The following is an excerpt from Morningstar's Premium Analyst Report for Oakmark International (OAKIX), a foreign large-blend fund that receives a Gold Morningstar Analyst Rating. Morningstar.com Premium Members can click here to see the full Analyst Report. Not a Premium Member? Take a free Premium trial to access this and hundreds more reports.
Process Pillar: Positive | 10/04/2013
Like all Oakmark stock-pickers, lead manager David Herro seeks companies trading at deep discounts to his and comanager Rob Taylor's assessment of their intrinsic value. Their estimates of a business' worth are based on multiple valuation models and, depending on the company under consideration, may focus on a firm's likely private-market acquisition price, its tangible book value, or normalized discounted cash flows.
That's not unusual, but the degree to which Oakmark focuses on absolute, not relative, value sets the shop and this team apart. Firms that appear attractively valued compared with industry peers will only garner attention if they also seem cheap relative to their own stringently vetted prospects.
The pair also favors companies with shareholder-aligned managements as evidenced by (among other things) their own investment in the firm and their capital-allocation skill. Stock-repurchase programs, dividend hikes, and sensible acquisitions that are accretive to earnings are generally regarded favorably, but as with all aspects of the team's entirely bottom-up process, judgments are made strictly on a case-by-case basis.
A portfolio that looks unusual relative to peers' often results from the process here. The team's strong stock selection and valuation discipline, however, has generated unusual success, too. The process here is sensible and, as the track record attests, repeatable.
At the close of 2012, nearly 25% of this fund's assets were invested in Japanese equities; as of June 2013, that figure had fallen to just more than 15%. That isn't because lead manager David Herro and comanager Rob Taylor have soured on the Japanese companies they hold. Instead, after a dramatic runup for the country's stock market, the pair of long-standing value hounds harvested gains and dialed up their exposure to developed European markets. All told, three fourths of the fund's assets were invested there at the close of June while the fund's Japan stake now represents an underweighting relative to the category norm.
Despite the elimination of Banco Santander (SAN) from the portfolio following changes in the Spanish bank's executive suite and on its board, financials remains the fund's largest sector exposure, soaking up 26.7% of assets at the end of the second quarter. With consumer discretionary companies accounting for a comparable sum, the fund's cyclical tilt remains, although (as usual) it has no exposure to energy. Health care, typically a more defensive area of the market, is also only lightly represented.
With just 10 names accounting for nearly a third of the fund's assets, the portfolio's concentration bears watching. The fund ranks among the largest owners of two European banks--Lloyds and Intesa Sanpaolo (ISP)--and 10% of assets reside in small- and mid-cap firms.
Performance Pillar: Positive | 10/04/2013
Between October 1992 and August 2013, this fund has delivered a cumulative return of 753%, nearly 3 times the gain of its benchmark, the MSCI World Ex U.S. Index, and the typical foreign-large blend fund. That showing doesn't owe merely to occasional spasms of outsized performance, either. In the time frame's rolling-36-month periods, the fund has bested those yardsticks more than two thirds of the time.
Versus the index, the fund has garnered most of its outperformance during downturns while hovering near the norm in rallies. That's not the case relative to the category's average entrant, though. The fund has offered the best of both worlds versus typical peers, surrendering less in down markets while also gaining more in upturns.
Unsurprisingly, the fund strikes an impressive risk/reward profile. Performance swings have been modestly wider than both the index and category norm, and while its overall Morningstar Risk rating is above average, its Morningstar Return rating is high. The fund's peer- and index-besting Sortino ratio, a volatility gauge that penalizes poor performance in declining markets, also indicates that investors here have been compensated handsomely for the volatility they've experienced.
Recent performance aligns with the fund's long-term track record. In the trailing 12 months through Oct. 3, 2013, a gain of 40% ranks in the category's top percentile.
People Pillar: Positive | 10/04/2013
Lead manager David Herro joined Oakmark Funds advisor Harris Associates in 1992 and has led this offering since its inception in September of that year. He currently serves as the firm's chief investment officer for international equities and as lead manager on the shop's Oakmark International Small Cap (OAKEX) offering as well. With fellow Oakmark veteran Bill Nygren, Herro also comanages Oakmark Global Select (OAKWX) , a concentrated world-stock fund that boasts an impressive long-term track record.
Results at Oakmark International Small Cap have also been strong. The ride there has been bumpier, but in the trailing 15-year period through Oct. 3, 2013, an annualized gain of 14.8% ranks in the foreign small/mid-blend group's top percentile.
As he does at each of his charges, Herro invests more than $1 million of his own money here. That's the case as well with the fund's comanager, Rob Taylor. With Clyde McGregor, Taylor also comanages Oakmark Global (OAKGX) , the shop's successful, broadly diversified world-stock fund. Taylor is responsible for the foreign-stock portion of that offering's portfolio.
Taylor signed on with Harris in 1994 and became comanager of Oakmark International in December 2008. In addition to his portfolio management duties, he serves as the firm's director of international research.
Parent Pillar: Positive | 11/09/2012
Harris Associates boasts an admirable investing-centric culture. New fund launches, for example, aren't driven by marketing trends but by money managers with decades of experience and outstanding long-term track records. Indeed, Oakmark has launched just one new fund in the past 12 years.
The firm is well-staffed with investment professionals, too; 11 portfolio managers and a similarly sized team of analysts support its mutual funds. The analysts are divided into international and domestic teams, and, in collaboration with portfolio managers, they maintain the list of approved stocks from which all Oakmark managers choose for their portfolios.
Overall, Harris is an impressive parent organization, but its Oakmark lineup should cost less. Assets under management in Oakmark funds have risen from roughly $21.5 billion in December 2008 to more than $42.0 billion in September 2012. Asset growth hasn't been accompanied by proportionate fee reductions, though. Even those Oakmark funds whose expense ratios seem reasonable relative to typical peers look pricey versus rivals of similar size.
That shortcoming aside, Oakmark investors have been well served over the long haul by managers who also are significant investors in their funds. With just one recently appointed exception, all Oakmark managers invest more than $1 million in their charges.
Price Pillar: Neutral | 10/04/2013
At 1.06% as of the fund's most recent annual report (September 2012), the price tag here is significantly lower than the broad foreign large-blend category norm. It's on par, moreover, with the expense ratio the typical foreign large-cap no-load fund charges. Judged by asset size, though, the fund is pricey. Between 2008 and 2010, assets ballooned, climbing from $2.6 billion to $6.7 billion. Fees barely budged, however, falling just 2 basis points below the 1.10% expense ratio the fund charged in 2008. To be fair, the current expense ratio does fall below the 1.17% investors paid in 2009. It's 2 basis points cheaper than the 2010 figure, too. Yet while the trajectory of fees is encouraging, Oakmark should reduce shareholder costs further in light of the economies of scale a fund of this size enjoys. Assets now weigh in at more than $20 billion.
Shannon Zimmerman does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.