David Herro, whose Asian stock-market investments helped the Oakmark International Fund outperform most of its peers since 1999, is putting...
David Herro, whose Asian stock-market investments helped the Oakmark International Fund outperform most of its peers since 1999, is putting the majority of his fund’s money in Europe.
“We’re seeing the best returns there,” Herro said. Asia “isn’t as cheap as it used to be.”
Herro has about four-fifths of the fund’s $4.8 billion invested in European companies including Vodafone Group and Lloyds TSB Group, up from 41 percent five years ago. It’s the fund’s biggest allocation to Europe since it opened in 1992.
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The Oakmark mutual fund rose at an average annual pace of 10 percent in the past five years, ranking 17th of 57 similarly managed “multi-cap value” stock funds tracked by Bloomberg.
It climbed 19 percent last year, trailing the 31 percent advance of the top-performing Royce Value Plus Fund.
Herro and co-manager Michael Welsh have bought 33 million shares of Vodafone, the world’s largest wireless telephone company by sales, and 12 million shares of Lloyds TSB, the U.K. No. 5 bank by assets, since last June.
London-based Lloyds TSB is paying above-average dividends and Vodafone of Newbury, England, doubled its six-month payout in November.
The Oakmark fund started purchasing shares of Lloyds TSB in the third quarter, when they were trading at less than 10 times earnings, Herro said. Lloyds TSB’s stock has gained 16 percent since then and now trades at about 12 times what analysts expect the company to earn this year.
Shares of Vodafone, which the Oakmark fund bought for less than eight times 2005 earnings before interest and taxes, has climbed 14 percent since the end of June.
The company last year also extended a stock buyback by 1 billion pounds ($1.9 billion).
Going with bargains
Herro “goes with where the bargains are and it serves the fund well over the long run,” said Bill Rocco, an analyst at Morningstar, a Chicago-based mutual-fund research firm.
The MSCI Europe Index, a stock-market benchmark, trades at an average 16 times profits with a dividend yield of 2.8 percent.
By contrast, Asia’s biggest companies, as measured by the MSCI Asia-Pacific Index, have a price-to-earnings multiple of 21 and a yield of 1.8 percent, according to Bloomberg data.
“Europe looks very attractive,” said Herro, who started managing stock portfolios in 1986 and today oversees about $15 billion as chief investment officer of international equities at Harris Associates. In Asia, some “stocks have got ahead of themselves,” he said.
The MSCI Asia-Pacific Index rose 16 percent last year, outpacing the 9.4 percent advance of the MSCI Europe Index.
The 12-nation euro region’s economy will grow 2.2 percent this year, trailing the 6.5 percent growth of emerging Asia, according to a forecast by the International Monetary Fund in Washington.
Outlook for Asia
Kurt Umbarger, a money manager at T. Rowe Price Group in Baltimore, said the economic outlook for Asia warrants the higher valuations. He favors the region’s financial stocks.
“Asia remains robust relative to other parts of the world,” said Umbarger, whose firm oversees $21 billion internationally.
“That gives us encouragement Asia can make progress in 2005.”
Herro and Welsh use a value approach to find companies whose share prices they think are cheap relative to estimated cash flow, earnings or enterprise value, the price that a potential buyer would pay to acquire a business. Their fund owns no more than 60 companies and tends to hold each stock for at least three years.
The managers “aren’t afraid of building big positions,” Morningstar’s Rocco said. “Their willingness to load up a lot of bargains in a particular sector or region can backfire.”
Value analysis led Herro to seek bigger returns outside Europe in the 1990s.
The fund suffered losses in 1994, when a devaluation of the Mexican peso roiled Latin America.
It lagged again during 1997 and 1998, when currencies plunged across Asia.
“People thought we were crazy at that time for owning so much in Asia,” said Herro, who has a master’s degree in economics from the University of Wisconsin in Milwaukee. “Certainly it paid off.”
GlaxoSmithKline, Europe’s biggest drugmaker, was the Oakmark fund’s largest holding, accounting for 3.6 percent of the fund’s assets on Dec. 31.
Takeda Pharmaceutical, Japan’s largest, and Novartis, the biggest in Switzerland, made up a combined 5.5 percent.
Drug stocks were among the worst performers in 2004 after Merck’s withdrawal of Vioxx spurred industrywide safety concerns.
The Bloomberg World Pharmaceuticals Index, which includes 41 companies, declined 3.5 percent last year.
Herro said he’s sticking to the holdings.
The companies “have a good stream of free cash, and management teams that use that cash wisely to deliver shareholder value,” he said.
Glaxo has spent 1.95 billion pounds repurchasing shares since 2002.
Takeda pledged to allocate more of its earnings to pay dividends. Novartis, based in Basel, Switzerland, has announced plans to use its more than $13 billion of cash to buy back stock.
“All the bad news is in the stocks and none of the good news is,” Herro said. “As value investors, we’re trying to buy good-quality businesses at low prices.”