Quick Take: Just as American tourists shop for clothing, leather goods and other products when they are cheaper overseas, David Herro looks for bargain-priced stocks around the world.
Herro, who has managed the Oakmark International Fund/I (OAKIX) since its inception in 1992, keeps an eye out for stocks priced well below what he thinks a company is actually worth. To make it into the portfolio, a company also has to increase its free cash flow over time.
The International fund, which buys large and mid-sized companies, was down 16% this year through September, while the average international stock fund lost 20.7%. Over the long-term, the fund has a more impressive record, however. Oakmark International returned 8.9% on average for the ten years ended last month, compared to its peers, which gained 4.2%.
Herro also pilots the Oakmark International Small Cap Fund/I (OAKEX), which invests is smaller companies than the International fund. However, that fund is currently closed to new investors.
The Full Interview:
David Herro concedes that stock exchanges in Europe and Japan have tended to move in the same direction as those in the United States over the last few years.
So why should American investors look beyond their own borders? Herro says the question should be: Why limit yourself to just one country?
“There’s a huge market out there,” the fund manager says. “Over half the world’s equities are located outside the U.S. We think it’s very important to expose yourself to these potentially very good investments.”
Herro, who prizes inexpensive shares, adds that foreign stocks currently look better than domestic ones in terms of valuations and dividend yields.
In picking stocks, Herro focuses on those trading at a discount to a company’s estimated intrinsic value. Next, he wants enterprises that generate loads of free cash and that use it in ways to benefit the business and shareholders, such as reducing debt. Herro also prefers companies that dominate their markets, or are the lowest-cost producer in their industry, since this can enable them to raise prices.
As an example of the kind of stock he likes, Herro cites Chargeurs SA, a French textile company that is a long-time holding in the Oakmark International fund. Although Chargeurs’ top and bottom lines don’t grow very much, the company continually increases its margins and cash flow, he says.
A new addition to the portfolio is Credit Suisse Group ADS (CSR), a global financial services company Herro began buying this month because it seemed attractively priced. The stock had been trading for about 60% of its book value, according to Herro. He also likes its banking business, which he describes as “basically a money machine.”