Fellow shareholders,
Both international strategies had adverse performance for the second quarter with the Oakmark International Fund losing just over 4% and the Oakmark International Small Cap Fund declining around 3%. More details are provided in the individual fund commentaries.
In summary, besides some stock-specific issues, two macro factors contributed to this quarter's decline in European markets and the Euro: the results of the European Parliament election and the uncertainty surrounding the two-part French election. The calling of an election in France was unexpected and caused extreme turbulence in both the French and European bond and stock markets because of fears surrounding the ideological make-up of the new National Assembly. Meanwhile, the broader Japanese market index, the TOPIX, where we are under-invested, rose in local market terms. However, I will stress that most of the time, the price declines that are associated with these events are rarely reflective of the underlying intrinsic value of the businesses in which we are invested. We recently posted commentary on the French election that provides more details about our fundamental approach to headline events. As a result, we have a portfolio that has weakened in price, but whose underlying invested companies have generally continued to grow value per share, thus creating more opportunity for future performance.
The prospects are great for value investors
The future of value investing—especially overseas—looks extremely promising. Once again, we are witnessing a new mania which is vacuuming up liquidity and placing it into narrow sectors of the various stock markets. We believe the neglected areas of the market that are being sold to fund “the mania” are very attractively priced. One cannot avoid hearing about the artificial intelligence (AI) revolution and the impacts it will have on our lives. Advancements in AI are revolutionary, much like the advent of railroads, electricity, the telephone, modern agriculture, mobile telephony, e- commerce, and more. However, money is not made on “themes,” but by applying a theme to a specific business practice that leads to shareholder value creation. Recall how many of the past themes resulted in corporate bankruptcy. In the 1800s, the proliferation of railroads caused a step change and revolutionized how goods and people were transported. However, by the late 1800s and into the 1900s, many of these companies went bankrupt. More recently, in the late 1990s, with advancements of the internet, mobile telephony and e-commerce, we saw the creation of thousands of companies ranging from “dotcom” companies to telecom providers as well as e-commerce businesses. From 2000 to 2003, many, if not most, of these businesses also went bankrupt. Frequently, themes do lead to profits, but the companies involved can become fundamentally over-valued. As an example, after struggling to earn money for years, Tesla is now a profitable company. In fact, today its market capitalization is greater than the entire European automotive sector. And, one can ask, is Nvidia (NVDA, Financial)—today's AI poster child which stands at a market capitalization of around $3 trillion— worth almost as much as the entire French or U.K. stock markets, or the entire German and Italian stock markets combined?
Besides Europe's valuation contraction over the last decade (Chart 1), the dollar has been on a bull run since its low point in 2011, with the dollar index appreciating over 40% (Chart 2).
This inherently means that returns for foreign investors, who own foreign currencies, had to fight this headwind for over 13 years. Today, a U.S.-based investor can use strong dollars to buy low-priced non-U.S. companies in their weak home currencies, receiving a double discount. Such opportunities indicate a stronger future performance and give us justifiable cause for optimism.
Investing versus trading
Whereas investors attempt to determine the price of an asset using fundamental analysis, then buy low and sell high, a trader uses analysis to predict price movement. We believe that investing provides a clearer path to long-term success, as our long-term numbers demonstrate. Although traders have greatly influenced current market conditions, we believe the result has been more opportunity for investors. Though we are frustrated with our recent performance, based on today's valuations, we remain fully confident on what we can deliver in terms of future performance for our clients and shareholders. We are grateful for your continued patience, which we believe will be rewarded.
Thank you again for your continued support,
David G. Herro, CFA
Portfolio Manager
As of 06/30/2024, none of the securities mentioned above are held in either the Oakmark International Fund nor the Oakmark International Small Cap Fund. Portfolio holdings are subject to change without notice and are not intended as recommendations of individual stocks.
To obtain a full list of the most recent quarter-end holdings, please visit our website at www.oakmark.com or call 1-800-OAKMARK (625-6275).
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.
