The Oakmark International Fund returned 5.4% for the quarter
ended March 31, 2013, outperforming the MSCI World ex U.S. Index,
which returned 4.7% over the same period. For the first six
months of the Fund's fiscal year, the Fund returned 20%, which
outperformed the MSCI World ex U.S. Index's 11% return. Since its
inception in September 1992, the Fund has returned an average of
11% per year, outperforming the MSCI World ex U.S. Index, which
has averaged 6% per year over the same period.
For the second straight quarter, Daiwa Securities, Japan's
second-largest brokerage, was the largest contributor to
performance. Continued talk of economic reform from Japan's new
government has led to a weakening of the yen and a rally in
Japan's stock market. These positive developments contributed to
Daiwa's strong quarterly results. Compared with the same quarter
last year, retail revenues increased 10% and profits more than
doubled, while asset management revenues were up 4% and profits
were 50% higher. In addition, the wholesale unit realized its
first profitable quarter since 2009, produced by higher trading
profits and commissions, along with solid cost-cutting. Although
Diawa's stock price has more than doubled over the past six
months, we continue to believe Daiwa has a significant upside and
will remain a good investment for our shareholders.
Another large contributor to performance for the quarter was
Olympus, a world leader in endoscopes and other medical
equipment, which returned 22%. Its medical systems group designs
and manufactures clinical analyzers and other imaging devices.
Olympus also makes products such as binoculars, microscopes,
measuring equipment, printers, barcode scanners and
magneto-optical disk drives, as well as traditional cameras. The
share price rallied early in the quarter after Bank of Japan
Governor Masaaki Shirakawa indicated the central bank would
pursue monetary easing, which stands to benefit export-oriented
companies. Share prices also rallied after Olympus announced
plans to cut interest-bearing debt by $100 billion (yen) during
the next fiscal year, much more than the $70 billion (yen) target
in the original plan.
The top two detractors from performance were European banks hurt
by Eurozone instability: Intesa Sanpaolo and Banco Santander.
While the latest quarterly results for Intesa Sanpaolo were
mixed, the larger issue in the quarter was the disappointing
Italian election results, which have left the country without a
clear government. This has called into question whether Italy
will continue on the austerity path set by the technocratic Monti
government. Furthermore, the conditions of the Cypriot bailout
have put pressure on banks in both Italy and Spain. Despite
Italy's disappointing electoral results, we continue to believe
that Italy is in better long-term fiscal shape than many
investors think and that it should not be lumped together with
the other European Union periphery countries. We also continue to
believe Intesa Sanpaolo is attractively valued and well-managed,
and that it has the highest quality retail franchise in Italy.
Banco Santander also reported mixed results in its latest
quarter. Although operating revenue and net interest income were
lower than expected, operating costs were in line with
expectations, and credit costs were less than anticipated.
Santander's balance sheet remains strong, as the company has
continued to strengthen its liquidity, capital and non-performing
loan coverage. Deposit growth was strong in Spain (+10%), which
management attributed to customers seeking out quality banks as a
result of the recent series of bank failures. In addition,
certain banks are under scrutiny by the Bank of Spain for
uneconomic deposit pricing. We believe that Banco Santander's
strength and quality will serve both its customers and its
We purchased one new stock during the quarter: AMP, the leading
independent wealth management company in Australia and New
Zealand. Australian law requires employers to contribute 9% of
salary to employees' retirement, and this number is expected to
increase to 12% by 2019. This is in addition to member
contributions, which have averaged 2-3% over the past few years.
We believe AMP will benefit from the required contribution
increase as well as expected wage growth in Australia.
Our geographical composition has changed since last quarter. Our
European holdings increased to 69%, our Pacific Rim exposure
decreased to 27% and our combined Latin America and North America
(Canada) exposure remained at 3%. The remainder of the portfolio
is invested in the Middle East.
Although many global currencies have weakened compared to the
U.S. dollar, we continue to believe they are overvalued. As a
result, we defensively hedge a portion of the Fund's currency
exposure, though all hedges in the portfolio were reduced last
quarter. As of quarter-end, approximately 51% of the Australian
dollar, 13% of the Japanese yen, 26% of the Swiss franc and 9% of
the Swedish krona exposures were hedged.
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