Embracing Value: A New Dawn for International Equities

Strong Quarterly Performance: A Testament to Value-Oriented Strategies

The second quarter of 2025 proved highly successful for both the Oakmark International Fund and the Oakmark International Small Cap Fund. The International Small Cap Fund delivered an impressive 16.99% return, marginally surpassing the MSCI World ex USA Small Cap Index's 16.82%. Similarly, the International Fund posted a solid 12.64% gain, outperforming the MSCI World ex USA Index, which rose by 12.05%. These results highlight the effectiveness of Oakmark's investment approach in the current market environment.

The Resurgence of Fundamentals: A Paradigm Shift Beyond US Borders

For over a decade, value investors, particularly those focused on international markets, observed as US growth and momentum stocks dominated. However, this trend, fueled by weak foreign currencies and escalating US growth valuations, appears to be unwinding. Recent shifts indicate a weakening US dollar and a moderation in the valuations of US growth and momentum equities. Concurrently, European equities, identified as undervalued, are demonstrating improving fundamentals, attracting renewed investor interest. This reversal validates Oakmark's long-held belief in the eventual return to fundamental valuation, suggesting that current market conditions offer substantial opportunities given the persistent valuation disparities.

Leadership Evolution: Preserving a Legacy of Excellence

Harris | Oakmark announced the departure of Mike Manelli, a distinguished veteran who co-managed the Oakmark Funds. His significant contributions as an analyst, investor, and partner, alongside his unwavering client focus, will be greatly missed. His successor, Tony Coniaris, the firm's Chairman and an experienced portfolio manager, will step into Mike's role as co-manager of the Oakmark International Fund and co-CIO of international equities. Tony's extensive background and leadership qualities ensure a seamless transition, reinforcing the firm's ability to maintain its rigorous investment philosophy and high standards of client service. This planned transition underscores the depth of talent within Harris | Oakmark, guaranteeing continued excellence in portfolio management and client advocacy.

STMicroelectronics (STM) stands out as a fundamentally strong and vertically integrated leader in the semiconductor industry. The company is strategically aligned with burgeoning growth sectors, including vehicle electrification, industrial automation, and cutting-edge artificial intelligence applications. Despite recent shifts in revenue and the inherent cyclical nature of the semiconductor market, STM demonstrates a formidable competitive advantage, rigorous cost management, and a track record of generating returns that significantly surpass its capital costs. A thorough valuation assessment indicates a substantial margin of safety for investors, predicated on expected enhancements in profit margins, operational efficiencies, and a higher rate of reinvestment in the business, rather than relying on aggressive top-line growth forecasts. Consequently, STM presents a compelling long-term investment opportunity for those confident in an impending recovery across its core markets.

The company's strategic focus on high-growth areas such as smart mobility, power and energy management, and IoT & AI positions it favorably for sustained future expansion. STMicroelectronics’ commitment to innovation, coupled with its robust manufacturing capabilities and broad product portfolio, underscores its ability to navigate market challenges and capitalize on emerging trends. The firm’s prudent financial management and operational discipline further reinforce its investment appeal, suggesting that even with current market headwinds, its intrinsic value remains strong. Investors looking for a solid long-term play in the technology sector, particularly in semiconductors, should consider STM’s enduring strengths and promising outlook for appreciation.

Strategic Market Positioning and Growth Prospects

STMicroelectronics is poised for substantial long-term growth, leveraging its strong market position in critical, evolving technological landscapes. The company's comprehensive portfolio and vertically integrated operational model enable it to capture significant value from the accelerating trends in vehicle electrification, industrial automation, and advanced artificial intelligence. This strategic alignment ensures STM's relevance and demand across diverse applications, from intelligent power and sensing technologies to embedded processing solutions. Furthermore, its continuous investment in research and development, particularly in innovative technologies like silicon carbide (SiC) and gallium nitride (GaN), reinforces its technological leadership and competitive moat. This forward-looking approach allows STM to not only adapt to technological shifts but also to drive them, securing its place at the forefront of the next wave of industrial and consumer innovation. By focusing on these high-growth areas, STMicroelectronics mitigates the impact of broader market volatility and establishes a pathway for sustainable expansion.

The company's strategic focus extends beyond merely producing components; it involves enabling complex systems that power the future. In the realm of automotive electrification, STM provides essential semiconductors for electric powertrains, battery management systems, and advanced driver-assistance systems (ADAS), which are integral to the global transition towards sustainable transportation. Similarly, its contributions to industrial automation are pivotal, offering solutions that enhance efficiency, connectivity, and intelligence in manufacturing and smart factory environments. The burgeoning field of edge AI, where processing happens closer to the data source, also presents a massive opportunity for STM, as its microcontrollers and sensors are critical for embedding intelligence into a wide array of devices. This multifaceted strategy not only diversifies revenue streams but also embeds STM deeply within the foundational technologies driving global industrial and societal transformation. The synergistic effect of these market segments creates a resilient business model capable of weathering cyclical downturns and capitalizing on secular growth trends.

Robust Financial Resilience and Undervalued Potential

Despite experiencing recent revenue contractions, STMicroelectronics demonstrates remarkable financial resilience, underscored by its disciplined cost management and a track record of generating impressive returns on invested capital. This financial fortitude is a testament to the company's efficient operational structure and its ability to maintain profitability even in challenging market conditions. The current valuation suggests that the market may not be fully appreciating STM's intrinsic value, presenting a considerable margin of safety for potential investors. This undervaluation is primarily attributed to expectations of significant margin expansion and enhanced operational efficiencies rather than an aggressive reliance on rapid revenue growth. The company’s capacity to consistently deliver returns above its cost of capital highlights its effective capital allocation and strong competitive standing. For investors, this translates into a compelling opportunity to acquire a high-quality asset at an attractive price, with substantial potential for appreciation as market conditions normalize and operational improvements materialize.

The core of STM's financial strength lies in its strong competitive position, often referred to as a "moat," which allows it to sustain high returns over time. This competitive advantage stems from its technological expertise, strong customer relationships, and efficient manufacturing processes. The market's current focus on short-term revenue fluctuations may obscure the underlying long-term value drivers, such as the company's ability to control costs, optimize production, and strategically reinvest for future growth. The margin of safety identified in its valuation implies that even if revenue growth remains modest, the company's profitability and cash flow generation are set to improve, leading to an upward revision of its stock price. Furthermore, as the semiconductor industry gradually emerges from its cyclical downturn, STM is well-positioned to benefit from increased demand, translating its operational efficiencies into higher earnings and greater shareholder value. This combination of undervaluation, robust financial health, and strategic market alignment makes STMicroelectronics an attractive proposition for long-term oriented investors seeking value in the semiconductor sector.