David Herro: Oakmark International Small Cap Fund: First Quarter 2015 by Oakmark Funds
The Oakmark International Small Cap Fund returned 9% for the quarter ended March 31, 2015, outperforming the MSCI World ex U.S. Small Cap Index, which returned 4% for the same period. Since the Fund’s inception in November 1995, it has returned an average of 10% per year.
Oakmark International Small Cap Fund: Top performing stock
The top performing stock in the Fund this past quarter was Michael Page International, a U.K.-based professional recruitment firm. The Fund owns a number of other European staffing companies, including Randstad (Netherlands), Brunel (Netherlands) and Sthree (U.K.), all of which were also strong contributors during the quarter. Even with high unemployment rates, staffing companies have maintained acceptable earnings due to strong demand and pricing despite market fears. Michael Page particularly benefited from improved sentiment in Europe and a growing sense that hiring activity will increase. Because of the company’s high exposure to the more volatile permanent placement market, its earnings are especially sensitive to increased hiring trends. During 2014 Michael Page reported a respectable 15% year-over-year increase in EBIT. We expect the rate of EBIT growth to accelerate further in the coming years due to continued growth in hiring activity as well as Michael Page’s productivity improvements, driven by a new IT system.
Oakmark International Small Cap Fund: Largest detractor
The Fund’s largest detractor for the quarter was Melco International Development (Hong Kong), which is a developer and owner of casino gaming and entertainment resort facilities in Asia. Casino revenues in Macau were weak due to China’s anti-corruption campaign, difficult year-over-year comparisons and a weaker macro environment. Although we continue to monitor the market, we remain optimistic about Macau’s long-term prospects, given low penetration of Chinese visitors, continued wealth creation of Chinese citizens and large infrastructure projects, which should help facilitate the growth of Macau.
Oakmark International Small Cap Fund: New positions
We added two new securities to the Fund during the quarter: China ZhengTong Auto Services, one of the five largest auto dealerships in China with 70 full-service dealerships and additional showrooms across the country, and Outotec, a Finland-based supplier of processing plants to the metals and minerals sector. During the quarter we sold Kansai Paint (Japan), Oracle Japan and Goodman Fielder (Australia) from the Fund.
Geographically, we ended the quarter with 64% of our holdings in Europe, 21% in Asia and 11% in Australasia. The remaining positions are in North America (Canada and the U.S.), Latin America (Brazil) and the Middle East (Israel).
At current U.S. dollar valuations we still maintain hedge positions on three of the Fund’s currency exposures. As of the recent quarter end, the Fund’s Australian dollar and Norwegian krone hedges decreased to 23% and 10%, respectively, and with the currency movement due to the unpegging of the Swiss franc to the euro in January 2015, our Swiss franc exposure increased slightly to 29%.
We thank you for your continued support.
David G. Herro, CFA
Michael L. Manelli, CFA