Oakmark International Fund: Third Quarter 2023 and Fiscal Year-End
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 is Oakmark International Fund's year-end summary. The manager explains why they think some European stocks are unfairly cheap: Worldline, a French payment firm, has seen its stock fall due to fears of US-style competition, but Europe's market is less competitive and its business is still growing well. Intesa Sanpaolo, an Italian bank, is making much more money from higher interest rates, with few bad loans. Bunzl, a UK distributor, can keep growing through acquisitions, but the market ignores that. For ordinary investors, it's a reminder that fear can make good companies cheap, creating opportunities.
The Oakmark International Fund returned 34.39% for the fiscal year ended September 30, 2023, outperforming its benchmark, the MSCI World ex U.S. Index (net), which returned 24.00%. For the quarter, the fund returned -6.89%, underperforming the benchmark's -4.10%, but since its inception in September
Theme and Background
This chapter reviews the performance and holdings of the Oakmark International Fund for the fiscal year 2023 (ended September 30). The report notes that the fund returned 34.39% for the fiscal year, significantly outperforming the MSCI World ex U.S. Index (24.00%), but underperformed the benchmark (-4.10%) in the most recent quarter (-6.89%). The author uses this opportunity to elaborate on the performance drivers, valuation logic, and reasons for new purchases/sales of several core holdings.
Core Thesis
The author's core investment argument is: The current market is significantly mispricing certain high-quality European companies, particularly those with sound business fundamentals whose share prices are under pressure due to macro sentiment or false analogies (e.g., applying U.S. competitive pressures to Europe). Counterintuitive judgments include:
- The European payments market (using Worldline as an example) has a far superior competitive landscape to the U.S., and market concerns about competitive pressure are excessive and misguided.
- The earnings resilience of Italian bank Intesa Sanpaolo during the rising interest rate cycle is underestimated, while its asset quality remains benign.
- The value creation potential of UK distributor Bunzl through M&A is underestimated by the market, and the current share price decline presents a buying opportunity.
Key Arguments and Data
- Fresenius (Germany): The Kabi division's organic growth continues to exceed its long-term framework (4-7%), with growth broadly covering all business units; Helios hospitals are performing steadily amid macro headwinds; the Vamed division is weak due to overexpansion by previous management, but the new management expects Q2 to be the trough. The company is divesting assets to simplify operations and deleverage.
- Worldline (France): The weak share price is primarily due to valuation compression (ongoing since November 2021), with the current forward EV/EBITDA at approximately 8.5x, a historical low. However, business fundamentals are healthy: 9% organic growth over the past twelve months, and a 2023 margin target up 90 basis points year-over-year. The author argues that the European payments market is far less competitive than the U.S. due to diverse payment methods (over 200, compared to 4 dominant in the U.S.), fragmented regulation, and cultural/language barriers. The shift from cash to cards is still in its early stages, and banks continue to lose market share, providing GDP+ growth potential for the industry. The company has completed over €8 billion in acquisitions since 2019, with integration costs expected to fade by the end of 2024, which will then drive margin improvement and free cash flow enhancement. Free cash flow is expected to compound at a mid-teens rate.
- Intesa Sanpaolo (Italy): Net interest income (NII) shows significant leverage to rising interest rates. NII grew nearly 69% year-over-year in the first half of 2023, with a 10% sequential increase in Q2. The 2023 net profit guidance was raised from an initial >€5.5 billion to >€7 billion. Asset quality remains benign, with a non-performing loan formation rate of only 25 basis points in the first half. The dividend payout ratio is as high as 70%, alongside share buybacks.
- Bunzl (UK): The business is highly defensive (distributing non-discretionary essentials), with organic growth tracking GDP, but M&A enables high single-digit growth (over the past decade). The author believes the market underestimates its future value creation potential through M&A.
Comparative Data Table:
| Metric | Oakmark International Fund | MSCI World ex U.S. Index (net) |
|---|---|---|
| FY 2023 Return | 34.39% | 24.00% |
| Q3 2023 Return | -6.89% | -4.10% |
| Annualized Return Since Inception (Sep 1992) | 8.40% | 5.67% |
Fund annualized return since inception 8.40%, 1-year return 34.39%, 3-month return -6.89%, expense ratio 1.04%
| Company | Key Valuation/Financial Data | Author's Judgment |
|---|---|---|
| Worldline | Forward EV/EBITDA ~8.5x; TTM organic growth 9%; 2023 margin target +90bps | Severely undervalued, market incorrectly analogizes U.S. competition |
| Intesa Sanpaolo | 2023 net profit guidance >€7 billion; NII H1 YoY +69%; NPL rate 25bps; dividend payout ratio 70% | Earnings resilience underestimated, asset quality robust |
| Bunzl | New purchase, position 0.1% | Market underestimates its M&A value creation potential |
Companies/Assets Involved
- Fresenius (Germany): Bullish. Kabi and Helios businesses are strong; new CEO driving operational transformation; asset divestitures expected to unlock value. Position 2.4%.
- Worldline (France): Bullish. Business fundamentals are healthy; valuation at historical lows; favorable competitive landscape in the European payments market; cash flow expected to improve significantly after integration costs fade. Position 1.8%.
- Intesa Sanpaolo (Italy): Bullish. Significant NII leverage in the rising rate cycle; excellent asset quality; high dividend plus buybacks reward shareholders. Position 2.7%.
- Bunzl (UK): New purchase, bullish. Highly defensive business; M&A value creation potential underestimated; current valuation attractive. Position 0.1%.
- Orica (Australia): Sold, position reduced to 0%.
- Restaurant Brands International (Canada): Sold, position reduced to 0%.
Investment Implications
- Focus on structural opportunities in the European payments sector: Do not simply apply U.S. payment market competitive pressures to Europe. The European payments market has a more favorable competitive landscape due to regulation, culture, and payment method diversity, with room for the cash-to-card shift. Companies like Worldline, if they achieve cash flow improvement post-integration, may offer long-term entry points at current low valuations.
- Value the earnings resilience of interest-rate-sensitive bank stocks: In the European rising rate cycle, banks like Intesa Sanpaolo with high NII leverage, robust asset quality, and strong dividend capacity may see earnings growth that consistently beats expectations. The market may underestimate its sustainability.
- Seek overlooked "defensive compound growth" names: Companies like Bunzl, with stable businesses and growth through M&A, may offer low-risk, attractive long-term returns during share price declines. Investors should focus on their M&A capabilities and management execution, rather than just static valuation.