By Daniel Ojeda

David Herro, Morningstar’s International Stock Fund Manager of the Decade, feels optimistic about his Oakmark International Fund this year. While maintaining its objective of long-term capital appreciation, OAKIX has continually achieved strong performance since its inception in September1992. By averaging 11% per year, it has outperformed the MSCI World ex U.S. Index which averaged 7% per year over the same period. This fund normally invests in undervalued securities in at least five countries outside of the United States. David believes that when it comes to shopping around for undervalued companies, the international marketplace provides the widest range of opportunities. He assesses the value of a company primarily on its ability to generate cash flow and also on its quality of management, market share, and degree of pricing power.What sets him apart from other managers is that he puts disciplined stock selection ahead of industry or country selection. There seems to be a common consensus among investors that growth always equals opportunity. David will argue, in fact, that the opposite is true. “It all has to do with price and valuation” one must look at individual stock valuations to get the answer. We believe it is a monumental investment error to simply put your money in those places that had a good macro economic run or impressive recent performance. He says, “The best way to navigate is to know your course ahead of time. Know the risk factors of the markets, avoid fads or trends, and never invest if there’s a lack of proper investment or regulatory infrastructure.” Going into the new decade, David Herro remains focused on doing what he does best: buying businesses when they are cheap and selling them when they become expensive. Though this is vastly different from the conventional approach of jumping into the hot sector, industry, or country, he believes that their philosophy will continue to serve their shareholders well in 2010. Some of the hot countries at the moment include emerging markets. Although David believes emerging markets will propel global economic growth, the fund does not expect to invest more than 35% of its assets in securities of companies based in emerging markets.
The fund is currently positioned with holdings in Europe (71.4%), Asia (18.4%), Latin America (3.7%), North America (3.4%), Australasia (2.9%), and the Middle East (0.2%). The three most heavily weighted sectors in the portfolio include consumer discretionary (36.4%), followed by financials (17.6%) and industrials (13.9%). The Fund has approximately 19% underlying euro exposure, 37% underlying Swiss franc exposure, and 24% underlying Japanese yen exposure hedged. One country getting a lot of attention from the fund is Japan, which has 3 companies in the fund’s top ten holdings. David believes there is opportunity in the Japanese equity market for the long-term. On a valuation basis, almost two-thirds of the Japanese stock market is trading below its book value whereas the return on those book values (ROE) is increasing, albeit from low levels. For the first time in decades in Japan, there are companies that are both low in price and are managed by people concerned with achieving acceptable returns. Expect David to keep an eye on new buying opportunities in Japan throughout 2010. Since Portfolio, LLC sees Japan as a country with few long-term economic prospects; we think investing in it needs to be done with a philosophy of deep value versus growth.

This is not a solicitation to buy or sell and is for informational purposes only.

Tags: David Herro, Internation Stock Fund Manager of the Decade, Japan, lee munson, LLC, OAKIX, Oakmark International, portfolio