Commentary

Global All Cap Strategy

September 30, 2022

THE MARKET ENVIRONMENT

Major global markets continued to experience pressure and volatility in the third quarter as investors reacted to prevailing challenges facing economies across the world. Efforts by central banks to reign in elevated inflation by tightening financial conditions were at the forefront of financial discourse with investors reducing exposure to assets, such as equities, as interest rates climb at aggressive paces. In the U.S., the Federal Reserve raised its benchmark interest rate by 75 basis points in July and again in August to 3.00–3.25%. Importantly, rhetoric following each decision was noticeably hawkish as Fed Chair Jerome Powell looked to emphasize the Federal Open Market Committee’s commitment to regaining price stability with further rate hikes, even at the expense of economic hardship. The Bank of England, Bank of Canada and European Central Bank all increased their respective benchmark rates in September by 50, 75 and 75 basis points, respectively. China and Japan’s central banks opted for more accommodative policies. Major currencies including the pound, yen, euro, Australian dollar and Swiss franc all depreciated against the dollar throughout the quarter.

Late in the quarter, newly elected U.K. Prime Minister Liz Truss created some volatility in markets when she announced plans for an unfunded tax cut totaling GBP 45 billion per year in hopes of easing citizens financial burdens and spurring economic growth. The 30-year yield for a U.K. government bond jumped nearly 150 basis points in under a week to nearly 5% before settling at around 3.8%. The Bank of England reacted by purchasing gilts to stabilize the market and delayed its planned quantitative tightening program of selling gilts.

While we do not overlook the negative impacts the war in Ukraine, tightening financial conditions, energy crisis and volatile currencies will continue to have, we remain cognizant that a company’s value is derived from its longer term cash flows discounted back to the present day. As share prices fall across the board, we rely on our disciplined approach to identify exceptional businesses overpenalized by share price activity. In our view, risk is not synonymous with owning equities during times of market turmoil. Rather, we believe owning companies that meet our rigorous criteria at discounted levels offers an attractive opportunity on a risk to reward basis.

THE PORTFOLIO

Top Performers:
Pinterest’s second-quarter earnings impressed investors due to stabilizing engagement trends and guidance for mid-single digit revenue growth in the upcoming quarter, despite foreign currency exchange pressures and disappointing recent guidance from peers. In addition, mobile app users, which account for the vast majority of revenue and impressions, increased 8% year-over-year. CEO Bill Ready indicated that the company will return to “meaningful margin expansion” in 2023 and noted that he would evaluate how best to deploy the company’s $2.7 billion in net cash for the benefit of shareholders. Our conversation with Ready and CFO Todd Morgenfeld after the release furthered our belief that they have the capability and appropriate vision to benefit the company and shareholders over the long term.

In our view, Fiserv delivered good second-quarter earnings results in July, including 12% organic revenue growth that remained ahead of analysts’ estimates. We appreciate that each segment performed well, led by the merchant acquiring business, which achieved 17% organic growth. In addition, the fintech segment grew 7%, and the payments and networks division accelerated to 8%. Despite a challenging inflationary environment that pressured margins, Fiserv anticipates a recovery in the second half of the year and also increased its 2022 organic revenue guidance. In our view, Fiserv is benefiting from the continued secular shift toward electronic payments and digital banking. We think the mission-critical nature of Fiserv’s products and its positive track record in down markets gives us confidence in the company’s ability to withstand today’s headwinds and thrive into the future. We believe the company has been unfairly penalized by the market as “buy now pay later” and other payments companies have seen their multiples compressed. We see this as an attractive opportunity based on our belief that it is a solid business with an attainable path to healthy growth.

Humana’s second-quarter earnings results beat consensus expectations on lower than expected medical expenses stemming from a decline in Covid-19-related medical costs that was not fully offset by non-Covid-19 utilization returning to normal levels. Management said the company is tracking well against achieving its $1 billion cost savings target by the end of 2023 and it plans to reinvest the majority of those savings into improved member benefits. Ultimately, Humana’s share price reached our sell target during the period, and we opted to eliminate the position.

Bottom Performers:
Given the Chinese lockdowns and difficult macro environment, recent results for Alibaba Group were suppressed as well as for Chinese internet companies in general. Despite the difficult background, Alibaba Group’s first-quarter results beat consensus estimates for revenue and adjusted earnings. Last quarter, management noted its intentions to begin cutting costs and focusing more on quality growth and efficiency, which was evident in this quarter’s results. Losses in many businesses were reduced and margins increased 390 basis points sequentially. The company’s CFO stated that cost cutting would continue throughout the year and expectations are for earnings and margins to improve. We appreciate the steps management is taking to improve what they can control, while respecting that the company’s topline will remain uncertain given the tough environment. However, we believe the company is well positioned to grow per share value for shareholders over the long term.

Liberty Broadband’s second-quarter revenue of $239 million outpaced market expectations by about 1%, while adjusted operating income (before depreciation and amortization) exceeded projections by 13%. Despite these solid results, the company’s share price fell in conjunction with the share price of Charter Communications. As we have reported previously, due to Liberty’s 26% ownership stake in Charter, its share price is sensitive to movements of Charter’s share price. During the second quarter, Liberty sold back to Charter 2.2 million of its shares and received $1.1 billion in proceeds. We still believe Liberty is a solid company that presents a good investment opportunity itself and also offers indirect ownership exposure to Charter shares at a steep discount.

Shares of Prosus fell throughout the quarter along with its major holding, Chinese internet company Tencent. Prosus continued to sell down its stake in Tencent following the June announcement that Prosus is planning to sell part of its $134 billion ownership in the company, which it inherited from its majority owner Naspers. Prosus sold 1.1 million ordinary shares in September as part of this repurchase program according to a shareholder notice. The company plans to use the proceeds to fund share repurchases with an open-ended and unlimited program according to CEO Bob Van Dijk. In our view, the company has deeply discounted shares, and we appreciate its efforts to take advantage of the opportunity to repurchase them at an attractive price and return capital to shareholders.

During the quarter, we added Warner Bros. Discovery to the portfolio. We eliminated our positions in Continental, Humana, Liberty Global and Richemont.

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 09/30/2022.

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.