of, and portfolio traits) are for informational functions solely and symbolize the investments and views of the portfolio managers and Harris Associates L.P. as of the date written and are topic to alter and should change based mostly on market and different circumstances and with out discover. This content material is just not a suggestion of or a suggestion to purchase or promote a safety and isn’t warranted to be right, full or correct.
Sure feedback herein are based mostly on present expectations and are thought of “forward-looking statements.” These ahead trying statements mirror assumptions and analyses made by the portfolio managers and Harris Associates L.P. based mostly on their expertise and notion of historic traits, present circumstances, anticipated future developments, and different components they consider are related. Precise future outcomes are topic to quite a few funding and different dangers and should show to be completely different from expectations. Readers are cautioned to not place undue reliance on the forward-looking statements.
EPS refers to Earnings Per Share and is calculated by dividing complete earnings by the variety of shares excellent.
The compound return is the speed of return, often expressed as a proportion that represents the cumulative impact {that a} collection of features or losses has on an unique quantity of capital over a time frame. Compound returns are often expressed in annual phrases, which means that the share quantity that’s reported represents the annualized fee at which capital has compounded over time.
The chances of hedge publicity of every international foreign money are calculated by dividing the market worth of all same-currency ahead contracts by the market worth of the underlying fairness publicity to that foreign money.
The MSCI World Index (NET) is a free float-adjusted, market capitalization-weighted index that’s designed to measure the worldwide fairness market efficiency of developed markets. The index covers roughly 85% of the free float-adjusted market capitalization in every nation. This benchmark calculates reinvested dividends internet of withholding taxes. This index is unmanaged and buyers can’t make investments straight on this index.
Now and again, Harris could decide, based mostly on its evaluation of a specific multi-national issuer, {that a} nation classification completely different from MSCI finest displays the issuer’s nation of funding danger. In these cases, studies with nation weights and efficiency attribution will differ from studies utilizing MSCI classifications. Harris makes use of its personal nation classifications in its reporting processes, and these classifications are mirrored within the included supplies.
The Fund’s portfolio tends to be invested in a comparatively small variety of shares. In consequence, the appreciation or depreciation of anyone safety held by the Fund could have a better affect on the Fund’s internet asset worth than it will if the Fund invested in a bigger variety of securities. Though that technique has the potential to generate engaging returns over time, it additionally will increase the Fund’s volatility.
Investing in international securities presents dangers that in some methods could also be better than in U.S. investments. These dangers embody: foreign money fluctuation; completely different regulation, accounting requirements, buying and selling practices and ranges of obtainable info; usually larger transaction prices; and political dangers.
The compound return is the speed of return, often expressed as a proportion that represents the cumulative impact {that a} collection of features or losses has on an unique quantity of capital over a time frame. Compound returns are often expressed in annual phrases, which means that the share quantity that’s reported represents the annualized fee at which capital has compounded over time.
The chances of hedge publicity of every international foreign money are calculated by dividing the market worth of all same-currency ahead contracts by the market worth of the underlying fairness publicity to that foreign money.
All info supplied is as of 12/31/2023 until in any other case specified.
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Editor’s Observe: The abstract bullets for this text have been chosen by Looking for Alpha editors.
