Fund manager Q&A: Oakmark's David Herro talks patience

AP News
|
Posted: Oct 22, 2015 2:59 PM

NEW YORK (AP) — For more than two decades, fund manager David Herro never owned a Chinese stock in his Oakmark International fund.

Until now. Stock prices in China tanked through the summer on worries that its economic growth is slumping even more than feared. That has Herro, whom Morningstar named as its fund manager of the decade in 2010 for foreign stocks, sensing a bargain.

He bought shares of Baidu, the Chinese search engine, last quarter. And he's prepared to wait for its price to turn around. He's making a similar leap with other beaten-down stocks, such as the mining giant Glencore, whose London-listed shares are down about 60 percent this year.

Such investments mean the Oakmark International fund has lost 1 percent this year, putting it close to the bottom quarter of its category. But its 10-year returns remain in the top 5 percent. Herro spoke recently about the value of waiting when it comes to stock investing. Answers have been edited for clarity.

Q: You added a Chinese and an Indonesian stock last quarter. Are you seeing more value in emerging-market stocks generally?

A: We are, finally. Three or four years ago, we had zero. If we back up to 1998 or 1999, during the Asian financial crisis, we had 25 or 26 percent of the portfolio in emerging markets. We built up a huge position, and we benefited greatly from that the whole next decade. It was the gift that kept giving.

But then the wall of money started moving into emerging markets. And when the wall of money moves in faster than companies create value, prices get stretched. And that's exactly what happened. By the end of the last decade, prices were starting to get stretched. So, by the middle of this decade, we had little to no emerging markets exposure. Now we're finally starting to see that come full circle again.

Not only are we able to get companies at good valuations, some of these emerging-market currencies are undervalued. The Indonesian rupiah is back to where it was in the Asian financial crisis, and the Indonesian economy is on much better footing than then. We didn't buy Bank Mandiri because of the currency, but that will provide us with a little bit of a tail wind.

Q: Should we expect the fund to get back to 25 percent invested in emerging markets?

A: No, no, no. It could come up to 10 or 15 percent, if prices are there. But we'll try to cap it there because, nowadays, people use managers (who are dedicated to emerging markets). And we don't bill ourselves as an emerging-market manager. We bill ourselves as an opportunist.

Q: The top-performing stock in your fund has been an Italian bank, which earlier lost more than 30 percent in both 2010 and 2011. Do you find that people are more or less willing to wait for a stock to rebound?

A: I don't think it's any different from 50 years ago, 10 years ago, one year ago. People are impatient, and I thank God every morning for it.

When I went to school, I thought I was going to be an economics professor. I never finished my doctorate. I left with my master's, and I thought if I can't deliver over five years, I'm going to go finish a doctorate and teach economics somewhere. I never had to do that, thankfully, and the reason is we can use long-term patience as an exploitable difference.

That might mean being early on a Bank Mandiri or a Baidu or a Glencore. But we think there's so much value there that it's worth it over the medium and long term. We're willing to take the short-term lumps.

Q: Is the definition of "patience" changing? Are you holding onto stocks longer than you did before?

A: We've been fairly consistent. In volatile markets, turnover will pick up a bit, but generally our natural portfolio turnover is 25 to 30 percent. (That means the fund is holding onto a stock for an average of three to four years.)

Be patient. Stock prices move a lot more rapidly than the underlying intrinsic values of their companies. Only be concerned about the value of the business and not the price of the business. On any given day, a stock price can move zero to 10 percent. And the value of the business is not wobbling by zero to 10 percent.

Q: Conventional wisdom says foreign stocks are cheaper than the U.S. market. True?

A: Foreign stocks still trade at a little bit of a discount as an asset class to U.S. stocks, on a normalized earnings basis. I would argue that there should be some discount, because the return structure of U.S. companies tends to be higher than foreign companies, but the current 20 to 25 percent discount is perhaps a bit large.