David Herro’s Oakmark International Small Cap Funds 2Q15 Commentary

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David Herro’s Oakmark International Small Cap Funds commentary for the second quarter ended June 30, 2015.

For the period ending June 30, 2015 the Oakmark International Small Cap Fund returned 2% for the quarter and 11% year-to-date.  This is compared to the MSCI World ex U.S. Small Cap Index, which returned 4% and 8% for the same periods, respectively.  Since the Fund’s inception in November 1995, the Fund has returned an average of 10% per year.

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David Herro - Oakmark International Small Cap Funds' top performing stock: Julius Baer Group

The top performing stock in the Fund this past quarter was Julius Baer Group.  Baer released interim results depicting assets under management of CHF289 billion, which outpaced market estimates, even though the company’s assets had declined almost 1% year-to-date due to the negative effects of a strong Swiss franc.  Baer’s gross profit margin was better than we expected, and the company’s cost/income ratio was, in our view, solid and slightly lower than Baer’s target range.  Additionally, the bank may be on the verge of reaching a settlement with U.S. authorities for charges of an alleged role in helping Americans with tax evasion—a  topic that has plagued it and several other Swiss banks since the U.S. Department of Justice started the probe in 2011.  The bank recently set aside USD350 million for fines related to such a U.S. tax settlement.  This is less than consensus and much less than what we have expected.  The settlement has been a long time in coming, and we are happy that the matter may soon be resolved.  With the settlement nearing a close and with a strong balance sheet, we think Julius Baer Group remains poised to benefit significantly as interest rates and volatility levels normalize.

David Herro - Oakmark International Small Cap Funds' largest detractor from performance: Atea

Atea, a Nordic IT infrastructure company, issued a profit warning in June, and this news, combined with a corruption investigation into its Denmark office, caused the stock price to suffer.  As a result, Atea was the largest detractor from performance for the quarter.   In regards to the investigation, Atea announced that it was determined to assist the police and that the case involved former employees who are now employed by another IT company.  Neither Atea as a firm nor any one on Atea’s current management team has been charged with bribery.  Management reported that it has known about this issue longer than it has been public, has investigated it internally and is confident that it did not take place in other geographies.  This news has not affected any of the company’s business outside of Denmark, which has experienced a postponement of orders pending the outcome.  Despite the corruption news, Atea holds leading market positions and competitive advantages as an IT infrastructure and system integration specialist, generates strong cash flow, produces high returns and is well-positioned to capture the long-term growth opportunities within the IT infrastructure market in the Nordic and Baltic regions.

David Herro - Oakmark International Small Cap Funds: Added and sold positions

We added three new securities to the Fund during the quarter: ALS Limited, an Australian-based testing services provider with operations in approximately 60 countries across the globe; Swiss-based EFG International, which offers private banking and asset management services in approximately 30 locations worldwide, and Mitie Group, a U.K. facilities management outsourcing company, focused almost exclusively in the U.K..

During the quarter we sold Autoliv (Sweden), Interpump (Italy), Carpetright (U.K.), Sika (Switzerland) and Tecan Group (Switzerland).

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), 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 hedges decreased to 18%, and the Norwegian krone and Swiss franc hedge exposures were 13% and 30%, respectively.

We thank you for your continued support.

David G. Herro, CFA
Portfolio Manager
[email protected]

Michael L. Manelli, CFA
Portfolio Manager
[email protected]


As of 06/30/15, Julius Baer Group, Ltd. represented 4.2%, Atea ASA 2.1%, ALS Limited 0.01%, EFG International AG 1.6%, Mitie Group PLC 1.6%, Autoliv, Inc. 0%, Interpump Group SpA 0%, Carpetright PLC 0%, Sika AG 0%, and Tecan Group AG 0% of the Oakmark International Small Cap Fund's total net assets.  Portfolio holdings are subject to change without notice and are not intended as recommendations of individual stocks.

Click here to access the full list of holdings for The Oakmark International Small Cap Fund as of the most recent quarter-end.

The MSCI World ex U.S. Small Cap Index (Net) is a free float-adjusted market capitalization index that is designed to measure global developed market equity performance, excluding the U.S. The MSCI Small Cap Indices target 40% of the eligible Small Cap universe within each industry group, within each country. MSCI defines the Small Cap universe as all listed securities that have a market capitalization in the range of USD200-1,500 million. This benchmark calculates reinvested dividends net of withholding taxes using Luxembourg tax rates. This index is unmanaged and investors cannot invest directly in this index.

Oakmark International Small Cap Fund: The stocks of smaller companies often involve more risk than the stocks of larger companies. Stocks of small companies tend to be more volatile and have a smaller public market than stocks of larger companies. Small companies may have a shorter history of operations than larger companies, may not have as great an ability to raise additional capital and may have a less diversified product line, making them more susceptible to market pressure.

Oakmark International Small Cap Fund: The percentages of hedge exposure for each foreign currency are calculated by dividing the market value of all same-currency forward contracts by the market value of the underlying equity exposure to that currency.

Oakmark International Small Cap Fund: Investing in foreign securities presents risks that in some ways may be greater than U.S. investments. Those risks include: currency fluctuation; different regulation, accounting standards, trading practices and levels of available information; generally higher transaction costs; and political risks.

The discussion of the Fund’s investments and investment strategy (including current investment themes, the portfolio managers' research and investment process, and portfolio characteristics) represents the Fund’s investments and the views of the portfolio managers and Harris Associates L.P., the Fund’s investment adviser, at the time of this letter, and are subject to change without notice.

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