Oakmark International Fund: First Calendar Quarter 2024

Theme and Background

This section is the opening of the Oakmark International Fund's first-quarter 2024 report, primarily reviewing the fund's performance during the quarter, the contributors and detractors among its major holdings, and newly established positions. The report emphasizes the fund's long-term outperformance relative to its benchmark and focuses on key events for two stocks, Daimler Truck and Bayer, while introducing the investment rationale for three new holdings: Brambles, Smurfit Kappa Group, and Smith & Nephew.

Core Views

• The fund underperformed its benchmark in the short term but delivered significant long-term excess returns: In the first quarter of 2024, the fund returned 0.11%, well below the MSCI World ex USA Index's 5.59%. However, since its inception in September 1992, the fund has achieved an average annual return of 8.55%, outperforming the benchmark's 6.10%, with long-term excess returns of 2.45 percentage points per year.
• Structural improvement is the core of stock selection: The report favors companies that achieve structural improvements in profitability and margins through management actions, rather than relying on industry cycles. Daimler Truck is a typical example, with its Mercedes-Benz division's adjusted EBIT margin rising from below 1% in 2019 to over 10% in 2023.
• Contrarian optimism on Bayer's litigation risk: Despite an adverse verdict in the RoundUp litigation, the report argues that fines will be significantly reduced on appeal and supports management's strategy of focusing on improving profitability and cash flow, opposing market expectations for a quick "win."

Key Arguments and Data

• Daimler Truck: The 2024 margin guidance significantly exceeded market consensus, achieved against a backdrop of a weak global truck market. Management enhances resilience by improving pricing, increasing service penetration, and enhancing cost flexibility. The Mercedes-Benz division's adjusted EBIT margin rose from below 1% in 2019 to over 10% in 2023. The report believes the company can achieve structurally higher cycle-average margins.
• Bayer: In January, an adverse jury verdict in the RoundUp litigation was higher than average, but the report notes that fines will be significantly reduced on appeal, and the company subsequently won two consecutive cases. The March Capital Markets Day did not provide medium-term targets or a spin-off plan, disappointing some investors, but the report supports management's strategy of prioritizing improvements in profitability and cash flow while cutting bureaucracy. Full-year 2023 results and 2024 guidance both met expectations.
• New Positions:
• Brambles: The world's largest pallet pooling provider. The report argues that the non-pooled pallet market still dominates, offering long-term growth potential. As a market share leader, scale effects provide cost advantages and capital returns. Since being sold in 2022, the stock's performance has lagged behind fundamentals, offering a discounted opportunity to rebuild the position.
• Smurfit Kappa Group: A leading European producer of containerboard and corrugated packaging. The stock has been pressured by post-pandemic supply chain adjustments leading to declining industry volumes and prices, but the report believes the adjustment has begun to reverse. The acquisition of WestRock, the second-largest producer in North America, with plans to list in the U.S. post-merger, aims to capitalize on the valuation premium of U.S. producers relative to European peers.
• Smith & Nephew: A global medical device manufacturer. Its sports medicine and advanced wound management businesses hold strong market shares with favorable growth prospects. The orthopedics business has historically underperformed, but the new CEO has taken decisive actions expected to improve growth, margins, and return on invested capital. The report believes the company is in the early stages of margin improvement, and product portfolio upgrades will drive sustainable higher revenue growth.

Companies/Assets Involved

The fund's Investor Class shares have achieved an average annual total return of 8.55% since inception in 1992, with a return of 0.11% in the most recent quarter, a 10-year return of 3.27%, a 5-year return of 5.51%, and an expense ratio of 1.05%

Investment Insights

• Focus on structural improvement rather than cyclical drivers: The Daimler Truck case shows that companies achieving structurally higher margins through management execution during industry weakness may offer excess returns. Investors should seek firms with "counter-cyclical" earnings resilience through pricing, service penetration, and cost flexibility.
• Contrarian bets on litigation risk: The Bayer case demonstrates that markets may overreact to one-off litigation verdicts. If company fundamentals (earnings, cash flow) and management strategy (focus on operational improvement) have not deteriorated, and legal appeal mechanisms exist, such events may create buying opportunities.
• Discount logic for new positions: The common thread among Brambles, Smurfit Kappa, and Smith & Nephew is that their stock prices, due to short-term factors (industry downturns, historical underperformance, lagging stock prices), are below the report's estimated intrinsic value, while fundamentals (market position, management actions, industry recovery) are improving. Investors can look for similar targets where "fundamentals are improving but stock prices have not yet reflected this."
• Regional allocation: The fund holds approximately 68.6% of its assets in Europe, 16.6% in the UK, and 6.2% in Asia, indicating a strong preference for European markets.