Change and Continuity at Oakmark International

Volatility in the global financial markets and a broad-based flight from actively managed funds have had a widespread impact. The latest result: The reopening of three Oakmark funds to all investors.

On July 29, Harris Associates, the advisor to Oakmark Funds,

that

David Herro, manager of Oakmark International and Oakmark International Small Cap, said in a statement that opportunities in the markets made this a good time to reopen, along with the desire to offset outflows with new inflows.

At the same time, Harris announced that Rob Taylor, a manager on Oakmark International and Oakmark Global, will retire at the end of September.

Oakmark International The biggest of the three funds to reopen, by far, is Oakmark International. In brief, the opening of its doors to all investors should not be considered as either a negative or a positive overall. One might wonder why it reopened. At $23 billion in assets, it is not a small fund, especially when compared with its own history. As recently as early 2009, it had less than $3 billion in its coffers. However, the fund is substantially less bulky now than it was in mid-2014, when it had more than $32 billion. The sharpest increase in assets came in 2013, owing to both capital gains and a huge amount of inflows.

While the fund is already a major shareholder of some of the companies at the top of its portfolio, Herro thinks there are still opportunities available in the markets. In fact, he believes that such opportunities became even more numerous in the wake of the shock over Britain's vote to leave the European Union.

The fund's performance has lagged in the past year, which--given the fact that the fund is still much bigger than it was in 2009--could offer another reason to wonder if it needs more money right now. However, it's not likely that the fund's size caused problems on the performance side. Rather, Herro's belief that a number of European banks and insurers have offered great values has stung the fund as their share prices have fallen precipitously.

Moreover, while it might seem that a fund with $23 billion should not feel the need for more cash, any time a fund is suffering net redemptions the portfolio does become more difficult to manage. Raising cash to pay off departing investors can become a priority, or at least a distraction, rather than the manager focusing purely on the investment merits of the names in the portfolio or those waiting to be added. Herro notes as much in the press release, saying that "restoring the balance between purchases and sales" is as much a reason for reopening the fund to intermediaries as is the fact that he's "excited" about the opportunities in the market.

In his second-quarter commentary, Herro explains why he's attracted to European financials, even as so many factors seem to be conspiring against them, including very low (or negative) interest rates, sluggish economic growth, the uncertainties of the fallout from Britain's vote to leave the European Union, and tighter regulation. One can agree or disagree with his reasoning, but the argument does help explain why he thinks that now is a time to be buying rather than selling. Having more inflows entering the fund would ease that process.

Longtime Oakmark Fixture to Depart In addition to Oakmark International's reopening, Harris Associates also revealed that Herro's comanager on that fund, Rob Taylor, will retire from the firm on or about Sept. 30, 2016. Taylor, who joined Harris in 1994, has been managing this fund with Herro since 2008. (He has been comanaging Oakmark Global with Clyde McGregor since 2005). While the funds he has comanaged will continue to have more-than-capable managers in charge of them, the departure of such an experienced manager can't be seen as a positive development for Harris.

Harris says it has no immediate plans to appoint a replacement for Taylor as Herro's comanager on Oakmark International. Should that be a concern? Covering the entire world outside the United States is a daunting task, and Herro also makes decisions on which currencies to hedge and in what amounts. And, in addition to Oakmark International, Herro also manages Oakmark International Small Cap (with Michael Manelli) and

Herro does have a team of eight internationally focused portfolio managers and analysts to work with. But that team has had a lot of turnover through the years--though the current crew has been with the firm for an average of roughly seven years.

Regardless, Herro should be well equipped to continue leading Oakmark International successfully over time. He has worked with a variety of analysts over the years (many of whom ended up successfully managing international funds at other firms), and recent struggles aside, the fund has performed very strongly throughout. It lands in the top decile of the foreign large-blend Morningstar Category over the trailing 10- and 15-year periods through Aug. 5, 2016.

Even so, Herro's workload post-Taylor will pose a challenge. Even though he won't have to research different stocks for Oakmark Global Select or Oakmark Global than those he's already looking at, he still has to make decisions for those portfolios that are different in nature or degree. For that reason, it would not be surprising to see Harris appoint someone to share the load on at least one of those assignments at some point down the road.