Global All Cap Strategy

June 30, 2023


Major global markets generally finished the second quarter higher, continuing the relief for the year-to-date period following a challenging 2022. In the U.S., the Russell 1000 Growth Index gained 12.81% versus the Russell 1000 Value Index, which gained 4.07% as technology and AI-related companies led the advances. While the U.S. and Europe equity markets showed strength on the back of better than expected economic data, Asian markets were mixed with China equities finishing lower and Japanese equities reaching 30-year highs.

Central banks continued to focus on reining in inflation, which remains elevated across most regions. The U.S. Federal Reserve increased its benchmark interest rate by 25 basis points in May before pausing at its June meeting. Comments from members of the Federal Open Market Committee pointed to further hikes in the future and interest rates remaining elevated for some time. The European Central Bank and Bank of England both increased their respective interest rates in May and June, reaching 4.00% and 5.00%, respectively, while Japan and China opted for more accommodative monetary policies. In the face of tightening financial conditions, inflation fell from prior year levels during the quarter throughout most of the world.

Regardless of the economic backdrop and central bank activity, our disciplined investment process continues to revolve around bottom-up, fundamental research. As long-term investors, we value our companies through the economic cycle and focus portfolio construction on optimizing what we believe are our best investment opportunities. We attempt to identify growing businesses that are managed to benefit their shareholders and invest in those businesses only when priced substantially below our estimate of intrinsic value, then patiently wait for the gap between share price and our estimate of intrinsic value to converge. We believe this approach best serves our goal of growing our clients’ capital over the long term.


Top Performers:
Alphabet’s first-quarter search revenue growth accelerated slightly sequentially, which management described as “resilient” against the backdrop of a pullback in advertising budgets. Travel and retail verticals were called out as performing well, offset by declines in finance and media and entertainment. Alphabet’s cloud business reached GAAP profitability this quarter, moving from a -12% margin a year ago to a 3% margin. On the AI front, Alphabet upgraded Bard to run on its more powerful PaLM language model, while also adding the ability to assist with coding and software development. CFO Ruth Porat revised 2023 capital expenditures guidance, driven by higher data center construction and server spending to support AI investments across consumer products, advertiser tools, and the cloud business. Porat reiterated that the company plans to hold expense growth below revenue growth and that it will begin to see the benefits of the company’s cost-reduction initiatives later this year and into 2024. Alphabet hosted its annual developer conference in May where it showcased what we view as an impressive array of new AI-powered consumer tools to be rolled out over the course of the year.

Amazon’s most recent earnings report revealed first-quarter revenue higher than consensus expectations across all segments and business lines. Margins were ahead of consensus for both North America and international retail and roughly in line at Amazon Web Services (AWS) after backing out an unusual charge. Shipping and fulfillment cost metrics improved again, which we view as a key indicator of progress. Although total company headcount was down 10% year-over-year, the improved efficiency is not at the expense of delivery speed, which continues to increase with 2023 on track to be a record year. Management noted a roughly 5% deceleration in AWS growth in April, but we remain confident that over time AWS will re-accelerate. CEO Andy Jassy said he believes large language models and generative AI will be drivers of growth for AWS, as many customer experiences will be invented or reinvented on the cloud. In June, the Federal Trade Commission (FTC) filed a lawsuit against Amazon, alleging that it lured customers into signing up for Amazon Prime and made it challenging to unsubscribe. Later, reports surfaced that the FTC was preparing an antitrust case against Amazon. We do not believe these will result in a material change in value, but we will continue to monitor the situations closely.

Oracle’s fiscal-fourth quarter earnings and full-year 2024 outlook were strong, in our view. Total revenue grew 18% in constant currency and 5% ex-Cerner, ahead of consensus expectations. Applications cloud and support revenue grew 11% in constant currency ex-Cerner powered by the “strategic back office,” consisting of Fusion and Netsuite, which together now account for $6.6 billion in runrate revenue. The infrastructure ecosystem grew 15% in constant currency powered by infrastructure cloud services. We see management’s announcement of $2 billion in new Oracle Cloud Infrastructure contracts with 33 AI companies and partnerships with Nvidia and Cohere as a sign that the company will be a leader in AI. Further, CEO Safra Catz guided to total revenue growth of 7-9% in the fiscal first quarter and approximately 30% cloud growth in constant currency in full-year 2024, both ahead of consensus expectations.

Bottom Performers:
Sentiment in Chinese equities has degraded after the initial excitement from China’s reopening earlier in the year. Incremental macroeconomic data coming out of China indicates that the Covid-19 re-opening bounce is fading, and the economy is struggling to sustain healthy growth. As the largest e-commerce platform in China, Alibaba’s share price has been caught up in this storm. The company has also continued to face intense competition from the likes of short video players and traditional e-commerce companies. Despite these negative factors, Alibaba remains an extremely important platform in China and continues to generate significant free cash flow. In the most recent completed fiscal year, the company generated $25 billion of free cash flow, which is 12% of the current market capitalization. Its core commerce business trades at approximately 5x adjusted earnings, a valuation we deem much too cheap, even with the headwinds noted above. Alibaba’s management team has been aggressive with share repurchases and recently formed a capital management committee. In addition, the company recently announced a major restructuring that will effectively break up the company and separately list various businesses within Alibaba. Today, the market is assigning little to no value to these businesses and having a market quote may force investors to give Alibaba value for these assets. Irrespective of whether the restructuring works or not, we appreciate management’s efforts to help unlock value in what, we see, is clearly an undervalued stock.

Anheuser-Busch reported first-quarter results that included revenue growth of 7.4%, volume growth of 0.9% and a 12% benefit from pricing and product mix from high inflationary markets. Volumes grew in about 60% of markets, including the start of a recovery in China and ongoing market share wins in Mexico. We spoke with CFO Fernando Tennenbaum regarding the recent Bud Light controversy as Bud Light’s sales are down 20-25% year-over-year since April, with mild contagion to other Anheuser-Busch products in the U.S. In response, Anheuser-Busch brought in new brand management and is increasing investment in the brand and support to wholesale partners. Tennenbaum provided insight on the full-year 2023 margin outlook, as Anheuser-Busch is expecting revenue growth ahead of its 4-8% organic adjusted earnings growth but sees commodities and currency impact as more supportive in 2024. The company is continuing to increase pricing in line with inflation and has not seen any broad-based negative volume response outside of a few areas where the macro environment has weakened. Despite the short-term volatility, we continue to believe that Anheueser-Busch is an attractive investment over the long term.

Bayer reported first-quarter results that fell short of consensus expectations, particularly in the crop and pharma segments. Within the crop segment, glyphosate normalization is materializing more completely than management’s expectations. Management guided to a EUR 1.7 billion revenue headwind in 2022 versus the EUR 0.9 billion prior guidance, effectively unwinding windfall price surges recently achieved during a period of shortages. The rest of the core crop segment is performing well, in our view, growing 8% during the quarter with the help of price increases, particularly in corn which grew 16%. The pharma business experienced challenges driven by China due to Covid-19 and volume-based procurement, which also weighed on Adalat. Xarelto declined 13% during the quarter, which management also attributed to China. Management expects growth to sequentially improve following the first quarter driven by the China headwind fading and strong growth drugs increasing in relevance. This was the final earnings report under CEO Werner Baumann, who was replaced by Bill Anderson on June 1, 2023.

During the quarter, we added Corebridge Financial, Danaher and IQVIA Holdings to the portfolio. We eliminated our positions in Arconic, Cushman Wakefield, NOV and Tenet Healthcare.

Past performance is no guarantee of future results.

The MSCI World Index (Net) 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.

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. Holdings are representative of Harris Associates L.P.’s Global All Cap Equity composite as of 06/30/2023.

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 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.