Oakmark International Fund: Third Quarter 2021
The Oakmark International Fund increased 42.0% for the fiscal year ended September 30, 2021, outperforming the MSCI World ex U.S. Index, which was 26.5% over the same period. For the most recent quarter, the Fund returned -5.0%, compared to the benchmark's return of -0.7%. However, the Fund has returned an average of 9.3% per year since its inception in September 1992, outperforming the MSCI World ex U.S. Index, which has averaged 6.3% per year over the same period.
Glencore, one of the world's largest mining firms with leading market positions in copper, coal, zinc, nickel and cobalt mining, was a top contributor for both the quarter and one-year period. The Swiss-headquartered company continued to outperform expectations and benefitted from rising commodity prices and a disciplined cost program. Copper is Glencore's most important commodity, and the company is benefiting from rising production and lower costs. Demand for copper is currently quite strong and, in our assessment, it will remain robust due to 1) broad infrastructure investment in China and elsewhere; 2) continued global industrial recovery; and 3) its use in environmentally favorable initiatives, such as grid investment, renewables and mobility electrification. At both current and normalized prices, Glencore generates a significant amount of cash flow, resulting in a double-digit free cash flow yield. Lastly, we like that the company is run by smart, hyper-competitive and value-focused managers who are incentivized to improve asset returns and return capital to shareholders.
Chinese internet company Alibaba was a top detractor for the year ending September 30. Regulatory headwinds and heightened competition continued to challenge the company's operating results. Earlier in 2021, China's State Administration for Market Regulation fined Alibaba Group $2.8 billion—the largest antitrust penalty issued in the country's history. The fine, which represents 4% of the company's 2019 annual domestic revenue, was imposed because China's State Administration for Market Regulation found that Alibaba's merchant exclusivity requirements hindered competition. Later, the company's share price plunged upon the release of fiscal full-year earnings, even though these were largely in line with our full-year estimates on an organic basis. Along with the earnings release, management announced it would reinvest all incremental profits in the current fiscal year, which disappointed investors. While this strategy will likely produce low or no near-term profit growth, management believes these investments will help grow the company's user base over the long term. In addition, the cloud business grew more slowly than had been expected, which Alibaba attributed to a large global customer moving its non-China business to a competitor. While the company faces near-term challenges from regulatory pressure and a slowing macro environment, we believe it is meaningfully undervalued relative to our estimate of its intrinsic value.
Continental, a German tire and automotive component manufacturer, was a notable detractor for the quarter after it released a mixed set of results in August. Incremental weakness on the component side was primarily driven by the global computer chip shortage, which has impacted light vehicle production globally and also especially affected Continental due to the company's business mix. On the positive side, its tires business is clearly benefiting from recoveries in both volume and pricing. Since reporting results, Continental's expectations for light vehicle production have come down further and will likely put pressure on near-term results. In September, the company completed the spinoff of its powertrain business, Vitesco Technologies, which produced solid results in its final quarter with Continental. We believe the eventual recovery of vehicle production growth, combined with increasing content in vehicles from Continental and significant cost reductions, should significantly improve the company's financial results over the next few years. We continue to find Continental has an attractive portfolio and believe that it is undervalued relative to its normalized earnings power.
During the quarter, we sold our holdings in Bunzl (U.K.) and EssilorLuxottica (France) as they approached our estimates of their intrinsic values. We also sold our remaining shares in Liberty Global Class C (U.S.), but we maintained our investment in Liberty Global Class A (U.S.). Similarly, we transitioned our Samsung Electronics (South Korea) position to the Samsung Electronics preferred shares.
We initiated the below positions during the quarter:
Informa (U.K.) publishes academic, scientific, commercial and professional data through electronic and print information services. In addition, the company produces more than 8,500 events and tradeshows. We believe the tradeshow business is underappreciated and likely to create value for the company.
Vipshop Holdings ADR (China) offers a differentiated value proposition to its customers via its online product sales and distributions services. We like that the business model is asset-light due to inventory being predominantly on consignment and logistics outsourced to a third party. We believe the company should generate meaningful free cash flow moving forward.
Worldline (France) creates and operates digital transaction processing platforms. It is the European payments leader and has, in our opinion, a long growth runway given lower European cashless penetration when compared to the U.S.
Trip.com Group ADR (China), the largest online travel agency in China, and Reckitt Benckiser Group (U.K.), a large global consumer products company, were both previous holdings in the Fund. With significant declines in share price, the stocks again offered the necessary potential upside to be selected for our portfolio.
We also received shares of Prosus (Netherlands) as part of a corporate action related to our holding of Naspers (South Africa). We elected to tender our Naspers shares in favor of Prosus given its better domicile and liquidity.
Vitesco Technologies Group (Germany), formerly Continental's powertrain division, spun-off to Continental shareholders in September. We think the company offers meaningful upside potential due to the successful management of its order book during the spinoff transition and we believe the stock is undervalued relative to our perception of intrinsic value.
We continue to think the Swiss franc is overvalued versus the U.S. dollar. As a result, we defensively hedged a portion of the Fund's exposure. Approximately 14% of the Swiss franc exposure was hedged at quarter end.
The securities mentioned above comprise the following preliminary percentages of the Oakmark International Fund's total net assets as of 09/30/21: Alibaba Group 0.9%, Alibaba Group ADR 1.0%, Bunzl 0.0%, Continental 2.7%, EssilorLuxottica 0.0%, Glencore 3.1%, Informa 0.3%, Liberty Global Cl A 2.0%, Liberty Global Class C 0.0%, Naspers 0.8%, Prosus 1.8%, Reckitt Benckiser Group 0.5%, Samsung Electronics 0.0%, Samsung Electronics Pfd 0.7%, Trip.com Group ADR 0.2%, Vipshop Holdings ADR 0.9%, Vitesco Technologies Group 0.3% and Worldline 1.1%. Portfolio holdings are subject to change without notice and are not intended as recommendations of individual stocks.
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