Oakmark International Fund: Fourth Quarter 2022
Oakmark is the mutual fund family launched in 1991 by Harris Associates, the Chicago deep-value firm founded in 1976 (about $105bn AUM). Bill Nygren runs the flagship Oakmark Fund and David Herro the Oakmark International Fund, buying businesses at large discounts to intrinsic value and holding them like owners — publishing quarterly fund commentaries, market commentaries and insight articles.
In plain words
This report covers Oakmark International Fund's performance in late 2022. The fund lost 15.7% for the year, but the managers say now is a good time to invest because their stocks trade at only about half their true value. They also note that foreign currencies (like the euro) are cheap against the U.S. dollar, which could boost returns if the dollar weakens. They highlight a few European companies, like Intesa Sanpaolo (an Italian bank benefiting from higher interest rates) and Sandvik (a Swedish engineering firm with a growing maintenance business). For regular investors, this suggests international stocks might be a bargain for a 3- to 5-year horizon, but don't expect quick gains.
The Oakmark International Fund returned 23.0% in the fourth quarter of 2022, outperforming the MSCI World ex U.S. Index's 16.2%, but posted a full-year return of -15.7%, slightly trailing the benchmark's -14.3%. Since its inception in September 1992, the fund has delivered an average annual return o
Theme and Background
This chapter is the opening of the Oakmark International Fund's fourth-quarter 2022 report, reviewing the fund's performance in the fourth quarter and full year of 2022, and elaborating on the portfolio managers' assessment of the current market environment. The report notes that despite significant valuation declines in the first three quarters, most portfolio holdings maintained healthy earnings and cash flows; the market environment improved in the fourth quarter due to interest rate hike signals, improved supply chains, and falling energy prices, providing a favorable backdrop for future investments.
Core Thesis
The author's core investment argument is: The current portfolio valuation is highly attractive, trading at just over 50% of estimated intrinsic value, and international currencies remain undervalued relative to the U.S. dollar, creating favorable conditions for generating positive absolute and relative returns over the next three to five years. The counterintuitive judgment is that although the portfolio is concentrated in "economically sensitive" sectors such as industrials, financials, and consumer discretionary, the author believes these companies are more resilient than the market expects, driven not by macroeconomic forecasts but by valuation appeal.
Key Arguments and Data
- Fund Performance Comparison: The fund returned 23.0% in the fourth quarter, outperforming the benchmark MSCI World ex U.S. Index's 16.2%; the full-year return was -15.7%, slightly trailing the benchmark's -14.3%; since inception in 1992, the annualized return is 8.3%, significantly outperforming the benchmark's 5.6%.
- Market Environment Improvement Factors: Central bank interest rate hike signals, improved supply chain conditions, and falling energy prices, which may collectively help reduce inflation in multiple countries.
- Currency Impact: The strengthening of international currencies relative to the U.S. dollar boosted international stock returns, but most major currencies still depreciated 5-15% against the dollar for the full year.
- Portfolio Valuation: As of early 2023, the portfolio traded at just over 50% of estimated intrinsic value.
- Portfolio Manager Actions: Both portfolio managers significantly increased their fund holdings in 2022, demonstrating confidence in the portfolio.
The fund's Investor Class has an average annualized return of 8.30% since inception in September 1992, 4.22% over 10 years, -1.70% over 5 years, -15.65% over 1 year, and 22.96% over 3 months, with an expense ratio of 1.05%
Companies/Assets Involved
- Intesa Sanpaolo (Italian bank): Major contributor in the fourth quarter. Nine-month net profit reached €3.28 billion, with management raising full-year guidance to over €4 billion; net interest income grew nearly 20% year-over-year and over 14% quarter-over-quarter; operating costs fell 1.8% year-over-year; plans to complete voluntary departures of 4,400 employees by the first quarter of 2025. The author is bullish.
- Credit Suisse (Swiss financial services): Major detractor in the fourth quarter. Third-quarter net loss was CHF 4.03 billion, including a CHF 3.7 billion impairment of deferred tax assets; required a larger-than-expected capital raise. The author lowered the intrinsic value estimate but believes core business performance was acceptable and capital conditions will improve after restructuring. The author is bearish (short-term) but still holds long-term.
- Akzo Nobel (Dutch paint manufacturer): New purchase. Fully recovered raw material cost inflation through pricing adjustments, expected to retain most pricing gains in the decorative paints business; the new CEO is underestimated by the market. The author is bullish.
- Sandvik (Swedish high-tech engineering company): New purchase. Actual capital expenditure in the mining industry is about 50% below the previous peak, with existing equipment being the oldest on record; maintenance services are provided for only 50% of installed equipment, leaving significant room for aftermarket expansion. The author is bullish.
- Others: Sold Brambles (Australia), Trip.com Group (China), UPM-Kymmene (Finland), and H&M Cl B (Sweden) to exchange for targets with higher upside potential.
Investment Implications
- Directional Judgment: Current valuations of international stocks (especially in Europe and the UK) are at historical lows, with the portfolio trading at half of intrinsic value, presenting a favorable opportunity for medium- to long-term positioning. Investors should focus on companies with healthy earnings and cash flows that are undervalued due to macroeconomic concerns.
- Sector Preference: High-quality companies in industrials, financials, and consumer discretionary sectors, though considered "economically sensitive," may have underestimated resilience and offer highly attractive valuations.
- Currency Factor: International currencies remain undervalued relative to the U.S. dollar; if the dollar weakens, international stock returns could receive an additional boost.
- Specific Targets: Intesa Sanpaolo benefits from rising interest rates and cost control, Akzo Nobel has pricing power, and Sandvik benefits from the mining equipment replacement cycle and aftermarket expansion.