The second quarter of 2025 proved to be a period of robust performance for the Oakmark International Small Cap Strategy, significantly outperforming its benchmark, the MSCI World ex USA Small Cap Index. This success highlights the effectiveness of a value-driven investment approach in navigating international markets, even as global economic dynamics shift. The strategy's proactive portfolio adjustments, including strategic new investments and divestitures, underscore a commitment to identifying and capitalizing on undervalued assets. Despite previous trends favoring U.S. growth stocks, the current landscape suggests a rebalancing towards international value, particularly in Europe, where improved fundamentals and expanding valuation spreads offer compelling opportunities. This shift validates the long-held conviction of value investors that market corrections eventually align stock prices with intrinsic business worth.
Amidst this favorable environment, the strategy's strong results were fueled by select companies that demonstrated resilience and growth, particularly within the financials and industrials sectors. Conversely, some technology and healthcare firms faced headwinds, leading to temporary setbacks. The ongoing emphasis on fundamental research and a disciplined qualitative and quantitative screening process enables the strategy to uncover businesses trading below their inherent value, managed by teams that operate with an owner's mindset. This meticulous selection process, combined with a forward-looking perspective on global market trends, positions the Oakmark International Small Cap Strategy for continued success as the paradigm shifts from growth to value in international equities.
Exceptional Quarterly Performance and Market Trends
In the second quarter of 2025, the Oakmark International Small Cap Strategy achieved an impressive net return of 17.13%, surpassing the MSCI World ex USA Small Cap Index's return of 16.82% for the same period. This strong showing reflects a favorable market environment where international equities experienced broad-based gains across all GICS sectors. Financials and industrials emerged as the top-performing sectors, significantly contributing to the overall market uplift. Geographically, Japan and Canada were standout performers, driving positive contributions from all countries in the index. This period marks a notable divergence from the prolonged dominance of U.S. growth and momentum stocks, signaling a potential return to value investing in international markets, as foreign currencies stabilize and valuation disparities narrow.
The positive momentum in international small-cap equities underscores a broader market recalibration. For years, value investors in overseas markets observed U.S. growth stocks soar, a trend many believed unsustainable due to currency weakness and valuation expansion. Now, the unwinding of this paradigm is evident, with international equities, especially in Europe, demonstrating improved fundamentals and attracting renewed investor interest. The Oakmark Strategy's outperformance is a testament to its disciplined value investing philosophy, which focuses on acquiring companies at significant discounts to their intrinsic value. This approach, centered on robust fundamental research and a commitment to long-term ownership, is designed to capitalize on market inefficiencies and deliver superior returns as valuations revert to their mean, reinforcing confidence in a value-centric investment landscape.
Strategic Portfolio Adjustments and Future Outlook
The Oakmark International Small Cap Strategy's Q2 2025 performance was significantly influenced by a series of strategic portfolio adjustments, including both successful contributors and carefully managed detractors, alongside the initiation of promising new positions. Among the top contributors were iM Financial Group, Atea, and BNK Financial Group, each benefiting from strong earnings, strategic share repurchases, or robust organic growth. Conversely, TeamViewer, Gerresheimer, and Azelis Group acted as detractors, primarily due to temporary market corrections, guidance cuts, or internal operational challenges. Despite these setbacks, the investment team maintains confidence in the long-term prospects of these companies, viewing current valuations as attractive entry points given their underlying quality and future potential.
Looking forward, the strategy remains optimistic about the future of international value investing. Several new positions were initiated during the quarter, including Amplifon, a global leader in hearing aid retail, Ayala Land, a prominent Philippine real estate developer, and Bakkafrost, a leading Nordic fish producer. Additionally, Jenoptik, a high-end optics and photonics supplier, and Misumi Group, a provider of factory automation components, were added to the portfolio. These additions reflect a commitment to diversifying across attractive sectors and geographies, capitalizing on companies with strong competitive positions, favorable demographic trends, or temporary valuation dislocations. The sustained large valuation spread between U.S. growth and international value stocks, particularly in Europe, continues to present a compelling opportunity for the strategy. As market dynamics continue to evolve, the disciplined application of value investing principles, combined with a focus on companies with sound fundamentals and strong management, is expected to drive ongoing benefits for the portfolio, reinforcing the long-term viability of this investment approach.