David Herro on the rough beginning of 2016 for Oakmark Funds and the global equity markets.
The beginning of 2016 has been quite rough for the global equity markets and the Oakmark Funds. With the exception of the Oakmark Equity and Income Fund, all of our Funds are down more than 10% at the time of this writing. However, we do not believe these adverse price movements are at all reflective of economic reality. Intrinsic value, in our view, is determined by the ability of a company to generate and grow free cash flow over time. If we look at today’s operating environment, though not robust, it is in our opinion quite suitable to long-term value creation. Consider:
Oakmark Funds: A Tough Start To 2016
- The U.S. unemployment rate sits at 4.9%. Not only are incomes beginning to rise again, but the American consumer has substantially deleveraged over the last decade. In addition to incomes increasing, consumers are benefitting from lower energy costs.
- Europe continues to recover from its slowdown. Take, for example, Germany, where the current 6.2% unemployment rate is lower than at any time since reunification. In the U.K., retail sales rose 3% in January. The “PIIGS” countries of Portugal, Italy, Ireland, Greece and Spain have stabilized and seen sovereign bond yields plummet.
- Despite the numerous headlines, we believe the global banking system is in good shape. Tier 1 capital ratios are near double where they were eight years ago. Bad debts are well controlled for the banks in our banking portfolio, and though there are some areas of concern such as energy lending, overall credit quality is improving.
- While some emerging markets (EM) are experiencing pain, we see improvement in others. Yes, China’s GDP growth is slowing and there have been questions on how leaders there have managed the economy, but consumption has still been growing near 10% per year despite a very high personal savings rate of around 30%. Note that the government’s stated goal is to move to a more consumer-oriented society versus one that is producer-focused. This transition presents challenges, but by no means are they unsurmountable. In addition, India and Indonesia continue to slowly reform and grow at rates of 5-7%. In fact, many EM countries are net energy consumers and will greatly benefit from the low price of oil.
In this environment, we are confident that the businesses in which we are invested will continue to grow earnings and cash flow streams; my co-manager for the Oakmark Global Select Fund, Bill Nygren, very much shares in that view. In fact, many partners, fund managers and employees of Harris Associates have been using this period of market weakness to buy additional shares in the Funds. Despite the macro noise, perhaps having a more amplified effect given the events of 2008-2009, it is our belief that a measurable spread has grown between the prices of businesses and what they are fundamentally worth. Given this opportunity, we remain very optimistic about our long-term investment success.
David G. Herro, CFA
Chief Investment Officer - International Equity, Partner and Portfolio Manager
David Herro is a Partner, Deputy Chairman, Portfolio Manager and the Chief Investment Officer of International Equity at Harris Associates. With 30 years of investment experience, David co-manages three Oakmark Funds: the Oakmark International Fund (OAKIX), the Oakmark International Small Cap Fund (OAKEX), and the Oakmark Global Select Fund (OAKWX). Prior to joining Harris Associates in 1992, he was a Portfolio Manager with both The State of Wisconsin Investment Board and The Principal Financial Group. David earned a BS from the University of Wisconsin-Platteville (1983) and an MA from the University of Wisconsin-Milwaukee (1985).