Granolas, Japan and Crypto – why we don’t chase momentum – International equity market commentary 1Q24
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 commentary explains why Oakmark avoids chasing popular assets like Japanese stocks, European Granolas, and crypto. They believe these assets are overpriced. Instead, they buy undervalued stocks: for every $1 of intrinsic value, they pay only $0.53. The key takeaway: don't follow the crowd; focus on cheap stocks with solid fundamentals. Worth reading for its clear data showing that value investing can outperform hype.
Oakmark's first-quarter 2024 report indicates that both the Oakmark International Fund and the Oakmark International Small Cap Fund posted returns below 1% for the quarter, underperforming their respective benchmarks. Despite the lackluster performance, the funds are trading at approximately 53 cent
Theme and Background
This chapter discusses the current phenomenon in international equity markets where capital is highly concentrated in a few asset classes (such as Granolas, Japanese stocks, and cryptocurrencies), and why the Oakmark fund chooses not to chase this market momentum. The report notes that although the fund returned less than 1% in the first quarter of 2024 and underperformed its benchmark, the portfolio managers remain optimistic about the portfolio's future performance.
Core Thesis
The author's core investment argument is: Do not chase momentum, only chase value. Oakmark adheres to intrinsic value assessments based on balance sheets and cash flows, refusing to purchase overvalued stocks even if they are the current hotspots for capital flows. The contrarian judgment is: Although the Japanese market has hit new highs and is in high demand, its valuation already reflects overly optimistic expectations, while actual earnings improvements have yet to materialize. Therefore, the fund maintains a significant underweight position.
Key Arguments and Data
As of March 31, 2024, the fund has an annualized return of 8.55% since inception, a three-year return of 3.27%, a five-year return of 5.51%, a one-year return of 4.42%, a three-month return of 0.11%, and an expense ratio of 1.05%.
- Extremely Low Fund Valuation: Both funds trade at approximately 53 cents per dollar of intrinsic value (i.e., for every $1 of intrinsic value, the market only offers $0.53), near the low end of their historical valuation range.
- Comparison with Japan: The TOPIX index currently has an expected ROE of only 8.73%, far below the S&P 500's 18.6% and the Stoxx Europe 600's nearly 13%. However, Japan's 2024 expected P/E ratio of 16x is higher than Europe's 13.7x, indicating lower cost-effectiveness.
- Capital Flow Examples: The Japanese market rose approximately 20% in the first quarter (local currency), with Toyota Motor up 37.61% and Tokyo Electron up 46.77%; Bitcoin rose about 65%; European Granolas (e.g., Novo Nordisk, ASML Holding) continued to attract capital.
- Portfolio vs. Benchmark Comparison: The Oakmark International Fund and the Oakmark International Small Cap Fund have P/E ratios of 9.4x and 9.6x, respectively, far below the MSCI World ex USA's 15.8x. Their ROEs are 14.5% and 15.6%, respectively, higher than the benchmark's 12.3%.
| Metric | Oakmark International Fund | Oakmark International Small Cap Fund | MSCI World ex USA | S&P 500 |
|---|---|---|---|---|
| Price/Earnings (P/E) | 9.4 | 9.6 | 15.8 | 24.7 |
| Price/Cash Flow | 7.0 | 8.7 | 10.1 | 29.2 |
| Price/Book Value | 1.2 | 1.3 | 1.9 | 4.3 |
| Dividend Yield | 3.3% | 3.5% | 2.9% | 1.4% |
| ROE | 14.5% | 15.6% | 12.3% | 17.5% |
As of March 31, 2024, the fund has an annualized return of 8.62% since inception, a three-year return of 4.65%, a five-year return of 8.45%, a one-year return of 12.74%, a three-month return of 0.51%, and an expense ratio of 1.34%.
Companies/Assets Involved
The valuation comparison table shows the Oakmark International Fund has a P/E of 9.4x and ROE of 14.5%, while the Oakmark International Small Cap Fund has a P/E of 9.6x and ROE of 15.6%, both significantly lower than the S&P 500's P/E of 24.7x and ROE of 17.5%.
- Toyota Motor (Japan): Rose 37.61% in the first quarter, benefiting from yen depreciation, but the fund does not hold it.
- Tokyo Electron (Japan): Rose 46.77% in the first quarter, the fund does not hold it.
- Novo Nordisk (Denmark): A Granolas member and leader in weight-loss drugs, the fund does not hold it.
- ASML Holding (Netherlands): A Granolas member and semiconductor equipment manufacturer, the fund does not hold it.
- Bitcoin: Rose approximately 65% in the first quarter, the fund does not participate.
- S&P 500: ROE of 18.6%, highest valuation (P/E 24.7x), used as a comparison benchmark.
- Stoxx Europe 600: ROE near 13%, P/E 13.7x, considered more value-oriented than Japan.
Investment Insights
- Avoid Overvalued Momentum Stocks: The Granolas, Japanese leading stocks, and cryptocurrencies currently chased by capital have significantly stretched valuations, posing high risks. Investors should avoid buying at elevated prices.
- Watch for Value Traps in Japan: Although the Japanese market has hit new highs due to corporate governance reforms and capital inflows, its overall ROE is only 8.73%, and its valuation (P/E 16x) has already priced in expectations, making it less cost-effective than Europe.
- Stick with Low Valuation + High Profitability Combination: The Oakmark portfolio trades at a P/E of 9.4x and ROE of 14.5%, far below global benchmarks. Earnings growth over the next 1-2 years is expected to drive value realization, making the current period an opportune time for allocation.