Investors should approach Japanese stocks with care, says David Herro, chief investment officer of international equities at Harris Associates. "There are still unique problems in Japan, which should give investors cause for concern," says Herro, who spoke in late June at the Morningstar Investment Conference, in Chicago. "Corporate Japan is still struggling with the premise that the primary purpose of a company is to make money for its shareholders."
When Herro speaks, it pays to pay attention. He manages Oakmark International (symbol OAKIX), a member of the Kiplinger 25, and Oakmark International Small Cap (OAKEX). Over the past ten years through June 30, Oakmark International returned 11.5% annualized, placing it in the top 30% of value-oriented, large-company overseas funds. International Small Cap returned 15.4% annualized over the past decade, also in the top 30% of its category (funds that invest in undervalued small and midsize foreign companies). Small Cap is closed to new investors.
Herro points out that the return on equity (ROE) -- a measure of profitability -- for the average Japanese company is 7% to 8%, or "about half of what we're seeing in the U.S." He notes, for example, that executives at Toyota Motor (TM) aim to generate an ROE of 10%. "Why not shoot for the 16% to 18% ROE that many U.S. companies generate?" he asks.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
This isn't a new issue for Herro. In his funds' first-quarter commentary, he wrote of the difficulty he has finding attractive, bargain-priced Japanese stocks. "Generally speaking, the shareholders do not appear to be a high-ranking constituency in the eyes of corporate Japan." Both funds recently had about 13% of their assets invested in Japanese companies (the MSCI EAFE index, a widely followed barometer of overseas stocks, has 21.5% in Japan).
When searching for Japanese stocks, Herro says, he looks for companies that trade at a discount to what he thinks they're worth and are run by managers who place a high priority on building shareholder value. Among his favorites are Rohm, a Kyoto-based semiconductor manufacturer, and auto maker Honda (HMC). "The biggest plus [for Japan] right now is that there's so much that can be done, if only it were allowed to happen," Herro says. The minus, he adds, is that the Japanese are slow to change.
Herro has about 70% of Oakmark International's assets and 60% of International Small Cap's assets in European stocks, but he's not pounding the table for Europe. "As we sit here today, I'm less enthused about European equities," he says. "Those tailwinds we've had for the last five or six years are diminishing."
-
What Is a Qualified Charitable Distribution (QCD)?Tax Breaks A QCD can lower your tax bill while meeting your charitable giving goals in retirement. Here’s how.
-
Embracing Generative AI for Financial SuccessGenerative AI has the potential to reshape how we approach learning about and managing our personal finances.
-
The 5 Best Actively Managed Fidelity Funds to Buy Nowmutual funds In a stock picker's market, it's sometimes best to leave the driving to the pros. These Fidelity funds provide investors solid active management at low costs.
-
The 12 Best Bear Market ETFs to Buy NowETFs Investors who are fearful about the more uncertainty in the new year can find plenty of protection among these bear market ETFs.
-
Don't Give Up on the Eurozonemutual funds As Europe’s economy (and stock markets) wobble, Janus Henderson European Focus Fund (HFETX) keeps its footing with a focus on large Europe-based multinationals.
-
Best Bond Funds to BuyInvesting for Income The best bond funds provide investors with income and stability – and are worthy additions to any well-balanced portfolio.
-
Vanguard Global ESG Select Stock Profits from ESG Leadersmutual funds Vanguard Global ESG Select Stock (VEIGX) favors firms with high standards for their businesses.
-
Kip ETF 20: What's In, What's Out and WhyKip ETF 20 The broad market has taken a major hit so far in 2022, sparking some tactical changes to Kiplinger's lineup of the best low-cost ETFs.
-
ETFs Are Now Mainstream. Here's Why They're So Appealing.Investing for Income ETFs offer investors broad diversification to their portfolios and at low costs to boot.
-
Do You Have Gun Stocks in Your Funds?ESG Investors looking to make changes amid gun violence can easily divest from gun stocks ... though it's trickier if they own them through funds.
