Oakmark International Finds Bargains in European Stocks

David Herro has either managed or comanaged Oakmark International (OAKIX) since its launch, in September 1992. Over that nearly 25-year-long period, the fund has earned an annualized 10.1%. That beat the MSCI EAFE index, which tracks large firms in developed foreign markets, by an average of four percentage points per year. Put another way, a $10,000 investment in International at its inception would be worth $106,000 today; the same amount in an EAFE index fund would be worth $41,000.

Herro is a classic bargain hunter, an approach he learned by reading the works of Benjamin Graham, considered the father of value investing. He and comanager Michael Manelli seek firms with executives who act like owners, that generate positive free cash flow (cash earnings after capital expenditures) and that reinvest profits wisely.

The final test is price: The managers buy only if a stock sells for at least 30% below their assessment of a firm’s intrinsic value per share—what a buyer would pay to acquire the entire business. “We’re looking for companies that can create value, which I define as growth in free cash flow per share,” says Herro. “We don’t care how they do it, as long as free cash flow is rising.”

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Lately, Herro and Manelli have been finding the most-attractive prospects in Europe. Oakmark has about three-fourths of its assets there, with financial-services firms, consumer-related companies and industrial stocks representing the biggest sector weightings. At last report, the fund’s top holding was Glencore, a global mining company headquartered in Switzerland. Other large positions included the United Kingdom’s Lloyds Banking Group, German automaker Daimler and CNH Industrial, an Anglo–Dutch maker of agricultural and construction equipment.

Like nearly all actively managed funds, International occasionally suffers through poor stretches. For instance, in 2007 the fund lost 0.5%, while the EAFE index gained 11.2%. “We don’t aim to have volatile periods,” says Herro. “We aim to take advantage of volatility by buying quality at a lower price, and sometimes that results in short-term underperformance. We’re willing to take short-term pain to make long-term gains.”

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