A conversation with shareholders | International equity market commentary 3Q 2026

1. How US Investors Should Allocate to International Equities

Oakmark notes that US investors' current allocation to international equities (approximately 9%) is significantly below the typical allocation in a diversified portfolio (approximately 30%). The author cites target-date funds (which, based on academic portfolio theory, typically allocate 30% to non-US assets) and global indices (where non-US exposure currently stands at about 30%, below the long-term average of 50%) as references. The author believes that US investors' underweight to international stocks has performed well in recent years, but this may not persist in the future, and maintaining appropriate diversification is prudent.

US Equity Premium and Concentration Risk

• The US accounts for roughly one-quarter of global GDP but represents 70% of global equity market capitalization.
• A strong US dollar and earnings growth from US tech stocks are the primary drivers of the widening US equity premium and the declining weight of non-US markets.

2. Currency Risk: Translation Risk and Transaction Risk

Oakmark distinguishes between two types of currency risk:

Risk Type	Definition	Example
Translation Risk	Fluctuations in the value of foreign investments when converted back to US dollars.	A Japanese company's stock rises 10% in yen, but the yen depreciates roughly 10% against the US dollar, resulting in a near-zero USD return. If the yen appreciates 10%, the USD return is approximately 21%.
Transaction Risk	Profit fluctuations caused by a mismatch between a company's cost and revenue currencies.	Toyota produces in yen in Japan and sells in US dollars in the US. When the yen depreciates, yen-denominated costs fall relative to USD revenues, boosting profit margins; the opposite occurs when the yen appreciates.

The author emphasizes that purchasing power parity (PPP) exerts a gravitational pull on exchange rates over the long term, but a company's competitive advantage is more important than currency forecasting.

3. Japan: Positioning, Opportunities, and Valuation

Market Background and Corporate Governance

• The Japanese market had extremely low valuations over the past 10-15 years, which served as a starting point for its recent strong performance.
• Improvements in corporate governance are part of the valuation re-rating, with more companies disclosing medium-term targets for profit margins and ROE, and placing greater emphasis on improving profitability and shareholder returns.
• However, progress has been slow: over the past decade, Japan's market ROE has only risen from 8.7% to 9.6% (as of the end of last year), an increase of just 90 basis points. The author notes that this improvement was partly aided by the weak yen's contribution to exporter profits.

Macro Factors and Investment Direction

• Japan has experienced its first positive inflation in decades, boosting nominal growth, but the issue of an aging population remains.
• The US-Japan interest rate differential has led to a significant weakening of the yen in recent years, providing a tailwind for exporter profit margins. The author expresses concern about the sustainability of these margins, as exchange rates tend to revert towards purchasing power parity over the long term. The yen has recently begun to strengthen; if this persists, the currency tailwind could turn into a headwind.
• Against this backdrop, Oakmark is more focused on domestic demand-oriented companies with lower reliance on a weak yen, as well as companies whose management is committed to improving returns on capital and deploying capital more efficiently.

Valuation

• The Japanese market currently trades at a P/E of 15x, nearly one standard deviation above its 15-year average.
• Relative to the STOXX Europe 600 index, the Japanese market trades at a valuation roughly 1.5x higher, yet its ROE is nearly 5 percentage points lower.
• The author believes that while market breadth still offers opportunities, the overall market appears expensive, making it more difficult to find interesting investments.

4. Portfolio Quality Improvement and Changing Sources of Risk

Oakmark addresses questions about the improvement in portfolio quality. The author notes that since June 2025, several quality metrics for the portfolio (such as profitability, earnings stability, and leverage) have improved significantly relative to the MSCI World ex USA Index. Specifically, profitability and earnings volatility have shifted from being inferior to the index to being superior, while leverage has moved from being higher than the index to being roughly in line with it.

Changing Sources of Risk

• The portfolio's active risk (tracking error) is increasingly coming from stock selection rather than factor exposures.
• Since June 2025, idiosyncratic stock-specific tracking error has increased by 24%, while factor tracking error has risen by only 9%. This indicates that the portfolio's active risk is becoming more driven by individual stock selection.

This concludes the interpretation of the subsequent content from the "Introduction" chapter of the Oakmark 3Q 2026 International Equity Market Commentary.

Portfolio Quality Improvement and Valuation Discount

Oakmark states that while adjusting the portfolio, its value discipline has not been relaxed. Current holdings exhibit higher earnings growth and return on equity (ROE), while still trading at a significant discount.

• Earnings Growth and Returns: The Oakmark International Fund's earnings per share (EPS) growth is 20.0%, significantly higher than the MSCI World ex USA Index's 9.3% and the MSCI World ex USA Value Index's 5.6%. Its ROE is 14.5%, above the Value Index's 12.7% but slightly below the broad Index's 14.9%.
• Valuation Discount: Despite superior fundamentals, the fund trades at a P/E of 13.2x, lower than the broad Index's 14.8x but higher than the Value Index's 12.4x. The author emphasizes that the portfolio's holdings trade at a 15% discount to the MSCI World ex USA Value Index based on free cash flow valuation.

Key Statistics Comparison (as of September 30, 2026)

Metric	Oakmark International Fund	MSCI World ex USA Index	MSCI World ex USA Value Index
Number of Holdings	59	736	435
Weighted Average Market Cap	$72.8B	$122.3B	$110.9B
Price/Earnings (P/E)	13.2x	14.8x	12.4x
Price/Book (P/B)	1.9x	2.1x	1.6x
Return on Equity (ROE)	14.5%	14.9%	12.7%
Earnings Growth (EPS Growth)	20.0%	9.3%	5.6%
Emerging Markets Allocation	8.7%	0.0%	0.0%

Quality Factor Exposure Change (June 30, 2025 vs. September 30, 2026)

Factor	2025/6/30	2026/9/30	Change	Description
Profitability	-0.16	+0.05	+0.21	Holdings are more profitable relative to the benchmark
Low Leverage	-0.19	-0.01	+0.18	Holdings' leverage is roughly in line with the benchmark
Low Earnings Variability	-0.02	+0.18	+0.20	Holdings' sales, earnings, and cash flows are more stable than the benchmark
Investment Quality	+0.13	+0.13	---	Composite of asset, capex, and net issuance growth
Earnings Quality	+0.13	+0.03	-0.10	Earnings quality based on cash earnings and accruals
Net Active Quality Exposure	-0.11	+0.37	+0.48	Rose from a 15-month low to a 15-month high, a change roughly 17 times the standard deviation of weekly changes

Increased New Idea Activity

The rate of new idea generation by the Oakmark team has accelerated significantly. From 2022 to 2024, the team generated an average of 18 new ideas per year. This number increased to 36 in 2025, and in the first three quarters of 2026, the team has already generated 30 ideas.

The author believes that more ideas provide more options for portfolio optimization. Each new idea competes for capital with existing holdings, which can both create new buying opportunities and raise the bar for retaining current positions. The author emphasizes that increased activity does not mean lowering stock selection standards.

Investment Decision Review: Cases of Selling and Holding

When holdings underperform expectations, Oakmark re-examines the investment thesis and makes decisions based on the latest information. Below are several recent cases with different outcomes.

Sell Cases

• OpenText: A Canadian enterprise software company. Following an analyst change, a new assessment identified issues with the product cycle, underinvestment, and the potential need for significant margin adjustments to restore competitiveness. The team concluded that the structural competitive challenges facing the company were more severe than anticipated and liquidated the position.
• Worldline and WPP: Due to continued fundamental deterioration, the team's research lowered their conviction, leading to sales.

Since Oakmark sold, the share prices (in local currency) of OpenText, Worldline, and WPP have fallen by approximately -19%, -50%, and -5%, respectively. The author notes that while short-term price movements do not determine the correctness of an investment decision, avoiding these subsequent declines was beneficial for fund performance.

Hold Case

• Edenred: This company underwent a formal review through the "Devil's Advocate" process. Although regulatory changes affected the economics of part of its business, the team believed that most of the impact was already reflected in the valuation and that its underlying growth characteristics remained attractive, so they decided to hold. Since the review, its share price (in local currency) has risen by 13%.
• Bayer: Also underwent a formal challenge. When the share price approached €20, the team reassessed key risks such as litigation, business quality, and execution. They concluded that the underlying value and potential for operational improvement still existed and chose to hold. Subsequently, litigation risks declined, the pharmaceutical business improved, and signs of self-help emerged in the crop science business, with the share price rising to approximately €48.

The author concludes that the common thread in these cases is not whether the final decision was to buy, sell, or hold, but that when facts change, the team re-evaluates the investment based on current information.