Oakmark International Fund: Second Calendar Quarter 2025

Theme and Background

This chapter is the opening summary of the Oakmark Fund's second quarter 2025 report, outlining the fund's overall performance, key contributors and detractors, and portfolio adjustments during the quarter. The report emphasizes that the fund outperformed its benchmark, the MSCI World ex USA Index, both for the quarter and since inception.

Core Thesis

The author's core investment thesis is that contrarian positioning—such as increasing holdings in South Korean bank KB Financial Group and buying high-quality companies like ASML and SMC whose share prices have fallen due to industry headwinds—combined with a long-term commitment to high-quality companies, can generate excess returns. The report argues that corporate governance in South Korea is improving (e.g., the Value-Up program and amendments to the Commercial Act), which should mark a turning point for the historically discounted book value multiples at which bank stocks trade.

Key Arguments and Data

Regional Allocation: The top three country allocations were Europe ex-UK at 68.2%, the UK at 14.5%, and Asia ex-Japan at 9.7%, with emerging markets accounting for 9.4%.
Relative Performance: South Korea, Germany, and Ireland were the best relative performers for the quarter; China, the United States, and Canada were the worst relative performers.
KB Financial Group: The stock rose due to strong first-quarter results, share buybacks and dividends exceeding expectations, and management's firm commitment to the Korean Value-Up program during turbulent times. Capital generation is robust, and net interest margins have proven more resilient than in previous rate-cutting cycles.
Alibaba Group: The stock fell due to US-China trade tensions and slightly weaker-than-expected 2024 results, but its e-commerce business is recovering well, cloud computing is growing healthily, and it is an early investor in China's AI sector.
ASR Nederland: The Dutch life insurance business generates strong cash flow and has historically returned most of its free cash flow to shareholders. The company benefits from regulatory reforms that could revive growth in the previously closed, non-growing life insurance market. The 2023 acquisition of Aegon Netherlands has yielded significant revenue and cost synergies. The stock was purchased at a valuation below its peers.
ASML: The global leader in lithography, dominant in immersion lithography and holding an effective monopoly in EUV lithography. Demand for EUV lithography machines is expected to accelerate due to the proliferation of AI and advanced chips. The stock fell as customers cut capital expenditure and due to geopolitical concerns, presenting a buying opportunity below intrinsic value.
SMC: The world's largest manufacturer of pneumatic equipment, which has gained global market share over the past decade due to its scale, product portfolio, inventory, and service network. The stock fell due to a weak factory automation cycle, high capital expenditure, and inventory overhang. However, the author believes a strong factory automation cycle will emerge over the next 3-5 years, capital intensity will normalize, and free cash flow will improve significantly.
Reasons for Liquidation: Anheuser-Busch InBev, Brambles, Compass Group, Holcim, and Schindler Holding were sold as their share prices approached fair value; Henkel was exited because management was unable to drive volume growth in its consumer goods business.

Companies/Assets Involved

Company/Asset	Role	Key Data	Bullish/Bearish
KB Financial Group	Top Contributor	South Korean bank; strong Q1 results, buybacks and dividends exceeded expectations, robust capital generation, resilient NIM	Bullish
Alibaba Group	Top Detractor	Chinese consumer company; stock fell due to trade tensions and slightly weak results, but e-commerce and cloud are growing, leading AI position	Bullish
ASML	New Purchase	World's largest semiconductor equipment maker; EUV lithography monopoly, demand driven by AI, stock fell due to industry headwinds	Bullish
ASR Nederland	New Purchase	Dutch insurance holding company; strong life insurance cash flow, benefits from regulatory reform and acquisition synergies, valuation below peers	Bullish
SMC	New Purchase	World's largest pneumatic equipment maker; beneficiary of automation trend, stock fell due to cycle and capex factors	Bullish
Anheuser-Busch InBev	Liquidated	Stock price approached fair value	Neutral (Sold)
Brambles	Liquidated	Stock price approached fair value	Neutral (Sold)
Compass Group	Liquidated	Stock price approached fair value	Neutral (Sold)
Henkel	Liquidated	Management unable to drive volume growth in consumer goods business	Bearish (Sold)
Holcim	Liquidated	Stock price approached fair value	Neutral (Sold)
Schindler Holding	Liquidated	Stock price approached fair value	Neutral (Sold)

Investment Implications

Focus on South Korean Corporate Governance Reform: The report argues that the Korean Value-Up program and amendments to the Commercial Act will change the historical valuation discount of bank stocks. Investors can focus on targets in the South Korean financial sector with improving governance and enhanced dividends and capital returns.
Contrarian Investment in High-Quality Companies: By buying industry leaders (e.g., ASML, SMC) whose share prices have fallen due to industry cycles or geopolitical headwinds, the report demonstrates that contrarian investing in companies with long-term structural growth logic (AI, automation) and deep moats during market panic is an effective strategy for generating excess returns.
Emphasize Free Cash Flow and Shareholder Returns: The investment logic for ASR Nederland highlights the importance of free cash flow generation and shareholder returns (buybacks, dividends). This should be a core metric for evaluating insurance and similar industry companies.