Betting on Today's Losers
International Fund Manager Steers Clear of World's Current Success Stories
By Steven Mufson
Sunday, February 14, 1999; Page H03
David G. Herro, director of international equities for Chicago-based Harris Associates and a childhood fan of the TV game show "Let's Make a Deal," likes to compare three stock market choices that investors can make, each one worth about $20 billion.
"Behind door number one," he says, "you have Amazon.com, which doesn't generate a profit and maybe never will. Behind door number two, you have every phone company, every cell phone, every fixed telephone line in Brazil, the eighth-largest economy in the world. Behind door number three, you have the entire New Zealand stock market."
For Herro, the choice is clear. Anything but door number one. "If you take door number one, you're not buying as an owner. You're buying as a speculator," he says.
Herro, who co-manages both the Oakmark International and the Oakmark International Small Cap funds, believes that investors can find better value in many of the world's battered international markets than they can in the richly valued markets in the United States and Europe. His biggest holdings are in Latin America; Asia outside Japan; and Britain. Rather than fleeing from emerging markets, Herro says he is looking to add to "holdings in businesses that are good and able to withstand the shock" of devaluations, deflation and recession.
Unfortunately for Herro and his clients, the strategy has yet to pay off. Over the past year, an investor would have been far better off with Amazon.com, which rocketed up tenfold in 1998, than with Oakmark International, whose value dropped 7.01 percent in 1998 even after a strong recovery in the fourth quarter.
Other international funds have also outperformed Oakmark's by placing more of their money in European equities. The Morgan Stanley international stock index, excluding the United States, rose 18.76 percent. Oakmark International, by far the larger of the two Oakmark funds, was fourth from last in its category of funds last year.
"The average international fund is a European fund. We were in other areas, which were trampled," Herro says.
Herro says he remains convinced his strategy eventually will pay off, so convinced that he says he has about 70 percent of his net worth in the two funds. He poured more of his money into the funds when other investors were pulling out $300 million to $400 million last year. "My partner and I took every penny we had [and invested in the fund] because we didn't want to sell stocks at such low prices," he says.
Now the money has stopped flowing out of the two funds, and Herro believes they are poised for a comeback. Oakmark International had $740 million in assets at the end of 1998 and Oakmark International Small Cap had $64 million. At one point, the Oakmark International fund had $1.8 billion in assets.
"Emerging markets are the forgotten place to invest. We've gone from people advising investors to put 10 percent of their money in emerging markets to people saying now you should have nothing there," Herro says. He argues, however, that the values there are better than ever.
"We look kind of silly now, but as the years go on, I don't imagine that the average international fund will have 85 percent of its money in Europe, and that money has to go somewhere," Herro says. Asian and Latin American markets "are small markets and when the money goes into them I imagine we'll benefit nicely."
He believes Asian economies will solve their macro-economic problems and emerge from their slumps as highly competitive nations. "They will compete with the U.S., they will chew up the Europeans and spit them out while Europe argues about 35 work weeks," Herro says.
What does he like?
In South Korea, Herro says Oakmark is avoiding the big conglomerates known as chaebols, which remain heavily in debt. He prefers mid-sized companies such as Woon Jin Publishing, a textbook publisher whose sales have been growing 10 percent to 12 percent a year. The company had strayed--unsuccessfully--from its core business, but management has learned its lesson, Herro says. He also invested in South Korea's Hite Brewery, which has 55 percent of the South Korean beer market and at one point had a market capitalization that dwindled to $40 million. "That's like 10 Anheuser-Busch [Cos.] commercials," Herro says.
In Brazil, Herro likes Embraer Aircraft Corp., a maker of 100- to 125-seat airplanes. Relatively free of foreign debt, its costs have dropped as the Brazilian currency has sagged. "If I were Bombardier [Inc.], I'd be worried," he says.
He also likes the Sao Paolo cellular telephone company. He says it will grow at a rate of 30 percent or more for the next 10 years and sells for 3 1/2 times cash flow, a fraction of comparable American firms. "Yes, Brazil deserves a bit of a discount, but that much?" he asks.
He has made mistakes, of course. One mistake: "We've been a bit early" to invest in Asian markets. |
