Oakmark International Fund: Third Calendar Quarter 2024

Theme and Background

This chapter is the opening section of the Oakmark Fund's third-quarter 2024 report, primarily reviewing the fund's performance, portfolio changes, and core investment logic for the quarter. The report notes that despite performance challenges over the past year, the current portfolio's valuation discount and fundamental quality offer attractive future return potential.

Core Views

• Fund outperformed its benchmark: Quarterly return of 8.79%, above the MSCI World ex USA Index's 7.76%; cumulative return since inception of 8.55%, outperforming the benchmark's 6.22%.
• Contrarian stance against market consensus: In an environment where market capital is concentrated in a few stocks, the report argues this provides opportunities to buy into structurally attractive sectors, particularly by adding to positions in consumer areas (spirits, luxury goods) during weakness.
• Portfolio valuation is attractive: The current portfolio trades at a 25-35% discount to the MSCI World ex USA Index on price-to-earnings and price-to-cash-flow ratios, yet its return on equity and expected earnings growth are comparable to the benchmark.

Key Arguments and Data

• Performance contributions: The largest contributor was Alibaba Group, benefiting from a share price rise driven by Chinese stimulus policies; the largest detractor was Kering, due to weak guidance for the second half of 2024, particularly impacted by the macro environment in China.
• Sector and geographic allocation:
• Top three regional allocations: Europe ex UK (68.5%), UK (16.0%), Asia ex Japan (6.4%).
• Emerging markets account for 6.4% of the portfolio.
• Regions contributing to relative quarterly performance: Netherlands, Denmark, China; regions detracting: France, South Korea, Canada.
• New purchase rationale:
• Diageo: A global leader in premium spirits, with over 200 brands and a presence in nearly 180 countries. Industry destocking and short-term demand weakness have driven the stock price down, offering a buying point below its average valuation. Structural tailwinds include premiumization trends and growth in emerging markets.
• Pernod Ricard: The world's second-largest premium spirits producer, with over 240 brands and a presence in more than 160 markets. It has a high exposure to brown spirits (whiskey, cognac) and high barriers to entry (aging inventory). Its geographic diversification is notable, with leading scale in India, China, and France. It similarly benefits from a buying opportunity created by demand normalization following industry destocking.
• Position increases: The fund used intra-quarter weakness to add to luxury sector holdings (Kering, Richemont, Swatch), as share prices fell due to China macro concerns.

Companies/Assets Involved

Investment Implications

• Focus on structural opportunities in consumer sectors: The fund is adding to positions in spirits and luxury goods during weakness, believing that industry destocking and short-term demand weakness are temporary, while premiumization trends and emerging market growth (especially in India and China) are long-term structural tailwinds. Investors can monitor consumer leaders with similar logic.
• Leverage narrow market capital flows: Current capital is concentrated in a few stocks, leaving some high-quality companies at valuation discounts. Investors should focus on sectors with strong fundamentals but overlooked by the market (e.g., healthcare, industrials), as well as global leaders trading below historical average valuations.
• Follow-up impact of Chinese stimulus policies: Alibaba benefited from Chinese stimulus policies, but the report argues its e-commerce transformation potential is not fully priced in. Investors need to assess the sustainability of China's consumption recovery and its transmission effects on related companies.