Performance Review 2005
Mike Mangan and Bob Levy: "Harris Associates U.S. Large Cap Value Fund returned -2.60% for the year ending December 31, 2005. This compares to the Russell 1000 Value Index that returned 7.05% for the same period. One of the main sources of underperformance was a low weighting in energy stocks, the best performers in 2005. Also, our underweight allocation in financials and lack of exposure to utilities detracted from performance, as these sectors also performed well during the year. In addition, our media holdings lagged the market, although we believe the underlying fundamentals are favorable.Currently, the Fund holds 50 securities across a variety of industries. During the year, we initiated positions in InBev NV, EchoStar Communications, Gannett, Hewlett-Packard Company, Intel, Pulte Homes, Texas Instruments and Tyco International. Additionally, the Fund now holds Discovery Holding Company, spun off by Liberty Media. We believe that the stock prices of these companies represent a significant discount to value.
Our positions in AmerisourceBergen, Automatic Data Processing, Carnival, Colgate-Palmolive Company, Costco Wholesale, Johnson & Johnson, Kraft Foods, McGraw-Hill Companies, Tribune Company and Waste Management were eliminated during the year.
Burlington Resources Inc., ConocoPhillips and AFLAC had a positive impact on performance. We believe earnings at Burlington Resources were helped by lower exploration expenses in addition to the continued increase of oil and natural gas prices throughout the year.
ConocoPhillips has enjoyed an almost two year run in which its stock price has more than doubled, as high petroleum prices and strong refining margins have contributed to what we consider to be strong profitability for the firm. Though Hurricane Katrina temporarily affected the company’s refining capabilities, we believe that ultimately it did not do any long term damage. The firm is using its strong cash flow to pay down debt and repurchase stock.
AFLAC’s earnings growth continued during the year as margins in Japan expanded. Sales in the U.S. performed better than expected and AFLAC began using its excess cash flow to repurchase stock.
Comcast, Masco and Liberty Media had a negative impact on performance during the year. We are confident that Comcast’s fundamentals are solid. The firm is growing revenue, increasing margins and generating attractive free cash flow. While competition from phone companies is a concern, we feel Comcast’s stock price more than reflects this change in the competitive landscape. We continue to like the stock.
The market’s skepticism that strength in the housing industry will persist hurt Masco’s stock price, especially in light of recent short-term interest rate increases. We are still very comfortable with this holding.
Liberty Media’s stock, along with many other media names, has been weak during the year. Management has moved to simplify the company and highlight specific asset values via spin-offs including Discovery Holdings and Liberty Global. We continue to hold the stock as we think it is attractively valued."
Performance Review 2006
Mike Mangan and Bob Levy: "Harris Associates U.S. Large Cap Value Fund underperformed its reference index, the Russell 1000 Value Index, for the year, returning +17.00% versus +22.24% for the Index.
The main sources of underperformance were technology holdings along with a lack of exposure to telecommunication services stocks and an underweight allocation to energy.
Underperformance was offset somewhat by health care and consumer discretionary holdings. An overweight allocation to consumer staples and holdings in this sector also contributed to the Fund’s return.
DIRECTV Group, Comcast, and McDonald’s contributed the most significant positive impact on the Fund’s absolute performance during the year. Dell, Pulte Homes, and Intel had the most significant negative impact on absolute performance during the year.
During the year, positions were initiated in The Coca-Cola Company, Dell, Gap, Medtronic, and Schering-Plough as it is believed the share prices of these companies represent a significant discount to the managers’ estimation of value.
Additionally, Liberty Media Corporation was split into two entities: Liberty Capital Group and Liberty Interactive Group. As Liberty Media Corporation itself is no longer a publicly traded entity, both of these new replacement stocks are now held in the Fund in its place.
First Data’s spin off of Western Union also created a new holding. The managers believe Western Union is an unusually high quality business. It is the dominant leader in international money transfers. The growing number of people working in countries away from their families has dramatically increased the demand for their services and the managers are of the believe that the stock price does not fully reflect Western Union’s growth prospects.
Coca-Cola Enterprises and TJX Companies were sold during the year. Also, both Burlington Resources and Knight Ridder were acquired by other firms, and shares of these companies are no longer held by the Fund."
Performance Review 2007
Mike Mangan and Bob Levy: "The Harris Associates U.S. Large Cap Value Fund (the “Fund”) returned -3.42% for the year ending December 31, 2007. This compares to the reference index, the Russell 1000 Value Index (the “Index”) that returned -0.17% for the same period. The portfolio’s relative underperformance is due to a significant underweighting in energy, as this sector performed particularly well during the year. An overweight allocation to consumer discretionary stocks also hindered performance for the period. Technology holdings and an underweight allocation to financials worked in the portfolio’s favor for the year.
Currently, the Fund holds 52 securities across a variety of industries. During the year, we made a number of changes to the portfolio’s composition. We initiated positions in Best Buy, Capital One Financial, FedEx, and Sprint Nextel, as we believe the stock prices of these companies represent a significant discount to value.
Positions in Coca-Cola, DIRECTV Group, EchoStar Communications, First Data, Gannett, Gap, and MGIC Investment Corporation were eliminated during the year.
McDonald’s, Intel, and Yum! Brands had the most positive impact on performance. McDonald’s produced solid earnings throughout the year as it continued to successfully execute its strategy for operational improvements. The big drivers of future earnings will be menu-driven in the U.S. and kitchen-driven in Europe. In the U.S., the company will be rolling out its premium beverages along with new menu items, while in Europe the focus will be on kitchen remodels required for premium chicken products.
Intel consistently reported better than expected earnings during 2007, and in the most recent quarter reported strong quarterly earnings (up 41%) with gross margins expected to be around 52% for the full year. We believe Intel will benefit from the explosion of processor power needed at the client level and the Internet service level. The trend toward mobile computing should also be a positive for the company.
Yum! Brands continued to show strong international growth, especially in China. Management expects to increase franchise ownership in the U.S. to over 90% by 2010, which we think should increase overall growth for the company.
Washington Mutual, Pulte, and Citigroup had the most negative impact on performance during the year. The deterioration in the housing market, coupled with significant loan write-offs, has injured Washington Mutual’s earnings power. While fundamentals have been hurt in this environment, we continue to feel that its retail banking franchise is worth well above the current stock price, and the mortgage business still has value. We feel the sell off has been overdone and the stock looks very cheap, trading at just 4x 2009 expected earnings.
The environment for home-builders remains challenging. Pulte has been forced to take write-offs, as business fundamentals weaken. However, with its stock trading at a significant discount to book value, we feel that the bad news is already factored into the share price.
Like other large financial institutions, Citigroup took a large write-down this past quarter relating to its CDO portfolio. Since then the company has raised capital, replaced its CEO, and is making good progress in reducing SIV exposure."
Performance Review 2008
Mike Mangan and Bob Levy:
"2008 Year Performance
Fund IA USD -33.20%
Russell 1000 Value Index TR -36.85%
The Fund outperformed its reference index due mainly to stock selection, especially in consumer-related sectors.
Consumer discretionary and consumer staples stocks added to the positive relative results for the year. Industrial stocks were also additive together with positive sector allocation effects. The top five stocks that helped performance for the year were H&R Block, Anheuser-Busch, Wal-Mart Stores, General Mills, and McDonald’s.
Sector allocation produced negative relative performance for the year. An underweight allocation to energy and an overweight allocation to technology were chiefly responsible, though technology holdings produced positive performance for that sector, curbing negative results there. The bottom five stocks that hindered performance for the year were Citigroup, Liberty Media Interactive, Viacom, Bank of America, and Washington Mutual."
Performance Review 2009
Mike Mangan and Bob Levy:
"2009 Year Performance
Fund I/A (USD) 41.02%
Russell 1000 Value TR 19.69%
The Fund’s outperformance relative to its reference index in 2009 was due to a combination of stock selection and sector weightings. Stock selection was especially strong in Financials, Industrials and Health Care. Weightings in the Consumer Discretionary and Technology sectors also helped relative results. Finally, a lack of exposure to Telecommunication Services and Utilities proved helpful on a relative basis.
The Fund also performed well on an absolute basis, with all sectors contributing positively. Energy, Technology and Consumer Discretionary shares produced the highest cumulative absolute return.
The only negative impact to the Fund’s performance occurred in the Materials sector. Weighting and holdings here produced a slight drag on results. However, individual issues in this sector provided positive returns.
The top five stocks that helped performance for the year were Liberty Entertainment, Schering-Plough, American Express, Texas Instruments and Liberty Interactive. The bottom five stocks that hindered performance for the year were H&R Block, Citigroup, Xerox, Fortune Brands and Comcast.
The significant changes that have taken place in the market in 2009 provided the managers with a unique opportunity to add high-quality names to the Fund. In order to capitalize on this situation, several securities were added, while other names were eliminated to allow for these additions during the year."
Performance Review 2010
Mike Mangan and Bob Levy: "The portfolio underperformed its benchmark somewhat for the year, returning 13.39% compared to the Russell 1000 Value Index that returned 15.51%.
Portfolio Activity
Stock selection caused the portfolio’s underperformance, as overall results brought about by sector weightings contributed for the past 12 months. Positions in the consumer discretionary and industrial sectors contributed most for the year. The weighting in the utilities sector added further value.
▪ Holdings in the technology and consumer staples sectors were the largest relative detractors for the year, and health care and materials stocks also exerted a negative impact.
▪ In terms of absolute performance, 7 of 9 sectors that we owned during the year generated positive cumulative returns. Consumer discretionary and industrial issues delivered the best performance, advancing over 30% each. Materials was the worst performing sector for the year, declining 14%. However, we sold our one materials holding in the second quarter, and currently the portfolio does not have exposure to materials stocks.
▪ The top five stocks that helped performance for the year:
Carnival
Caterpillar
Marriott International
National Oilwell Varco
Starwood Hotels & Resorts
▪ The five stocks that hindered performance most for the year:
Hewlett-Packard
Transocean
Medtronic
Best Buy
Monsanto
▪ The portfolio finished the year holding 41 securities across a variety of industries. The following are changes to holdings over the last 12 months:
Performance since 2005
Investment Process and Strategy – How does the Fund Manager invest?
Mike Mangan and Bob Levy: "Harris Associates are value investors who invest in companies which trade at a substantial discount to their true business value and are run by managers who think and act as owners. Harris believes that purchasing businesses at a discount to underlying value minimizes risk while providing substantial profit potential. Harris Associates view every stock purchase they make as if they were buying a piece of a business, not just a stock certificate. They look for managers who seek to maximize the long term value of a business for its owners: in other words, run efficient operations, focus on cash flow and allocate capital wisely.
Harris are patient investors. Over time, they believe the price of a stock will rise to reflect the underlying business value; in practice, their investment time horizon is long-term, generally three to five years. Harris’ investment professionals also build focused portfolios that provide sufficient diversification but are concentrated enough so that their best ideas can make a meaningful impact on investment performance.
Three key tenets of Harris Associates’ investment philosophy are:
- Buy businesses trading at a significant discount to their estimate of intrinsic value.
- Invest in companies expected to grow intrinsic value over time.
- Invest with management teams that think and act as owners.
Process overview
Harris Associates utilize a fundamental, bottom-up investment approach. Exceptional effort is expended to identify companies the market has overlooked or underappreciated. Fundamental research underscores the stock selection emphasis of the process as portfolio managers and analysts search the U.S. equity markets for investment candidates. Investment professionals are generalists and unconstrained in their search for value. Portfolio construction is entirely bottom-up without sensitivity to the benchmark with sector exposures a residual of stock selection. The Fund is concentrated to leverage stock selection expertise.
Universe construction begins with all publicly traded stocks in U.S. equity markets. Then the universe is cut down by excluding stocks with insufficient liquidity and stocks with unreasonable valuations.
Research coverage is then developed qualitatively and quantitatively from the smaller universe. Interesting ideas arise from monitoring the markets, databases, trade publications, industry and business contacts, management meetings, and industry conferences, among others. Few ideas come from Wall Street. The qualitative part of the review serves 2 purposes. First, exclude companies with obvious fundamental impediments. Second, uncover value opportunities using less traditional approaches:
• Regulatory and legal environment
• Ownership issues
• Liquidity
• Opportunistic market events
• New low list
• Capital activity (M&A, spin off, share repurchase activity)
• Insider transactions
These companies pass through quantitative methods to identify those broadly meeting the manager’s definition of value:
- Low price to NAV (P/NAV) market discount
- Low enterprise value to operating income (EV/EBITDA) cash flow dynamics
- Return on capital employed (ROIC) capital efficiency
- This research yields approximately 300-400 stocks that will be covered by analysts."
Investment Outlook
Market Environment
Despite all the warnings that the sharp recovery in 2009 was nothing more than a “dead-cat bounce,” the stock market in 2010 proved to be both resilient and profitable to those willing to focus on corporate fundamentals. The news was daunting at times – a major oil spill, a Eurozone debt crisis, a disruptive election. But the economy continued to move forward, and businesses generated robust profits that translated into double-digit gains by the major U.S. indices. Our portfolios fully participated, but many investors still shaken by the crisis have been absent from the 93% rally off the March 2009 panic-induced bottom.
While there has been broad improvement in corporate fundamentals and economic conditions, the stock market has garnered a more bullish outlook in the financial press. But there has yet to be much of a real reaction among investors. Retail and institutional investors alike remain strongly tilted toward seemingly risk-averse asset classes, with investor exposure to bonds at a record high.
Outlook
In a world of rock-bottom interest rates, the long-term savings challenge is daunting for all investors. But given current allocations, many investor portfolios seem poorly positioned to achieve their own long-term investment goals. We think plan sponsors will be under increasing pressure to boost actual portfolio returns. In the meantime, prospects look good for more gains in corporate profits and cash flow. Although stock prices are up, we believe equities are still cheap on most fundamental measures. Also, much uncertainty has faded: the tax cuts were extended, the risk of a "double-dip" seems to fall with each economic report, and the new Congress faces greater pressure to address the long-term fiscal concerns that tend to worry investors the most. As a result, we think the external environment favors owners versus creditors.
As always, we expect in the short run for stocks to be both volatile and unpredictable. But the market’s fundamentally grounded recovery – and importantly, the improved economy itself – should no longer be ignored, particularly by investors with long-term objectives that cannot be met by low-yielding bonds.
Fund Positioning
As we have said before, our investment process is bottom-up and relies exclusively on stock selection. Therefore, we do not intentionally sector-weight equities in the portfolio against any benchmark. Our primary long-term goal is to achieve a high rate of return, and we continue to emphasize higher quality businesses that today sell at little or no premium to their lower-quality peers.
• Currently, the portfolio holds 41 companies across a variety of industries.
• During the period, we initiated new positions in Cisco Systems, Range Resources, Republic Services, Ultra Petroleum, and Wells Fargo.
• We eliminated our positions in Best Buy, General Mills, Kroger, and Safeway during the period.
• The portfolio is most heavily weighted in technology (21%), financial (19%), and consumer discretionary (19%) stocks. The portfolio contains no exposure to materials or telecom issues.
• Health care and utility positions and the portfolio’s weighting in the consumer discretionary sector had the most positive overall impact on relative performance for the quarter.
• Industrial and technology holdings, and a lack of exposure to materials stocks, detracted most for the period.
Additional Notes
This material has been prepared by Natixis Global Associates. This material is provided for information purposes only to certain investment service providers and other Professional Clients, Qualified or Institutional Investors, and, when required by local regulation, only at their written request.
The Fund is a sub-fund of Natixis International Funds (Lux) I which is organized as an investment company with variable capital under the laws of the Grand Duchy of Luxembourg and is authorized by the Commission de Surveillance du Secteur Financier (the “CSSF”) as a UCITS. The Fund offers multiple share classes with differing fees. Natixis Global Associates S.A. is the management company of the Fund. Harris Associates L.P. is the investment manager of the Fund.
Harris Associates L.P., a subsidiary of Natixis Global Asset Management, is an investment adviser registered with the U.S. Securities and Exchange Commission (IARD No. 106960) and is licensed to provide investment management services in the United States. The company conducts all investment management services in and from the United States.
Risks: Value investing involves risk related to investments in companies experiencing market or financial weakness that may or may not achieve their expected aggressive goals, which may cause the Fund to lose money. Investment in fewer issuers or concentrating investments by region or sector involves more risk than a fund that invests more broadly.These and other risks of the Fund are described in greater detail in the Prospectus..
In the E.U. (outside of the UK) This material is provided by Natixis Global Associates S.A. or one of its branch offices listed below. Natixis Global Associates S.A. is a Luxembourg management company that is authorized by the CSSF and is incorporated under Luxembourg laws and registered under n. B 115843. Registered office of Natixis Global Associates S.A.: 2-8 Avenue Charles de Gaulle, L-1653 Luxembourg, Grand Duchy of Luxembourg. France: Natixis Global Associates International (n.509 471 173 RCS Paris). Registered office: 21 quai d´Austerlitz, 75013 Paris. Italy: Natixis Global Associates S.A. Succursale Italiana (Bank of Italy Register of Italian Asset Management Companies no 23458.3). Registered office: Via San Clemente, 1 - 20122, Milan, Italy. Germany: Natixis Global Associates S.A., Zweigniederlassung Deutschland (Registration number: HRB 88541). Registered office: Im Trutz Frankfurt 55, Westend Carrée, 7. Floor, Frankfurt am Main 60322, Germany. Netherlands: Natixis Global Associates S.A., Nederlands filiaal (Registration number 50774670). Registered office: Evert van de Beekstraat 310, 1118CX Schiphol, the Netherlands. Sweden: Natixis Global Associates S.A. (Luxembourg) Nordics Filial (Registration number 516405-9601 - Swedish Companies Registration Office). Registered office: Master Samuelsgatan 60, 8th Floor, Stockholm 111 21, Sweden.
The above referenced entities are business development units of Natixis Global Associates and subsidiaries of Natixis Global Asset Management, the holding company of a diverse line-up of specialised investment management and distribution entities worldwide. The investment management and distribution subsidiaries of Natixis Global Asset Management conduct any regulated activities only in and from the jurisdictions in which they are licensed or authorized. Their services and the products they manage are not available to all investors in all jurisdictions.
Although Natixis Global Associates believes the information provided in this material to be reliable, it does not guarantee the accuracy, adequacy, or completeness of such information.
The provision of this material and/or reference to specific securities, sectors, or markets within this material does not constitute investment advice, or a recommendation or an offer to buy or to sell any security, or an offer of services. Investors should consider the investment objectives, risks and expenses of any investment carefully before investing. The analyses, opinions, and certain of the investment themes and processes referenced herein represent the views of the portfolio manager(s) as of the date indicated. These, as well as the portfolio holdings and characteristics shown, are subject to change. There can be no assurance that developments will transpire as may be forecasted in this material.
This material may not be distributed, published, or reproduced, in whole or in part.
