Herro: We've Been More Active in This Market
Because prices are fluctuating as much as they have, we have been a lot more active than we normally would be, says the Oakmark International manager.
Because prices are fluctuating as much as they have, we have been a lot more active than we normally would be, says the Oakmark International manager.
Jason Stipp: I'm Jason Stipp for Morningstar.
As the third quarter comes to a close, we're checking in with some of our favorite managers to get a perspective on what's happening in the international marketplace. I am talking today with David Herro. He is a manager at Oakmark. He is also Morningstar's International Manager of the Decade, named earlier this year.
He is going to tell us a little bit about what he is seeing and where he is putting some money to work.
David, thanks so much for joining me again.
David Herro: Very, very happy to be here.
Stipp: First question for you, in a market that in a lot of respects – we've had a pretty good September – but in lot of respects the market has been somewhat sideways this year. Have you been putting money to work, what have you been finding to buy in a market that hasn't really been up big or really down big, at least, over the year-to-date, although we have seen some obviously fluctuations within that?
Herro: That's exactly right. Even though the market year-to-date hasn't seemed to move much, but during this time period, the sub period between the beginning and the end date, there has been not only a lot of movement but to some degree very violent and abrupt price movements.
Now, even though this causes someone like myself who focuses on companies, fundamentals, and bottom-up stock selection – normally our style is to invest in a good company at a low price and hang on, but when prices are fluctuating as much as they have, they cause us to be a lot more active than we normally would be. And this year's a case in point. Actually since the crisis started, we've been a lot more active, and you had to be active because of the abrupt price movement.
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As an example, by the end of 2008, you saw a very bifurcated global equity market. Everyone was hugging stability, and consumer staples, and utilities, and things they viewed as safe, and collectively everyone appeared to have left more economically sensitive names, such as the financials and consumer discretionary.
Now, of course, we tend to sometimes behave counter, because if all the money is on one side that means there is a lot of value on the other. And so as of the end of '08, we saw ourselves heavy in consumer discretionary, heavy in financials. One year later, by the end of '09, the market had already corrected quite aggressively and all the sudden that bifurcated market that I spoke about became one that was far more consistent, and we've started seeing the price of staples and utilities come in, and it gave us an opportunity to start buying staples again. But again it's not because we like to trade, it's because the volatility of the market has moved share prices so abruptly in such a short time period.
Stipp: Given that we have seen that volatility, you talked a little bit about what you were buying, have you been doing any trimming, have you seen that valuations got a little ahead of themselves in any areas, or have you been more bargain-hunting and taking positions rather than selling?
Herro: Great question, because if in the beginning of '08 we were way overweight financials, by the end of '09, we actually trimmed a lot of those financials as they got closer to their targets. So, in one year they went from being stocks that had perhaps a 150% to 200% upside to having just 50% or 60% upside. So we trimmed them, and we trimmed them in late '09 and early 2010, but then the European crisis, sovereign debt crisis, came in the second quarter of 2010, and these things headed south again.
So, stocks that we had just trimmed in the third and fourth quarter of '09, and the first quarter of '10, we started buying back in the second and third quarter of 2010, which again is very counter to our typical behavior, but when you see such dramatic price movement, in our view, not much has changed in terms of the fundamentals, we have to act. We have to continually position the portfolio such that our money is weighted in those stocks that have the highest expected rate of return.
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