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By Gregg Wolper | 06-19-2014 02:00 PM

Herro: Don't Look for International Fund to Reopen Soon

Unless a fragile market triggers outflows, the Oakmark International fund is likely to remain closed to retain its flexibility and concentrated portfolio, says manager David Herro.

Gregg Wolper: Hello, I'm Gregg Wolper, senior fund analyst at Morningstar.

I'm here at the Morningstar Investment Conference in Chicago with David Herro, manager of Oakmark International, Oakmark International Small Cap, and Oakmark Global Select Fund. We have a few questions for David, and I'd like to start off with the question of the closing of the fund itself.

Oakmark International Fund grew in assets over recent years, tremendously, bringing in assets from interested investors. Last year you decided to close it to new investors. What was your reasoning there, and what would it take to reopen the fund?

David Herro: The reasoning was, we are an extremely performance-driven organization. And at times if you grow too fast too quickly it may limit your ability to perform as we want to; it might limit that flexibility.

We're bounded by two conditions. One is we want to stay concentrated. We want to keep the portfolio at 50-55 stocks, the top 10 names perhaps being around 30%. And we don't want to own more than 10% of a large group of companies. So those are the two things that bind us. And as money was coming in, we wanted to slow those flows of new assets so as not to limit our flexibility, not to limit our ability to stay concentrated without having to hold large positions in companies. So that's why we did it; we want to remain flexible. We want to still be able to achieve the types of numbers we have in the past.

Wolper: And what sort of signs would you be looking for to think about reopening to new investors.

Herro: I think if the markets became extremely fragile, and we started to see outflows, and size of the fund shrunk, then we would consider reopening, but without those things happening--and by the way, I don't think they are going to happens because I think the fundamentals are pretty good. So don't look for us to open soon, but if for some reason, we had a situation like '08 and '09, in a situation like that we'd reopen the fund.

Wolper: You do a lot of traveling, a lot of talking to managements of companies, and that's something that shareholders and outside investors can't really get a handle on--what really goes on in those discussions? So could you tell us, what are you looking for in these discussions? What do you find out?

Herro: I have to tell you, Gregg, that is one of the most enjoyable, if not the most enjoyable aspect of my job--sitting down with management teams and trying to learn and understand what makes them tick.

More importantly, since we're interested in companies that could grow value per share, does that management team have the tools and the desire to be committed to value creation? That means, how and why are they earning appropriate returns, and capital allocation. What are their plans for their free cash once it's generated? And better yet, to go back and question them. We have a clear idea on what they did with the money in the past. And for the things that worked and didn't, we like to question them, understand how they think and try to get an idea about what their priorities are going forward.

Because really ultimately, what we're looking for are managements that do what we want them to do, and that's build this value per share. And in order for us to get comfortable with that company, we have to sit down and meet the managements.

So we're not interested in short-term performance, or what does their business look like for the next couple of quarters? What we are interested in is, how are you going to get good returns? How are you going to maintain good returns, and how are you going to allocate the free cash which your business generates.

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