MARKET ENVIRONMENT
Global equities finished higher during the third quarter, with 10 of 11 GICS sectors posting positive returns. The financials and industrials sectors contributed most to market performance, while energy was the sole detractor. By country, the U.S. and Canada were the strongest contributors to global market returns, and Denmark and the Netherlands were the only two detractors.
PORTFOLIO PERFORMANCE
The portfolio’s return was 8.07% (net) for the reporting period. This compares to the MSCI World Index that returned 6.36% for the same period.
Top contributors:
Fiserv (FI) was a top contributor during the quarter. The U.S.-headquartered transaction and payment processing company’s stock price rose following solid second-quarter results with revenue growing high single digits and adjusted earnings per share growth in the high teens. We continue to be impressed with Fiserv’s improved business results under CEO Frank Bisignano. We believe Bisignano is a passionate and knowledgeable leader who is focused on leveraging the company’s scale and large distribution network to drive continued growth at the company. We believe that Fiserv is well-positioned to benefit from the secular trend toward digital payments and banking and that the stock offers an attractive risk/reward.
Bayer (OTCPK:BAYRY) was a contributor during the quarter. The Germany-headquartered pharmaceutical, consumer health and crop science company’s stock price rose after a favorable ruling from the U.S. Court of Appeals in the RoundUp case. The Third Circuit Court of Appeals ruled in favor of Bayer on its core preemption argument that the federal regulations around the pesticide’s warning label supersede state law. During the quarter, we had the opportunity to meet with CFO Wolfgang Nickl who provided an update on Bayer’s Dynamic Shared Ownership (DSO) reorganization. The DSO is a company-wide effort to streamline operations and reduce bureaucracy. We are pleased with the DSO momentum so far, with more than 900 teams already on the program and delivering tangible success in their respective business units. We continue to believe Bayer’s focus on cost and execution can benefit shareholders in the long term.
Alibaba Group (BABA) was a contributor during the quarter. The China-headquartered consumer discretionary company’s stock price rallied following the announcement of a multi-pronged stimulus package by the Chinese government. Despite the stock’s strong performance for the quarter, we continue to believe there is upside in the name and that the market is not fully pricing in the turnaround potential for the e-commerce business or other optionality the company possesses.
Top detractors:
Kering (OTCPK:PPRUF) was a detractor during the quarter. The France-headquartered luxury goods company reported first half of 2024 results largely in line with expectations but issued weak guidance for the remainder of 2024 as revenue trends deteriorated in the final weeks of the second quarter. While new Gucci creative director Sabato de Sarno’s collections have resonated with the existing customer base and customer conversion is holding up, store traffic was hurt by a lack of new client recruitment which was amplified by the challenging macro environment, particularly in China. We moderately decreased our sell price after meeting with management, but continue to believe they are making the correct decisions for the long-term health of the brands and see attractive upside for the investment.
Worldline (OTCPK:WWLNF) was a detractor during the quarter. The French payments firm announced that long-time CEO Gilles Grapinet would leave the company after issuing another downward guidance revision. Deputy CEO Marc Henri will step in as temporary CEO while the company conducts an external search. We believe this change is a positive for the company as the former CEO had continuously overpromised and under-delivered. We spoke with CFO Gregory Lambertie and new Chairman of the Board Wilfried Verstraete after the announcement. Our fundamental view of the company remains largely unchanged. We find Worldline is a wellpositioned company in a growing European payment market, and the business can return to stronger growth as it completes acquisition integrations and improves commercial execution. We continue to believe the payments industry is structurally attractive and think Worldline offers an attractive upside.
Samsung Electronics (OTCPK:SSNLF) was a detractor during the quarter. The South Korea-headquartered technology company’s stock price declined amid weaker than expected demand for memory semiconductors as a result of weaker PC and mobile industry sales. While the weaker memory sales in the short term are disappointing, we remain optimistic about memory demand over the medium and long term.
PORTFOLIO POSITIONING
We initiated the following position(s) during the period:
Aptiv (APTV) is a global technology company and industry leader in vehicle architecture. Aptiv naturally benefits from cars requiring more power and computing resources, and as a leading supplier for vehicles of every powertrain type, we like that the company has built a durable, high-returning business model. In our view, Aptiv is uniquely positioned as a premier technology supplier for the next generation of software-defined vehicles, as the vast majority of its existing products will carry over to hybrid and electric vehicles (EV) and content per vehicle should steadily increase on each step toward full autonomous driving. Recently, production slowdowns on certain customer platforms have weighed on Aptiv’s share price. However, we believe investors are overlooking Aptiv’s solid underlying performance, attractive competitive position and future growth prospects, which provided us the opportunity to establish a position at a discount to the market and to companies with comparable fundamental outlooks.
Charles Schwab (SCHW) is a leading provider of brokerage services, with more than $9 trillion in client assets spread across over 35 million active brokerage accounts. As the largest discount brokerage platform, Schwab has meaningful scale advantages, which the company uses to reinvest in providing the best service quality and pricing in the industry. These customer-friendly investments attract even more clients to its platform, furthering a virtuous cycle that has enabled Schwab to gain share of U.S. investible assets for more than four decades. In recent years, this underlying growth has been masked by short-term headwinds, as high rates have incentivized clients to shift cash from Schwab bank into higher yielding alternatives. Schwab has had to rely on more expensive funding to replace these deposits, pressuring earnings per share. We view this as a temporary headwind. Over time, we expect Schwab’s strong underlying business growth will drive growth in Schwab deposits and a rebound in earnings per share. The current concerns provided the opportunity to establish a position at a discount to the market for a business that is well above average, in our view.
Diageo (DEO) is a global producer, distributor and marketer of premium drinks with more than 200 brands and sales in nearly 180 countries. The U.K.-based holding company’s portfolio includes leading brands, such as Johnnie Walker, Guinness, Don Julio, Crown Royal, Smirnoff, Baileys, Casamigos and Captain Morgan. As the market leader, Diageo’s scale provides meaningful competitive advantages in terms of distribution and marketing, which enables the company to invest more than its peers while still generating superior returns on capital. In addition, we like that the company’s portfolio is well diversified by geography and category, which helps mitigate against earnings volatility related to economic cyclicality and shifting consumer preferences. Industry de-stocking and rising agave prices impacting tequila margins have weighed on the share price recently, which provided an attractive re-entry point to invest in this dominant beverage company at a below-average price.
GE HealthCare (GEHC) is a leading global medical technology company that was spun off from GE in January 2023. As a standalone company, we expect GE HealthCare to benefit from increased focus, better aligned management and incentives, and an improved corporate culture. We believe this will help drive higher margins and sustainably higher organic growth over time. Additionally, we believe GE HealthCare is well-positioned to capitalize on technology trends in healthcare as an increasing portion of the value proposition comes from artificial intelligence-enabled software, as well as a shift towards precision care. In our view, investors have a stale perception of GE HealthCare and haven’t given the company credit for the significant self-help potential or the improving industry backdrop, which provided the opportunity to purchase shares at a discounted valuation to other quality medical technology companies.
Lamb Weston (LW) is the leading producer of French fries and other frozen potato products in North America. French fries provide attractive returns on invested capital for producers stemming from an oligopolistic structure and high barriers to entry. Lamb Weston has a strong market share supported by its concentration of plants in the best geographic area for production – the Columbia Basin of the Pacific Northwest. The company also benefits from value-added offerings that carry higher margins and increasing per-capita fry consumption in developing markets. We bought shares at a discount to peers and historical trading levels amid concerns around near-term pricing and volume trends.
We eliminated the following position(s) during the period:
OUTLOOK
In the short term, traders analyze news flow to predict price movement, whereas investors, like ourselves, attempt to determine the price of an asset using fundamental analysis, then buy low and sell high. We believe traders have greatly influenced current market conditions leading to a disconnect between price and fundamental business value. The result is an opportunity for investors who can identify businesses with strong, durable cash flow streams. Though we are frustrated with our recent performance, based on today’s valuations, we remain confident in our time-tested investment approach.
The specific securities identified and described in this report do not represent all the securities purchased, sold, or recommended to advisory clients. There is no assurance that any securities discussed herein will remain in an account’s portfolio at the time one receives this report or that securities sold have not been repurchased. It should not be assumed that any of the securities, transactions, or holdings discussed herein were or will prove to be profitable. The information, data, analyses, and opinions presented herein (including current investment themes, the portfolio managers’ research and investment process, and portfolio characteristics) are for informational purposes only and represent the investments and views of the portfolio managers and Harris Associates L.P. as of the date written and are subject to change without notice. This content is not a recommendation of or an offer to buy or sell a security and is not warranted to be correct, complete or accurate. Data is in terms of U.S. dollars unless otherwise indicated. Certain comments herein are based on current expectations and are considered “forward-looking statements”. These forward-looking statements reflect assumptions and analyses made by the portfolio managers and Harris Associates L.P. based on their experience and perception of historical trends, current conditions, expected future developments, and other factors they believe are relevant. Actual future results are subject to a number of investment and other risks and may prove to be different from expectations. Readers are cautioned not to place undue reliance on the forward-looking statements. The MSCI World Index is a free float-adjusted, market capitalization-weighted index that is designed to measure the global equity market performance of developed markets. The index covers approximately 85% of the free float-adjusted market capitalization in each country. This benchmark calculates reinvested dividends net of withholding taxes. This index is unmanaged and investors cannot invest directly in this index. ©2024 Harris Associates L.P. All rights reserved. |
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