When commodity prices cratered in 2014 and 2015, the share price of Anglo-Swiss commodity miner and trader Glencore (GLCNF) plunged. Investors fretted over the falling prices of Glencore’s assets, particularly its copper hoard, and over the firm’s $30 billion in debt. Glencore’s managers took desperate measures, eliminating the dividend and selling $2 billion in assets and $2.5 billion in stock.
While the bears were growling, David Herro, the lead manager of Oakmark International (OAKIX), spotted a bargain. He loaded up on Glencore in the spring of 2015, then watched as the stock sunk another 30%, making it the largest detractor from the fund’s performance for the 12 months ending Sept. 30, 2015, a span in which Glencore lost 70% of its share price.
But since the bottom, the stock has more than quadrupled, and Herro has earned 300% on his initial investment. Dividend payments are slated to resume this year. Glencore is now the fund’s largest holding.
It’s all in a day’s work for Herro, 56, who has been lead manager of the fund since its inception in 1992. He uses a variety of tools to measure the “intrinsic value” of a stock, taking into account a company’s assets and profitability as well as its prospects, and then looks for high-quality firms trading at yawning discounts to that value. That often means buying into troubled companies or industries.
It’s a strategy that clearly works. Over the past 10 years through April 3, the fund returned an annualized 4.5%—an average of 3.2 percentage points per year better than the fund’s benchmark, the MSCI All-Country World Index, ex USA. The fund ranks ahead of 96% of diversified foreign stock funds during that stretch.
Herro currently is finding value in Europe, especially in European banks, as well as European industrials and commodity producers. Indeed, Herro has 73% of the fund in Europe (including the United Kingdom), roughly 25 percentage points more than the MSCI index. “The industrials and materials are good values,” Herro says. “And the financials are cheap, and they haven’t moved much.” Financial services firms he owns that he’d recommend today (trading here as American depositary receipts) include Lloyds Banking Group (symbol LYG, $3), BNP Paribas (BNPQY, $33) and Allianz (AZSEY, $18).
That’s not to say that Europe isn’t facing huge challenges. You can’t read the news today without seeing a story about the retreat from globalism in the U.S. and Europe—with the election of Donald Trump, Great Britain’s decision to leave the European Union, and the upcoming French presidential election, which a right-wing nationalist could win. The sentiment threatens the continued existence of the EU.
But Herro is confident that voters won’t let the EU splinter into pieces, partly because if it did, most countries would lose their extremely low interest rates, hurting borrowers. Without the EU, lenders to economically weaker nations would demand sharply higher yields, which in turn would slow growth.
The fund is loaded with economy-sensitive financials, industrials and consumer stocks. That amounts to a big wager on the EU holding together, albeit without Britain, and growing more rapidly than the consensus predicts.
That’s not Herro’s only contrarian view. He’s one of a minority of analysts who think the dollar is near a peak. The dollar, he says, “is noticeably overvalued. I’d rather be an investor in these non-dollar currencies.”
Herro won’t invest in Russia because of its lack of a free-market economy. He has just 2% of assets invested in China because he dislikes the lack of transparency and the government’s meddling. “Until the Chinese learn to keep their paws off the companies, it’s not so attractive,” he says. For that matter, Herro finds little to like today in most other emerging markets. But he doesn’t let his big-picture views stop him from finding promising investments. He’s bearish on Japan overall, for example, but likes both Toyota (TM, $109) and Honda Motor (HMC, $30).
Herro offers a consistent lesson to individual investors: Focus on value instead of hot performers. “People look in the rearview mirror instead of saying, ‘I want to buy something cheap and sell it dear.’ ”
As much as I admire Herro and Oakmark in general, there are a few flaws. The 1.0% expense ratio is too high given its $29.6 billion in assets and increasing competition from lower-priced exchange-traded funds.
And the fund is volatile. Over the past three years, it was 24% more volatile than the MSCI index. That’s a function of Herro’s appetite for deeply undervalued stocks, which can move erratically.
Investors might worry about the impact of comanager Robert Taylor’s departure last year after eight years at the fund. Michael Manelli replaced him. The change doesn’t bother me; Herro’s investment style plainly permeates the fund.
To investors attracted to his fund, my advice is simple: If you buy, plan to hold on through the bad times. If you do, I’m confident you’ll be well rewarded.
Steve Goldberg is an investment adviser in the Washington, D.C., area.
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