Bill Nygren Q2 letter to shareholders on his favorite value stocks in Japan and Europe.
The Oakmark Global Select Fund returned 8% for the quarter ended March 31, 2013, matching the MSCI World Index’s return of 8%. During the first half of the fiscal year, the Fund returned 19%, compared to 10% for the MSCI World Index. More importantly, the Fund has returned an average of 7% per year since inception, outperforming the MSCI World Index, which has averaged 3% per year over the same period.
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Bill Nygren on favorite stocks
We’ve discussed Daiwa Securities (TWO:8601), Japan’s second-largest brokerage, many times in past commentaries, and it was again a top contributor this quarter, returning 21%. Daiwa’s fiscal 2012 results were very strong. Net operating revenues increased 24%, and operating expenses decreased about 7% from the year-ago period. The retail unit performed particularly well, as revenues increased 16% for the year and were 44% higher compared with the previous quarter. Operating profit in the retail unit rose 72% versus 2011, and operating margins were better than our estimates. Profits in the asset management and wholesale units were also stronger than we expected, and robust equity trading helped the company’s investment bank results. These business successes, combined with the weakened yen and the strengthened Japanese equity market, reinforce our view that Daiwa will provide good long-term returns for its shareholders.
Another top contributor for the quarter was Daimler (DAI), the global auto manufacturer of the Mercedes brand. Even though Daimler’s first-quarter results were below expectations, investors remained upbeat, and Daimler’s stock price continued to climb due to improving sales trends in the auto industry. The company’s Mercedes-Benz deliveries increased nearly 12% in April, and since the beginning of the year unit sales increased about 6%. Mercedes-Benz sales in the U.S. grew just over 4% during the past quarter, and year-to-date sales were up 10% versus the year-ago period. In addition, Daimler announced that it may sell four company-owned Mercedes-Benz dealerships in Germany to reduce costs and better align its profitability with its close competitors, BMW and Audi.
The largest detractor from performance was Canon (CAJ), a Japan-based professional and consumer solutions company, which lost 8%. Canon’s first quarter results were weaker than expectations and guidance. Camera sales were hit particularly hard due to excess inventory stocked up after the Thai floods. Demand did not come through as expected, particularly in China and Europe, so heavy discounting was used to move excess inventory. For the remainder of the year, Canon should scale back these steep discounts, which will improve margins. Canon’s office segment also produced weak results; however, a recent refresh of their entire lineup of printers should help that division. Despite Canon’s disappointing first quarter results, we believe it remains a good long-term investment opportunity for our shareholders.
We purchased three new names during the quarter: Bank of America (BAC), one of the largest banks in the U.S.; Diageo (DEO), the leading premium spirits business in the world; and Oracle (ORCL), the largest provider of enterprise software. During the quarter we sold Texas Instruments as it approached our estimate of intrinsic value. We also sold Dell (DELL) during the quarter. In last quarter’s commentary we discussed the many external parties interested in purchasing Dell. Blackstone, the potential bidder in which we had the most confidence, withdrew from the bidding process and confirmed it would not offer to purchase the company. That surprised and disappointed us, so we sold our position and allocated the capital to other names in which we have more confidence.
Geographically, we ended the quarter with our European holdings increasing to 42% and Japanese holdings decreasing to 11%. North America accounts for the remainder of the Fund’s equity holdings.
Although many global currencies have weakened compared to the U.S. dollar, we continue to believe some are overvalued, and we are defensively hedging the Fund’s currency exposure. As of quarter end, approximately 18% of the Swiss franc and 9% of the Japanese yen exposures were hedged.
We thank you, our shareholders, for your continued support and confidence.
Bill Nygren, CFA
David G. Herro, CFA
As of 6/30/13, Daiwa Securities Group, Inc. represented 5.0%, Daimler AG 7.1%, Bayerische Motoren Werke (BMW) AG 0%, Canon, Inc. 4.4%, Bank of America Corp. 4.7%, Diageo PLC 3.5%, Oracle Corp. 4.5% Texas Instruments, Inc. 0%, and Dell, Inc. 0% 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.
For a full list of The Oakmark Global Select Fund’s holdings as of 6/30/13, click here.