Harris Associates Global All Cap Strategy Q1 2024 Commentary

Market Environment

Major global stock markets showed strength throughout the first quarter of 2024. The US and Europe were buoyed by excitement around artificial intelligence, favorable economic data, and investor hopes that central banks will cut interest rates this year. The US stock market reached new highs during the quarter, while Japanese stocks continued to rise, surpassing their all-time highs from 34 years ago. Chinese stocks were under pressure throughout 2023, but showed a recovery in the first quarter of 2024. In March, the US Federal Reserve, the Bank of England, the European Central Bank, and the Bank of Japan all met. The US, UK, and Europe chose to keep interest rates unchanged while continuing to monitor developments in economic data, while the Bank of Japan implemented its first interest rate hike since 2007, moving out of negative interest rate territory.

Portfolio Performance

The portfolio returned 4.80% (net) during the reporting period, compared to 8.88% for the MSCI World Index over the same period.

Key contributors:

• Daimler Truck Holdings (OTCPK:DTRUY, OTCPK:DTGHF) was the largest contributor for the quarter. In March, the German truck and bus maker announced strong fourth-quarter results with 2024 margin guidance well above consensus expectations. Despite the weakness in the global truck market, the expected margin recovery is the result of management’s decisive actions to improve pricing, increase service penetration and increase the flexibility of the cost base. This is most evident in the Mercedes-Benz division, which primarily serves the European and Latin American markets, where adjusted EBIT margins increased from less than 1% in 2019 to over 10% last year. We are impressed with management’s execution following its spin-off from the former Daimler Group in 2021 and believe the company is positioned to capture structurally higher through-the-cycle margins than in the past. We spoke with CEO Martin Daum after the release and believe the investment continues to have attractive upside potential.
• General Motors (GM) was the quarterly contributor. Shares of the US-based consumer goods company rose following fourth-quarter earnings in line with consensus expectations and 2024 guidance that beat consensus expectations. Demand and pricing remain resilient despite persistent concerns about an impending market downturn. Notably, General Motors announced it would postpone its scheduled investor day from March to an undetermined date later this year, as CEO Mary Barra wants to focus on showcasing performance to investors rather than laying out a plan to restore management credibility. Overall, we are pleased with General Motors’ performance and believe the company continues to be more resilient than expected. Additionally, we value the significant cash flow being returned to shareholders. General Motors remains an attractive holding.
• Core Bridge Financial (CRBG) was the quarterly contributor. The US-based financial company’s shares rose following a strong fourth quarter financial report with, in our view, earnings per share above consensus estimates. We appreciate that liquidity and capital are above target levels and expect a healthy dividend for both the parent company and shareholders. Overall, we believe that perceptions of CoreBridge are gradually changing for the better. We continue to believe in CoreBridge Financial’s long-term prospects.

Most critical:

• Charter Communications (Chinese) was the largest negative factor during the quarter. Shares of the US-based communications services company fell in February when the company reported a 0.2% decline in broadband subscribers quarter-over-quarter. We expect broadband subscriber growth will remain challenging in the near term due to an increased competitive environment and the potential end of government subsidy programs. However, we expect these competitive forces to abate over the medium term and Charter’s broadband subscriber growth to return to normal growth. In the meantime, the company continues to grow revenue, invest in high-return capital projects, and repurchase shares. We maintain our confidence in Charter Communications’ long-term prospects.
• St. James’s Place (OTCPK:STJPF) was the biggest negative factor during the quarter. In January, the UK-based asset manager reported that net inflows in 2023 would be £4.6 billion lower than in 2022. This disappointing update came shortly after the company announced a major overhaul of its fee structure. In February, the company reported its full-year 2023 results. Underlying cash flows were below our expectations, mainly due to margins from new business and other income and expenses. In our view, the big miss was the large provision that St. James’s Place made in consideration of potential customer refunds. There had been increasing complaints from customers that the company was charging for advice when in fact it had not provided it. St. James’s Place conducted an internal investigation, citing gaps in service that existed before the company implemented Salesforce in 2021. The provision includes the appointment of a research valuation, the expected cost of refunding service fees, the administrative costs of running the refund program, and interest expenses to cover the time value of money. We met with management after the results announcement and continue to believe in St. James’s Place’s long-term prospects.
• Bayer (OTCPK:Bayes, OTCPK: Bailey) was the largest negative factor during the quarter. In January, the Germany-based healthcare company received a larger-than-average adverse jury verdict in the long-running Roundup litigation. We continue to believe these high-profile verdicts will be significantly mitigated on appeal, and note that Bayer has since won two consecutive cases. And in March, the company held its long-awaited Capital Markets Day. The event was limited in significant strategic updates, as Bayer no longer communicated its litigation strategy up front, remained conservative by not issuing mid-term targets, and postponed the divestiture until its balance sheet improves. While this did not produce the quick results some investors had hoped for, we support the strategy and appreciate that management is sharply focused on improving profitability and cash generation while simultaneously beginning to reduce the company’s bureaucracy. Full-year 2023 results and 2024 guidance were both in line with our expectations.

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Portfolio positioning

The following positions were opened during the period:

• Deere & Company (GermanyDeere is a leading manufacturer of agricultural equipment with a dominant market share in North America and Brazil. Despite its strong brand, technology and distribution advantages, Deere’s stock price has recently come under downward pressure due to investor concerns about the trough of the current agricultural business cycle. Over the long term, the world’s population and food demand are expected to grow every year, while the land and labor devoted to agriculture is expected to decrease every year. Farms need to become more productive, and we believe that as a technology leader, Deere is well positioned to benefit from this trend. We also believe that Deere’s management has a track record of organically growing its business through cycles, continually improving its return on invested capital, and returning capital to shareholders. We were able to purchase the company’s shares at a discount to our estimated intrinsic value and to other blue-chip industrial stocks.
• Vail Resorts (MT-N) is a leading mountain resort company with a portfolio of iconic destinations including some of the largest and highest quality ski resorts in North America. The company operates in a stable oligopoly which, combined with the scarcity of its mountain assets, has historically given it significant pricing power. Vail Resorts’ stock price declined after a recent ski season characterized by severe staffing shortages and poor snow quality. On a positive note, the company recently reported that it is fully staffed across its resorts and that labor costs are also manageable, which should mitigate some of the recent headwinds. Additionally, we believe Vail Resorts is positioned to benefit from upcoming season pass price increases as its Epic Pass, a season pass, is currently priced at a significant discount to the competing Icon Pass, despite offering a comparable or better product. We believe Vail Resorts offers an attractive investment opportunity as we were able to purchase the company’s shares at a discount to the market and to our estimated intrinsic value, despite a compelling fundamental outlook.

DanaherIndia) during that period.

Outlook

While we closely monitor the macroeconomic environment, we focus on bottom-up fundamental analysis at the company level when constructing our portfolios. We invest in companies that we believe are significantly cheaper than our estimate of intrinsic value and will grow in value per share over time, and management teams think and act like owners. Our analysts are industry-agnostic generalists focused on finding value regardless of current trends. We believe this positions our portfolio for sustainable long-term success.

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Original Post

Editor’s note: The summary bullet points for this article were selected by Seeking Alpha editors.