Oakmark International Fund: Fourth 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 a quarterly update from Oakmark International Fund. It highlights two key holdings: Ryanair, a low-cost European airline that raised fares and profits, and Worldline, a French payment processor whose stock fell 60% due to regulatory and economic pressures. The fund manager argues that Worldline's long-term prospects are still solid, and the sell-off is overdone. For ordinary investors, it's a reminder not to panic over short-term bad news, and to look for companies with strong competitive advantages. Worth reading because it shows how professional investors find opportunities in downturns.
The Oakmark International Fund returned 8.70% in the fourth quarter of 2023, underperforming the MSCI World ex U.S. Index's 10.51%, but its full-year return of 18.81% outperformed the benchmark's 17.94%. Since its inception in September 1992, the fund has achieved an annualized return of 8.62%, sign
Theme and Background
This chapter is the opening section of the Oakmark International Fund's fourth-quarter 2023 letter to investors. It primarily reviews the fund's performance in the quarter and the full year, with a focus on analyzing the operational dynamics and management judgments of two core holdings—Ryanair Holdings (the largest positive contributor) and Worldline (the largest negative contributor). The market backdrop features strong demand but constrained supply in the European aviation industry, alongside dual pressures from regulation and macroeconomics on the European payments sector.
Core Views
The author argues that the fund outperformed its benchmark for the full year (18.81% vs. 17.94%), and its long-term annualized return (8.62%) significantly exceeded the benchmark (5.96%), validating the effectiveness of its value investing strategy. For Ryanair, the author holds an optimistic view, believing its strong performance and shareholder return plan will support the stock price. For Worldline, the author takes a contrarian bullish stance, arguing that the 60% decline in the stock price is disproportionate to the extent of damage to the company's long-term fundamentals, and that current valuations have already overly reflected negative factors.
Key Arguments and Data
- Fund Performance: Q4 2023 return of 8.70%, trailing the benchmark (10.51%); full-year return of 18.81%, outperforming the benchmark (17.94%). Since inception in September 1992, the annualized return is 8.62%, outperforming the benchmark (5.96%).
- Ryanair Holdings:
- First-half fiscal 2024 revenue grew 30% year-over-year, with average fares up 24% to €58, and total passenger numbers up 11% year-over-year to 105.4 million.
- Management expects full-year fiscal 2024 net profit of €1.85-2.05 billion, above the market consensus of €1.82 billion.
- Restored a €400 million dividend (€0.35 per share) and announced an additional €1.5 billion in shareholder returns starting in 2025.
- Key risk: Reliance on Boeing's delivery capabilities to achieve the 183.5 million passenger target.
- Worldline:
- Third-quarter results missed expectations, with management lowering guidance for 2023-2024; the 2024 adjusted earnings guidance is approximately 16% below consensus.
- The stock price fell 60%, which the author believes is disproportionate to the impact on fair value.
- Sources of negative factors: Stricter European cybersecurity regulations led Worldline to terminate partnerships with some online merchants (involving annualized revenue of €210 million, less than 6% of combined revenue); weak German macroeconomics shifted consumer spending to non-essential categories, reducing merchant profit contributions. Profit margins were cut by 250 basis points, and short-term cash flow was weighed down by restructuring costs.
- Author's judgment: The negative impact is expected to ease starting in the second half of 2024. The European payments market remains cash-heavy, and traditional banks are ceding share to pure acquirers like Worldline. The company benefits from a pan-European footprint, an asset-light model, strong cash flow, medium-term growth potential, and valuations that already fully reflect risks.
- Portfolio Adjustments: No new positions were established this quarter. The fund sold Sandoz (Switzerland, spun off from Novartis) and Vipshop Holdings (China) to free up capital for investments with better risk-reward profiles.
- Regional Allocation: As of quarter-end, Europe accounted for 69.1%, the UK 19.6%, Asia 5.9%, Japan 3.5%, and North America (Canada) 1.8%.
The fund's average annualized return since inception in September 1992 is 8.62%, with a 1-year return of 18.81% in 2023, a 3-month return of 8.70%, and an expense ratio of 1.04%
| Metric | Ryanair Holdings | Worldline |
|---|---|---|
| Quarterly Performance | Largest positive contributor | Largest negative contributor |
| Core Data | Revenue +30%, fare €58, passengers 105.4M | Stock price -60%, annualized revenue impact €210M |
| Management Guidance | Net profit €1.85-2.05B | 2024 earnings guidance 16% below consensus |
| Shareholder Returns | Restored €400M dividend + €1.5B from 2025 | None |
| Author's Stance | Optimistic | Bullish (contrarian) |
Companies/Assets Involved
- Ryanair Holdings (Ireland): European ultra-low-cost airline. Bullish. Key role: Largest positive contributor to the fund. Data: Revenue +30%, fare €58, passengers 105.4M, net profit guidance €1.85-2.05B, dividend €400M + additional €1.5B in returns.
- Worldline (France): European merchant acquiring and payment processor. Bullish (contrarian). Key role: Largest negative contributor to the fund. Data: Stock price -60%, annualized revenue impact €210M (<6% of combined revenue), profit margin -250bps, 2024 earnings guidance 16% below consensus.
- Sandoz (Switzerland): Generic drug company spun off from Novartis. Sold for reallocation.
- Vipshop Holdings (China): Chinese discount e-commerce company. Sold for reallocation.
Investment Insights
- Ryanair: In the European aviation market with constrained supply and strong demand, Ryanair continues to exceed expectations due to its cost advantages and scale effects. Investors should monitor Boeing's delivery progress; if deliveries go smoothly, the 2024 passenger target of 183.5 million and higher profits are achievable. The shareholder return plan (dividends + buybacks) provides an additional safety cushion.
- Worldline: The current stock price has already overreacted to short-term regulatory and macroeconomic shocks, while the company's long-term competitive position (pan-European network, asset-light model, industry consolidation trend) remains unchanged. Investors can watch for a performance inflection point after negative factors fade in the second half of 2024, with current valuations offering a contrarian entry opportunity.
- Portfolio Rebalancing: The fund's sale of Sandoz and Vipshop indicates that management believes other holdings offer better risk-reward profiles. Investors can monitor new or increased positions in the fund (not disclosed in the letter) to capture its value discovery direction.