David Herro Market Commentary | 3Q12 — Summary & Takeaways · Oakmark Funds

Theme and Background

This section presents the performance data of the Oakmark International Fund and the Oakmark International Small Cap Fund as of September 30, 2012, including annualized returns over the long term (10 years), medium term (5 years), and short term (1 year), as well as expense ratios. This provides a foundation for investors to evaluate the performance of the two funds across different market cycles.

Core Argument

Through data presentation, the author emphasizes that both funds achieved significant positive returns over the long term (10 years), but recorded negative returns over the medium term (5 years) due to market volatility, followed by a strong rebound in the short term (1 year). This suggests that the fund strategy is effective over the long term but requires enduring medium-term volatility risk. The counterintuitive point is that despite negative 5-year returns, the 10-year returns remain in double digits, indicating that long-term holding can smooth out short-term fluctuations.

Key Arguments and Data

The data directly supports the above argument, with specific returns shown in the table below:

Fund Name	10-Year Annualized Return	5-Year Annualized Return	1-Year Annualized Return	Expense Ratio (as of September 30, 2011)
Oakmark International Fund	10.75%	-0.11%	17.40%	1.06%
Oakmark International Small Cap Fund	12.34%	-1.87%	13.15%	1.38%

Long-Term Performance: Both funds achieved annualized returns exceeding 10% over 10 years, with the small-cap fund (12.34%) slightly outperforming the large-cap fund (10.75%), indicating that long-term holding can generate substantial returns.
Medium-Term Volatility: The 5-year annualized returns were negative for both funds (large-cap -0.11%, small-cap -1.87%), reflecting the impact of the 2008 financial crisis and subsequent market downturn.
Short-Term Rebound: The 1-year annualized returns were strong (large-cap 17.40%, small-cap 13.15%), showing a rapid recovery during the market rebound in 2011-2012.
Expense Ratios: The large-cap fund has an expense ratio of 1.06%, while the small-cap fund has 1.38%, both at moderate levels within the industry, slightly eroding long-term returns.

Companies/Assets Involved

This section does not mention specific companies or assets, focusing solely on the overall performance data of the two funds. The funds themselves are investment vehicles rather than directly held underlying assets.

Investment Implications

For investors, these data indicate:

Long-Term Holding Strategy is Effective: Despite negative medium-term returns, both funds achieved double-digit annualized returns over the 10-year cycle, validating the effectiveness of value investing or active management strategies over the long term.
Need to Tolerate Medium-Term Volatility: Investors should expect potential losses over 5 years or even longer, but persisting with holdings can benefit from market mean reversion.
Expense Impact Requires Attention: The small-cap fund has a higher expense ratio (1.38%), which may partially offset its long-term excess returns; investors should weigh expenses against potential returns.
Short-Term Rebound Offers Opportunities: The strong 1-year returns show that funds can recover quickly when market sentiment improves, but this should not be used as a basis for market timing.