Oakmark International Fund: Second Calendar Quarter 2023
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 is Oakmark International Fund's Q2 2023 letter. The manager explains why they bought more Alibaba when its stock was falling: its core e-commerce business trades at just 5 times earnings, it generates huge cash, and it's splitting up to unlock value. They also like BMW for its strong electric vehicle sales and hidden profit margins. For regular investors, the takeaway is: when markets panic, solid companies can get unfairly cheap; focus on real earnings and what management does, not just the news.
Oakmark International Fund returned 3.1% in the second quarter of 2023, slightly outperforming the MSCI World ex U.S. Index's 3.0%; since its inception in September 1992, the fund has delivered an annualized return of 8.7%, significantly beating the benchmark's 5.9%. Key insights: BMW (Germany) was
Theme and Background
This chapter is the fund manager letter of the Oakmark International Fund for the second quarter of 2023. It primarily reviews the fund's performance and provides a detailed analysis of the investment logic behind the quarter's largest contributor, BMW, and the largest detractor, Alibaba. The market backdrop features weakening post-COVID recovery momentum in China, escalating US-China political tensions, and the European automotive industry demonstrating resilience amid the electric vehicle transition.
Core Views
The author argues that despite Alibaba facing market share loss and macroeconomic headwinds, its core e-commerce business is valued at only approximately 5 times EBITA. Management is actively unlocking value for minority shareholders through buybacks, restructuring, and spin-off listings, making the current stock price severely undervalued. For BMW, the author is optimistic about the strong execution of its electrification strategy and the pricing power afforded by its premium positioning, believing that its automotive segment's EBIT margin of 12.1% is still understated due to accounting factors.
Counter-Intuitive Judgment: As Alibaba's share price comes under pressure from China's macroeconomic weakness and intensifying competition, the author has increased the position against the trend, believing that the market is assigning near-zero value to its non-core business assets (such as cloud computing, logistics, etc.). Spin-off listings will force the market to reprice these assets.
Key Arguments and Data
- BMW: Battery electric vehicle (BEV) sales grew 112% year-over-year, accounting for 11% of total sales. Management reaffirmed targets of 15% for 2023 and over 50% by 2030. The automotive segment reported an EBIT margin of 12.1%, but the author notes that due to the accounting treatment of acquiring additional equity in its Chinese joint venture, the actual profitability is stronger. China sales declined 6.6% in the first quarter, but management is confident in the post-COVID recovery.
- Alibaba: Generated $25 billion in free cash flow in the most recent fiscal year, representing 12% of its current market capitalization. The core e-commerce business is valued at approximately 5 times EBITA. The company is actively buying back shares and has established a capital management committee. It recently announced a major restructuring, planning to spin off and separately list several business units.
- New Positions: Bank Mandiri (Indonesia's largest bank, with a leading CASA market share and sustainable NIM expansion) and Recruit Holdings (its Indeed platform exhibits excellent unit economics; current uncertainty in the US labor market provides a buying opportunity).
The fund's average annualized returns across various periods are: Since Inception 8.73%, 10-Year 4.97%, 5-Year 3.13%, 1-Year 22.90%, 3-Month 3.05%, with an expense ratio of 1.04%
| Metric | BMW | Alibaba |
|---|---|---|
| Quarterly Performance | Largest Contributor | Largest Detractor |
| Key Data | BEV sales +112% YoY, 11% of total | Free cash flow $25B (12% of market cap) |
| Valuation | Not explicitly stated | Core e-commerce ~5x EBITA |
| Management Actions | Reaffirmed electrification targets | Buybacks, restructuring, spin-off listings |
Companies/Assets Involved
- BMW (Germany): Bullish. Electrification progress exceeds expectations; premium positioning supports pricing power; profit margins are undervalued.
- Alibaba Group (China): Bullish. Extremely low valuation; management actively unlocking value; spin-off and restructuring act as catalysts.
- Bank Mandiri (Indonesia): New position, bullish. Benefits from Indonesia's low deposit costs, high lending rates, and favorable demographics; NIM expansion is sustainable.
- Recruit Holdings (Japan): New position, bullish. Indeed platform has strong unit economics; domestic advertising and recruitment business shows steady growth; current US labor market uncertainty provides a buying window.
Investment Implications
- Increase Holdings in European Auto Stocks: BMW's electrification execution and pricing power validate the moat of its premium positioning. The margin undervaluation caused by accounting factors provides a margin of safety.
- Contrarian Positioning in Chinese Internet: Alibaba's valuation already reflects extreme pessimism, with a free cash flow yield of 12%. Spin-off listings could act as a catalyst for value reassessment. Focus on management's shareholder return actions is recommended.
- Monitor Emerging Market Banks: Bank Mandiri represents a structural opportunity in the Indonesian banking sector. ROE expansion driven by low funding costs and a wide interest rate spread is worth tracking.
- Capitalize on Labor Market Volatility: The buying opportunity for Recruit Holdings is based on short-term uncertainty in the US job market. Its platform business model and the stability of its domestic Japanese operations provide downside protection.