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David Herro and Rajiv Jain: Should US Investors Look Overseas?

Two esteemed international investors discuss the case for non-US stocks as well as where they’re finding opportunities today.

Image featuring Christine Benz, host of The Longview podcast

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This podcast was recorded live at the Morningstar Investment Conference in Chiago.

And we are thrilled to have with us today two fabulous investors in global equities. David Herro is here from Harris Associates. He is a longtime portfolio manager at Oakmark International and Oakmark International Small Cap. Rajiv Jain, to David’s left, is here from GQG Partners, which he founded in 2016. Both of these gentlemen have strategies that are rated Gold by Morningstar’s Manager Research team. So, we’re really excited to have them here and to dig into international investing and the case for international investing.


David Herro Bio

Oakmark International Investor

Oakmark International Small Cap Investor

Rajiv Jain Bio

GQG Partners Global Quality Equity

GQG Partners Emerging Markets Equity

International Funds, Interest Rates, and More

Going Where the Value Is Greater: International Equities,” by David Herro,, Jan. 4, 2024.

Bloomberg Interview: Rajiv Jain Spotlights Nvidia, Discusses Elections, India’s Potential, and China,”, June 11, 2024.

Fund Manager Rajiv Jain Takes $2.8bn Bet on Middle Eastern Stocks,” by Jennifer Hughs and Brooke Masters,, Jan. 14, 2024.

The Harrowing Story of a Top Manager’s Biggest Investing Mistake,” by Gregg Wolper,, Aug. 30, 2023.

David Herro’s 1st-Quarter International Equity Market Commentary: Granolas, Japan, and Crypto—Why We Don’t Chase Momentum,” by Sydnee Gatewood,, April 9, 2024.

Billionaire Fund Manager Griffin Predicts Fed Rate Cuts in 2024,” by Dan Weil,, May 7, 2024.

Jamie Dimon—Head of US’ Largest Bank—Warns of 8% Interest Rates Along With Recession,” by Derek Saul,, April 8, 2024.


(Please stay tuned for important disclosure information at the conclusion of this episode.)

Christine Benz: Hi and welcome to The Long View podcast live from the Morningstar Investment Conference in Chicago. We’re thrilled to have you here. I’m Christine Benz. I’m director of personal finance and retirement planning for Morningstar.

Dan Lefkovitz: I’m Dan Lefkovitz, strategist for Morningstar’s Index group.

Benz: And we are thrilled to have with us today two fabulous investors in global equities. David Herro is here from Harris Associates. He is a longtime portfolio manager at Oakmark International and Oakmark International Small Cap. Rajiv Jain, to David’s left, is here from GQG Partners, which he founded in 2016. Both of these gentlemen have strategies that are rated Gold by Morningstar’s Manager Research team. So, we’re really excited to have them here and to dig into international investing and the case for international investing.

Lefkovitz: As always, please submit questions through the app. Our colleague, Andrew Daniels from Morningstar Manager Research, will be curating the topics. Good for all of you for sticking around for the last panel of the conference and on an out-of-favor asset class. So, we’ve got a lot of contrarians out there.

Benz: The session is called Should US Investors Renew Their Passports? And we want to dive right into that. I recently posed this question to some financial advisor friends. I gave them two choices and said, which of these discussions are the most difficult ones with your clients? And the first one was coaxing them out of cash and into bonds, which I think I’ve been hearing is a tough sell. And the other was keeping the faith in international investing. And to my surprise, more of them said that the international investing question was the difficult one, that their clients were feeling uneasy with international equity allocations, especially given the performance differential relative to their US equity portfolios.

So, Rajiv, let’s start with you and talk about when you’re making the elevator pitch for why people should have a globally diversified equity portfolio, what do you say? What are the main reasons to keep the faith?

Rajiv Jain: As you know, this has been an age-old question and usually happens after 10 years of underperformance of non-US. Our view is that at the end of the day, corporate earnings will drive returns and if you leave US, these cycles that happen from time to time in different markets, you actually get a reasonably diverse book of investments you can have outside the US. And over the very long run, the returns patterns are remarkably similar. So, if you’re sitting for 2000-10, you actually didn’t really make any money in the US, and then the US did very well. If you’re sitting in ‘90 to 2000, you did well in a lot of non-US So, I think these cycles come and go, but that’s the whole point of diversification is not everything should go up and down together.

Lefkovitz: David, for the past 15 years, US has outperformed ex-US I remember talking to you in 2005 or 2006. That was a very different time. As Rajiv said, it was a lost decade for US equities. Ex-US was outperforming throughout this whole 15-year run, it seems like people have said valuations are better outside of the US and yet US continues to outperform. What do you think—are the higher valuations in the US justified? Why haven’t lower valuations been a catalyst for ex-US?

David Herro: As a value investor who bases my appeal and my appetite for investing in certain stocks based on the cash flow streams and the price I have to pay for that cash flow stream. And you’re exactly right. We go through these periods where cash flow streams are more expensive or less expensive. If you look at what’s happened in the last 10 years, as Rajiv said, there’s been huge valuation compression between US and non-US stocks. It used to be the US trade at 14%, 15% premium. Today, that number is almost a 50% premium. Some of this is also driven by currency. Don’t forget the dollar bottomed in 2014. When we buy shares in a foreign company, we have to buy the local currencies. And when the currencies are expensive, as they were in 2013-14, foreign currencies were very expensive.

Now in the last 10 years, they’ve devalued. So, the owner of foreign stocks has not only faced devaluation versus the US, but currency devaluation. So, the underlying investment is now a lot less expensive than say a US counterpart. And you’re able to buy those investments using undervalued currencies. So, looking forward, you have a double positive: underpriced stocks using underpriced currencies. Unfortunately, to have gotten to this position, we’ve had to go through 10 years of pain—a headwind of share prices falling or valuations falling and currencies falling. I just personally don’t think it’s sustainable. We’re investing in financial assets. The financial assets value is based on the cash flow stream it generates. And all else equal, you want to pay a low price and not a high price for an equal cash flow stream.

So, I know it’s been tough, and it’s especially been tough if you’re a value investor. Because not only do we have the international versus US headwind that we faced, but we also have the growth versus value. So, it’s been a double headwind for us. But I say if it looks bad in the rearview mirror, the front windscreen looks really good. The last time, I think what you’re talking about was 2007. I told the crowd, you look back and you see all these double-digit returns. Don’t believe that. That’s unsustainable. Companies do not create value, generally speaking, double digits. Now when you look back and you see international, international value, you see low single digits. Don’t believe that either. That’s unreal as well. So, I actually feel really good. Though to get to this position, it hasn’t been pretty.

Benz: David, you hedge your portfolio’s currency exposure opportunistically. Can you address how you’re thinking about that today, given the long run that the dollar has had relative to major foreign currencies? How are you positioning your portfolio’s currency exposures?

Herro: What we do—this is actually what I started doing my very first job at the Principal Group in 1986—is look at fundamental currency value like purchasing power parity, come up with a certain idea on what a currency should be priced at based on long-term fundamentals. Having said that, very inexact, very inexact, but there is a tendency for currencies to drift toward their purchasing power parity level. So, what happens is, if it’s more than 20% overvalued, we’ll start hedging some of that currency back. And then as it approaches that fair value, we’re unhedged. We absolutely would rather hold an undervalued currency as much as we don’t want to hold an overvalued currency. Because it’s so inexact, we don’t start unless it’s 20%.

I told you 2014 was a year when the dollar kind of troughed. At that time, people were speaking, the dollar has lost its reserve status, the dollar is never going to go up, the euro was probably at 150. In 2011, the yen was sitting at 75 yen to the dollar. Today, we’re at 160. But when these levels are at these extremes, people think it’s going to last forever. So, our view is, to hedge when they’re really expensive, a couple of standard deviations expensive, and then hold the currency when they’re undervalued. And then when it does swing back, think of a pendulum, you’ll enjoy that currency lift as well. But we’ve suffered it for now.

Lefkovitz: Rajiv, how does currency figure into your investment calculus?

Jain: What we try to do is we incorporate that on a bottom-up level in terms of what the earnings stream would look like based on the inflation in different countries. Because we feel we don’t really add much value hedging. Being there, tried that, lost enough money, so we stopped doing that. So, we incorporate that on a bottom-up level. And we feel that over the long run, if inflation, for example, in a country is 8%, the other one is—in the US is, let’s say, 3%—over the long run, currency probably will reflect that. And we need to incorporate that in the earnings stream to adjust for that. So, we do it on a bottom-up basis.

Benz: Our team works on this paper that examines correlations among asset classes. And we’ve seen that US equity relative to non-US equity, the correlations have gone up and up and up. But when we look at the data—Rajiv, I’d like to pitch this question to you—emerging markets looks much better from the standpoint of correlations. The correlation relative to US equities is lower. Can you talk about that and how that affects your thinking on, if at all, on the role of emerging-markets equities as a component of a broadly diversified portfolio?

Jain: Yes. So, if you look at the emerging markets as such, they begin to diverge from the US Fed policy. If you look at last two years, if somebody has said that US rates are going to go from basically 0% to 5%, what would have impacted emerging markets? Nobody would have said that some of the currencies would actually appreciate and interest rates in some cases would actually be cut. So, I think some of these countries are becoming large enough where they’re less impacted by the US Fed policy.

So arguably—now there’s still a need to corporate earnings and so on and so forth. So, we don’t buy based on what diversifiers from a correlation perspective. But we do feel that a lot of countries are acting much more fiscally responsible. And the foreign-exchange setup is fine, like current account deficit, and so on. So, there’s a lot less risk on a long-term basis. And the economies are large enough. If you look at, for example, Ukraine-Russia war, the impact has been a lot more muted is because if you look at G7, that’s give and take around 35%-ish of global GDP, 65% is non-G7. If you look at market cap of emerging markets, now it’s actually larger than non-US developed. It’s around $22 trillion. India has almost $5 trillion market cap. Germany is around half of that. So, the market caps have shifted. These are large systems on their own, driving, walking to their own beat. We still don’t find good names. So that increases the opportunity set, but also diversifies better than what used to be the case.

Lefkovitz: When you talk about GDP versus equity market capitalization, the US is way out of whack, right? The US is like 25% of the global economy and 60-odd percent of the global equity market cap. David, do you see that as a concern? Do you think that that has to come into closer proportion?

Herro: I think fundamentals would say that at some point the price of the asset should match the productive prowess of the assets. And you’re exactly right, I think it’s 70% now. It’s at an all-time—the US weight in the global all-cap index is around 70%, 25% of global GDP. Now, US assets are more productive. There should be a premium. I would just argue that it’s too high. That’s too big. There’s too much money that has gone into US assets. And then when you really slice and dice it, it’s the top-quartile P/Es in particular that have attracted this massive amount of money from around the world. So, I do believe that at some point you have a form of mean reversion, which will bring this back into sync.

Benz: Going back to emerging markets, I’d like to ask each of you about China, which has gone from hot to not hot. Rajiv, you’ve invested in state-owned enterprises in China. David, I’d like to hear how each of you are approaching China, how comfortable you are with investing in China today.

Herro: Well, we just treat a company listed in China like any other company that we try to run through. Does it meet our criteria? Does it possess management teams that, what I say, have the two C’s, a capability and a commitment to build shareholder value? So, as long as there’s transparency into the financial statements, as long as we believe that the managements are working toward that objective of creating shareholder value, and as long as they sell at discounts to what we measure to be their intrinsic value, we are happy to invest there with a caveat. Because of some of the big macro concerns, there are some command structure—it’s a command economic structure—that we are not going to price, we’re not going to use as a cost of equity in China the same as Switzerland. So, in Switzerland or the US, we will use a 9% or 10% cost of equity. For China, it’s 14% or 15%. So, it has to go through a much higher valuation hurdle in order to make it into our portfolio. And then it also has to have those other standard factors we look for. For this reason, we shy away from companies that have big state ownership, because our view is the state has a different objective than—a state bank might want to keep a SOE, a state-owned enterprise, open and float them alone. Well, you’re doing things for the good of the locality, but not for the good of the shareholders. We want to be number one.

Jain: We have a slightly different view on China, but also the SOEs. We feel that China is a unique setup. And the leadership is always afraid of alternative centers of power. So, if you look at long history of companies that have been come under the gun, whether it’s SOE or private, whether it’s China Mobile, toll roads, utilities, gaming, education companies, gambling, and so on and so forth, it’s a matter of time. So, the runway isn’t long enough in China. So, it’s futile to pay high multiples because you wouldn’t have the same runway.

On the other hand, the state-owned enterprises as they stand today, there’s actually a direct reform that has taken place which benefits them. There’s a much, much better alignment with shareholders in terms of the focus toward better ROEs and so on and so forth, much higher equity ownership, which is being mandated by the government. Government wants these stocks to do well. So, we feel that as long as that trend last, that could be five years, 10 years, we don’t know. So, in fact, we don’t want to do anything which is not an SOE in China. Eighty percent of exposure is SOEs because the government policy is promoting them. And at the end of the day, there’s nothing permanent in this world. Everything is subject to change. Everything is temporary. So, this could last two years, five years, I don’t know. But we’re actually very nervous owning any private sector in China because the government policy specifically targeting private sector, which is opposite of some of the other countries.

Lefkovitz: Obviously, trade tensions between the US and China are an issue. We had a big session this morning on geopolitical risks. There’s a whole litany. There’s wars happening, elections across the world. How is geopolitical risk affecting your investment decision-making these days? David?

Herro: What we try to do is understand what’s happening in the geopolitical scene actually filters down to a specific company’s ability to make and generate cash for its owners. So many, many, many times an election result, a central bank pronouncement, a regulatory change, many times these things impact price far more than it actually impacts the underlying intrinsic value of the business as defined by its ability to generate cash. So, we can’t be oblivious to what’s happening in the world around us. But what we have to do is actually see, does this really impact the fundamentals, the fundamental economic value of this business? Most times the answer is no. And especially if you think that the discounted present value of a future cash flow stream, one little period, just has a small impact on the worth of that business. So, we try to certainly be aware of all these things that are happening. But on the other hand, we’re also aware that more often than not, these events impact the price of the business in a far different way than the impact of underlying fundamental value, which gives us investment opportunity. Now, you got to be patient. And these days we’re a lot less patient than we used to be.

Lefkovitz: Rajiv, I think you’ve had investments in Russia before. Talk about that experience and did it change you at all as an investor?

Jain: Well, yes and no, because our view in Russia was that there was a big change in corporate governance code in 2015-16 era. Before that, I never really invested big time in Russia, and we thought they’re trying to do the right things from a shareholder perspective. And there’s some very powerful companies, which are some of the lowest-cost producers, commodity so on and so forth, and they were paying a lot of dividends. So, the interests were aligned. As the more clouds started gathering, we started cutting back our exposure. We do have macro overlay where we feel that we can’t handicap the risk. So, we need to cut back.

I’ll give you one interesting data point. From 1993 approximately Russia opened, and China opened up till the war started in February 2022. Which market did better for shareholders? It was not China, it was Russia, in dollar terms. So, these trends can last a long time, or any market can blow up. France nationalized vast majority of the banks, and so on, in 1980-81. France and Germany just nationalized some of the utilities. So, this is much more fluid. Malaysia put capital controls in ‘98. So, our view is that we need to manage risk. Everything is risky in the world. As long as we’re getting paid to take risk, we need to manage risk on the other side. So, we cut back our exposure, but we still had enough exposure, which we had to write it down to zero. The businesses are doing fine on their own. The companies that we own, basic commodity companies, but obviously we lost our money.

So, I think the lesson was that our view—and people can draw different lessons. Somebody will say, well, why invest in Russia at all? That’s one lesson. Our view is that there are other big markets which have gone under. So, the lesson is, we need to manage this more tightly and we did cut back, but obviously too slow. We started cutting back after the geopolitical risk. But on the other side, understanding the Russian commodity companies gave us a much better perspective on what’s happening in OPEC and so on and so forth, which allowed us to have greater oil exposure and the impact of war, which offsets some of those losses.

If you look at the last 25, 30 years, let alone last 50, 60 years, there have been capital controls in Malaysia, there have been capital controls in a bunch of other countries. Chile used to have restrictions. There was an embargo against India. Obviously, Russian sanctions. So, a lot of these things happen. But I don’t believe any of this is permanent. It feels permanent, but they’re not permanent. So, our job is to see if there’s real interesting opportunities there, but manage risks if macro changes. Like for example, in France, we’re actually very concerned about what’s happening with Le Pen. Because if you read the manifesto, what she has said, they want to nationalize—and this is recent, not 10 years ago—they want to nationalize utilities and toll roads. Well, it’s not exactly far-right agenda. And if she does that, I think it could scare a lot of different things and spreads are beginning to widen out. Probably nothing will happen, just like Meloni in Italy. But we won’t say zero probability. It’s maybe more than zero. So, could that impact banks and the spreads widen out? They said they want to leave euro, but now they’re backing off. So, our view is that if you’re not sure of these macro risks—and that applies to almost every country. If you own utilities in California, the outcome was as bad as Russia, by the way. So, it’s actually not as straightforward.

Benz: I want to follow up on energy with you, David. You avoid energy stocks—and maybe you can talk about the thesis there—whereas Rajiv had a massive bet on the energy sector, which he since scaled back. So how do you think about clean energy and the risk of stranded assets in the energy sector? How do you think about the whole sector today?

Herro: I do believe that all energy companies are investable, first of all. However, these are tougher businesses than one would think. Any extractive business is relatively difficult. And so, you have to price it as such. We own shares in Glencore, which is, well, two-thirds of their business is mining. And so, we price that given the difficulties that extractive industries face. So first, you have to keep in mind that they are price takers. Even when price goes up, their cost inputs go up. They face regulatory scrutiny perhaps more than other businesses, maybe depending on where they’re located. So, it’s not that we wouldn’t own them. It’s just that there’s a higher valuation hurdle that they have to overcome.

In the case of oil, in the case of any commodity, you have to come up with what you believe is a price. Because if you’re pricing the business, you also have to price as an input what that commodity goes for in the market. You have to come up a normalized price. So, all these things make it difficult, not impossible, but difficult to more accurately price. As such, we apply lower multiples. So, there are periods of time which we would own them. If something that met our value criteria, we would own. I don’t believe that we’re going away from fossil fuels in a while. It’s just simple energy density and costs. As technology advances, you will see more substitution. I’m a car guy and the current technology for batteries for cars isn’t doing it for the masses. In 2030, 2035, it probably will. You have solid state technology, you have all these things coming on. But I think this transition is going to take a while. So, I would happily own an oil company, a natural gas in particular company, if it’s at the right price. I think the best players in the industry for shareholders are here. So, you see in some of our domestic and global funds, we own energy just harder to find outside the US these types of efficient players that are good capital allocators, and so on.

Lefkovitz: Let’s switch gears and talk about a commonality between you. Neither of you seems to be very bullish on Japan, which is interesting because the Japanese equity market has done well and there’s a lot of positive sentiment around Japan these days, corporate governance reforms, the macroeconomic backdrop, deflation seems to be maybe behind us. Rajiv, what’s keeping you from having more exposure to Japan?

Jain: I always say I like Japan, but as a tourist. I think it’s a fantastic place to visit. With yen at 160, everybody should go to Japan. But look, investment-wise, the problem is that Japan isn’t cheap. It’s just too expensive for the growth to get. And this is a chronic issue for us. The best growth companies are too expensive, and you can justify why. You have to pay a premium, they have high depreciation, higher CapEx, higher tax rate. But look, our view is, either the free cash flow or net earnings have to show up. It’s like taxes are high. It is what it is, even today. But if you look at some of the best companies, they are fantastic companies, but they tend to be just too much premium. We can find cheaper elsewhere.

And the reforms are fine, but I’ll give you one important data point. If you look at corporate earnings growth in Japan over the last three years, last five years, that’s a pre-covid trend today. It’s a clean measure. If you look at US, Europe, China, and Japan, China corporate earnings have actually declined around 3% to 4%. This is MSCI, so I’m not cherry-picking any index. Japan is slightly better. Europe has done better, corporate earnings, this is despite all the reforms. And the US has done the best. Lo and behold, the US has been a better market. So, I think corporate earnings have still been soft.

Herro: All the reforms that you mentioned, they’re happening, but almost at a snail’s pace. It’s just more talk than it is action. And how can I demonstrate this to you? Year 1989 was the last time before March, the Japanese market peaked. The Nikkei was just under 40,000. It was traded at about 60, 70 times earnings, 5 times book. By the way, the average return on equity of a Japanese company in 1989 was about 7% or 8%. Here we are, 2024. Yeah, the market is cheaper, 15, 16 times earnings, 2.5 times book. The average return on equity, despite all this talk of reforms, is 8% or 9%. One percentage point, it went up. You would think that with the yen devaluing from 75 to 160, at least you would see this huge increase in earnings growth, which you have seen in certain sectors, the export sector. But it hasn’t waved through the rest of the economy. So, the quality just isn’t there. If value investing to us is what you get for the price you pay and what you get briefly described in a stock as just say return on equity, we haven’t seen—one major change when you look at the Japanese market on whole and that ROE, and that’s what’s also preventing earnings growth, as you don’t have increased margins. It’s a slow growth economy, declining population, no immigration, low productivity. So, it should be priced that way. And it’s just not priced that way.

But I agree with Rajiv. It’s a great place to visit, especially at 160. And the restaurants, if you like all this Asian, Japanese food, they’re meticulous. They’re really small. They’re about as big as this—where we’re sitting here, and t’s a great place to visit. So go this summer. Or some people like to ski there, but I guess the snow is dry or something.

Benz: So come for the investment advice, stay for the travel guidance. Rajiv, we want to ask you about technology investing. You’ve expressed enthusiasm for AI. We had a great AI panel or AI discussion yesterday afternoon. You felt like technology stocks were frothy, overpriced in 2021, but less so today. So, you own Nvidia, Meta, Alphabet, lots of semiconductor names. So how do you separate hype from reality to identify winners within the technology space?

Jain: So, if you go back to 2021, there were no specific drivers we thought on some of these names. And the whole semiconductor industry was overearning. So, what we try to look at long term, are they overearning or underearning? And we thought they were massively overearning. And we wrote about that because the valuations are high and/or overearning, and they were all signs of retail frothiness that’s typically associated with that. It was not exactly dot-com but was a kind of what I call cousin of dot-com. It is never identical. You never find siblings. It’s usually a cousin or something.

Fast forward to last year and this year, now we see the real catalyst in terms of you talk to any company, any country for that matter, there’s a big drive toward making sure they have the data centers, they want to spend on AI and so on and so forth. There’s no direct utilization outside of the hyperscalers, the Amazons and so forth, for AI. But the desire to spend money is clearly there. The digitalization theme is still pretty much on. And so, within semiconductors, we feel there’s some select group of companies that are benefiting. Are they a little bit sort of on a higher side? Yes, they are. But the earnings growth is strong enough. In fact, it’s ironic. If you look at Nvidia, it was around 35 times earning three years ago. It’s still 35 times earnings, and we believe the numbers are too low. So, it has not had any multiple expansion. There will be a typical sign of frothiness as multiples expand. Are they overrunning? You could argue they’re overrunning. We feel at this point they are not. So, we quite like semiconductors.

On the other side, we feel these bunch of software names, which will be casualties of AI. Do we need the same number of seeds for Adobe? Or some of the basic stuff can be done a lot faster, cheaper, and so on and so forth. There’s all the competition coming in. So, we have actually cut back on software. We quite like the whole semiconductor space because the content in the automotive side is going up content. There’s a big smartphone cycle we feel ahead of us. If you look at 2016, the global smartphone sales are around 1.6 billion units. It’s been below that now for three years running. Smartphones don’t have an unlimited life. Forty percent of iPhones are still iPhone 12 or older. So, there will be an upgrade cycle. PCs, we are still running around 250 million units, which is around 20% below the peak almost four years ago. Again, this upgrade cycle is in front of us. So, it’s less of software issue, it’s much more hardware, which we feel it should be the next driver, which is why we like them. So, good things always look a little bit expensive. You’re not going to find that 5 times earnings outlook being bright. So, it’s very different from 2021 at this point.

Lefkovitz: Rajiv, I anticipate we might get this as a question from the audience. I’m going to preempt. Nvidia is in your International Equities Fund, and I think in your Emerging Markets Fund as well. What’s the rationale for that?

Jain: So, our view is that as long as the economics in revenue or assets or something are in emerging markets, majority of them, we can own them. So, if you look at revenue base of Nvidia, it’s still more than half. So, we bought at 2% position. The stock has done well. So, it became larger. Because sometimes companies move around. So, there should be some flexibilities. If you look at South African Breweries, it was a South African company, became a British company, should we sell out. Philip Morris is a 100% non-US business, but it listed in the US. So, as long as the economics are driven by that region or outside the US, we can own up to 20%. So, we are going to own like a Home Depot in International. There’s basically nothing outside US. Because the lines are kind of blurred. It’s not as clear-cut. Companies move around. There are domiciling and listing issues and so on and so forth.

Benz: We will be taking questions. Please enter them through the app, if you could, and our colleague Andrew is here to give them to us. Before we get into questions from all of you though, David, I wanted to ask you about Credit Suisse. It was a holding of yours for 20 years until last year when the Swiss government stepped in and arranged its acquisition by UBS. And that was around the same time that Silicon Valley Bank failed. Our colleague Gregg Wolper wrote a great analysis of your ups and downs with Credit Suisse. Maybe you can talk about how that experience changed you as an investor and what lesson did you take away that you incorporate into the portfolio on a forward-looking basis?

Herro: What did you say the name of the company was? Oh, Credit Suisse. Yes, this was a company we first bought after the tech bubble imploded and everything got beat up. So, we first bought it in around 2000-01 at around 20-something Swiss francs. And they were building their private wealth business, became the second biggest private bank in the world. By the way, four businesses: a private bank, asset management, a Swiss universal bank, and the investment bank. So, there’s four businesses in this financial institution. We were very attracted, especially to the wealth management private bank, because they were growing fast, they were very successful, one of the biggest players in EM, and so on. It did very well. We almost sold completely out of it by ‘07 and ‘08, tripled, quadrupled, kept a small position. It made it through the global financial crisis almost stronger than any other of these global financial institutions. And in fact, UBS required the Swiss government to bail them out. And I think that at one point they owned 40% or 50% of it.

So, then what happened was we get to 2016, 2017, 2018, and they start having issues in their investment bank. We knew there were issues there, but we thought the other three businesses were so strong that eventually they’d fix this investment bank. And then you’d get the total valuation that it deserved, because the other three businesses were doing well. Well, of course, the banana peels instead of getting smaller started getting bigger. And they changed management. Our belief was with new management, different people attacking this problem, they’d be able to iron this out.

Finally, of course, this all came to a head about two years ago. They decided finally, once and for all, that they were going to restructure the investment bank. Mind you, the other three businesses were still doing well. This was in 2022, summer of 2022. Fall of 2022 comes up and they launch their plan. It’s terrible, terrible plan. So we go, OK, that’s it. We’re out. We should have actually sold out. Mistake number one was when there was a big fight between the chairman and the CEO and the chairman presided over every banana peel, we lost this battle. We had over 30% of the shareholders agreeing with us and never ever underestimate home field advantage. It’d be a chapter in a book if I ever write it. And we lost. Corporate Switzerland circled the wagons and Urs Rohner stayed, Tidjane Thiam left. We should have just left. There’s a lesson. We lost that battle. We didn’t like the chairman. The compromise was he is only going to stay a year.

Number two, I think that some of the parts and this belief that if they could only fix this one part of the business, this was a big pull. And at least we finally got rid of it before the thing went under. But still, we lost a lot of money. It cost our two- or three-year performance. And the mistake was actually compounded, to be honest, was if you look at the book value of Credit Suisse—I’m going to use just raw numbers. Say when UBS took it over, it had a book value of $45 billion. UBS bought it for $2 billion and change. Then you thought, well, is the book value any good? They wrote down about $3 billion or $4 billion. So, they basically got the thing for $38 billion or $40 billion. It’s about $7 or $8 a share. UBS was at $15 or $16 a share. Today it’s $26, $27.

Of course you would have thought, oh, I’m not going to go right away and invest in UBS. Because who knows what’s in there? We thought it was better. We didn’t think it was worth what the market thought. But still. Last summer when UBS said, we don’t need the Swiss backup, because the Swiss government was giving them a backup up to $9 billion. They said, we don’t need that. That was the time we probably should have actually went back in. And in essence, we wouldn’t have lost a lot of what we lost. But there was inertia and I think people were scared to go back into anything that smelled the Credit Suisse.

But the other lesson is you have to keep looking at every situation fresh. You can’t just be jaded by the past. You have to learn from the past. But every day is a new day. It’s like if you golf, don’t worry about that last bad shot. Every shot is a separate, different, and unique event. And we should have been quicker because those people who owned UBS, they got $7 or $8 of free money. Now the Swiss government let UBS buy it for a couple of billion, because they didn’t want the tail risk. It’s a tiny little country. They didn’t know what was really in there, but UBS did, and they got a great deal.

So sadly, I’ve been doing this ‘86, ‘87. You remember the ones you lose more than the ones that were triples, quadruples, quintuples. And what you try to do is you will never get the zero losers. But you try to get that number down, down, down, down. You try to keep learning from your mistakes. And hopefully that loss ratio just gets smaller through time. And that’s what you can only hope for. And you have to train your team and you have to train your group to think that same way. You can’t be afraid to lose, but you have to make losses smaller and smaller and smaller through time. And unfortunately, you can’t win them all.

Lefkovitz: Andrew, any questions from the audience?

Andrew Daniels: Yes, lots of questions from the audience. I will start off with a question about increasing isolationism, which is growing in the United States, as well as regulation. What does that mean for the future prospects of international investing?

Lefkovitz: Rajiv, you want to take that one?

Jain: In an ironic way, it may be good from a global perspective because you get more diversification. As I just mentioned, emerging markets are now less dependent. So, they’re behaving on their own. You still have to find the right names, right countries, but everything is not going to walk and sink. But the real question is depending on the level of isolation. So, if the isolation is only toward China, then it’s one thing. But if it spreads everywhere else, it’s a different thing. So, I think my view is, we’ll cross the bridge when we get to the bridge. These broad, big-picture questions, sometimes the devil is in the details. And I think at this point, the world isn’t as bad. There’s still enough opportunities for things to do outside and things can go wrong in any country. It doesn’t have to be one or the other. China, for example, if you look at it, the things went south not because of the US-China relationship that mattered at the end a little bit, but it went because the Chinese authorities intervened on some of the tech companies. So that was the first trigger in the last quarter of 2020. So, the triggers can be domestic. It doesn’t have to be sort of global geopolitical stuff.

Daniels: Another question on interest rates, which are expected to be lowered in the United States at some point in the next six months. We’ve been waiting for that for a while, but can you talk about which countries or regions should benefit most from that and include some of the companies that you might be investing in because of that?

Lefkovitz: David, do you want to take that one? I know you own a lot of banks.

Herro: Will our foreign banks benefit? The US lowers interest rates. I guess if the US lowers interest rates, it has an impact on demand. I just don’t buy any of it. First of all, I don’t think our long-term rates are going materially down anytime soon under the current fiscal situation. I was overhearing your last speaker. There’s just no way a country that’s growing at 1% to 2%, that has a 7% deficit to GDP that you could see sustainably long-term rates. There might be cuts in short-term rates. Of course there might. But I think if anything, if anything, this does not bode well for the US dollar. The fiscal situation we have in our country—and honestly, I don’t know how it’s going to get resolved because—I hear Jamie Dimon talking about it, Ken Griffin talk. You just hear some of these voices in the wilderness. This is a really bad situation. And when you start seeing lower appetite for some of these Treasury auctions, maybe the roosters will come home. But I think the biggest impact will be on this whole US fiscal and monetary policy both will be on a weaker dollar going forward. We’re going to have stubbornly high inflation because you have this extremely aggressive fiscal policy. The Fed will not be able to cut rates the way they want to. And the rest of the world is not going to have this inflation problem as bad as the US And in fact, a lot of the countries in Europe, Germany, they’re fighting over whether it’s 2% or 3% deficit to GDP. We’re 6%, 7%, 7.5%. So, I think the biggest impact of this whole fiscal/monetary policy—I’m combining them both—I don’t see how the dollar strength could continue. I really don’t.

Daniels: Have either of you thought about coming out with an ETF version of your international equity offering?

Jain: No.

Daniels: Why not?

Jain: I think our view is that we like to have transparency, sorry, a little bit of opacity in terms of our holding and so on and so forth.

Lefkovitz: Opacity.

Jain: Opacity. So, I think we need to have that. Transparency on a daily level is actually problematic for us. And we feel that we don’t want to grow the business for the sake of growth as such. So, we feel perfectly happy with the ways that are, particularly, the international side, where the gap can be very wide with the domestic pricing because of the US movements and so on and so forth.

Herro: We’re looking at any vehicle which is demanded by the client base. A mutual fund, SMA, ETF, those are delivery vehicles. And our drug is that we’re trying to push through these vehicles as value investing, long-term value investing. And if anything, we can do to address a more efficient delivery method of our drug—I think it’s a good drug; I’ll call it a vitamin—anything we could do to deliver that vitamin to the body that the market wants we’re looking at. Now, we haven’t gone head over heels to any of these things. Especially, domestically, we’ve got some SMAs. We have an international SMA experiment going on. We’ll look at meeting the market’s demands, because sadly, the mutual fund business wasn’t what it was 10, 15, 20 years ago.

Benz: Well, I want to follow up on that. I attended a session that our colleagues presented today on interval-type funds as potentially a way for people to invest in less-liquid assets where they want them to have a really long-term—the investor to have a long-term holding period and not be able to get their money out on a daily basis. Have either of you looked at that as a potential format for any of the strategies that you run or any strategies you might like to run?

Herro: I don’t know. I think it’s a good idea, because I think money that’s invested in equities should be looked at long-term capital. People put money in private equity funds all the time and they’re really happy with the numbers because the price of those assets are determined at the end of the year by some accountant, probably with a thumb underneath the thumb. The price of our assets are determined every minute of every trading day, and we own the exact same assets. So they go, look how volatile you are. We’re no less volatile than them. We charge less, we offer daily liquidity, and we invest in the same things. But I don’t know if there’s an investor appetite to have money locked up.

Jain: I agree. Completely agree.

Herro: I don’t think there is, but we do the same thing. I just wish investors would give us, OK. we’re going to go through some of these bad periods, folks.

Jain: Actually, it’s worse in a way because private equity is levered.

Herro: They’re levered.

Jain: So, if interest rates go higher for longer, the outcome could be meaningfully different, and the exit is still the public markets for them also. The ultimate exit for them is the same. So, what are we investing today at these public markets? There’s only so much money to go around at a higher leverage. So, I think the risk in private equities may not be lower. It probably is higher. But I agree that there’s no real appetite to make it more interval funds generally speaking.

Herro: But their exit is also to sell to other funds, including sometimes their own different vintages, which, OK.

Daniels: Question on automotive manufacturers. Rajiv, I think you recently purchased Toyota Motor. David, it seems like you have preferred mostly auto manufacturers in Europe like BMW and Mercedes-Benz. Why is that?

Herro: We liked the premium space because there’s structural growth and premiumization still. And in one particular instance, you had a huge amount of self-help in Mercedes. It was part of this thing called Daimler and it got spun off and split off. And new management came in. We were long-term investors in BMW. We saw the returns BMW earned, and Mercedes wasn’t earning anywhere near these returns. By the way, these are 15%, 16% return on capital employed, generate huge amounts of cash even in these difficult time periods. And now finally, they’re aggressively buying back their stock. They had huge piles of cash on their balance sheets. And now they’re buying back their stock. They trade at about 3.5 times cash flow. They’re generating lots of free cash. They do have to compete against some of these electrified players, but it’s a lot less so, just given the price point. So, we generally think at these prices—I caveat everything by saying “at these prices”—I think they’re two very good investments given low double-digit, mid-double-digit free cash flow yields and growing them and growing them.

Lefkovitz: Rajiv, do you want to weigh in?

Herro: Toyota is a great company, by the way. I just worry about the yen coming back.

Jain: So, we feel that Toyota is probably better positioned from an EV perspective. Hybrid is a very good solution, which they bet on in a big way. It always stayed a little bit premium to the German automotive. We like Mercedes and BMW. We owned Mercedes before. So relative to the way the yen is, because yen is a big tailwind for them, the positioning in the emerging markets is pretty damn good. Toyota aside, so that’s one of the reasons why we like Toyota. It’s a little more pricier here than the Germans, but we feel that they … If you look at what Volkswagen has done just a couple of days ago, now they’re trying to buy Rivian, which you have to wonder, did you really have any EV strategy as such? You spend tens of billion dollars and then go, and you have to buy Rivian? So, it’s a question mark. So, hybrid we feel is a far better, longer-term solution for a whole host of reasons in vast majority of markets. If there is power shortage in half of the world, EV is not the solution. So, hybrid we find is a very good solution. And in that context, Toyota has been, it’s an extremely well-known company.

Benz: So, I think we’re going to have to let that be the last question. Rajiv and David, thank you so much for joining us on The Long View.

Jain: Thank you.

Herro: Thank you.

Benz: Thank you for joining us on The Long View. If you could, please take a moment to subscribe to and rate the podcast on Apple, Spotify, or wherever you get your podcasts.

You can follow me on social media @Christine_Benz on X or at Christine Benz on LinkedIn.

Lefkovitz: And at Dan Lefkovitz on LinkedIn.

Benz: George Castady is our engineer for the podcast and Kari Greczek produces the show notes each week.

Finally, we’d love to get your feedback. If you have a comment or a guest idea, please email us at Until next time, thanks for joining us.

(Disclaimer: This recording is for informational purposes only and should not be considered investment advice. Opinions expressed are as of the date of recording. Such opinions are subject to change. The views and opinions of guests on this program are not necessarily those of Morningstar, Inc. and its affiliates. While this guest may license or offer products and services of Morningstar and its affiliates, unless otherwise stated, he/she is not affiliated with Morningstar and its affiliates. Morningstar does not guarantee the accuracy, or the completeness of the data presented herein. Morningstar shall not be responsible for any trading decisions, damages or other losses resulting from or related to the information, data analysis, or opinions, or their use. Past performance is not a guarantee of future results. All investments are subject to investment risk, including possible loss of principal. Individuals should seriously consider if an investment is suitable for them by referencing their own financial position, investment objectives and risk profile before making any investment decision.)

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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About the Authors

Christine Benz

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Christine Benz is director of personal finance and retirement planning for Morningstar, Inc. She is also the author of a new book, How to Retire: 20 Lessons for a Happy, Successful, and Wealthy Retirement (Sept. 2024, Harriman House). She co-hosts a podcast for Morningstar, The Long View, which features in-depth interviews with thought leaders in investing and personal finance.

Benz joined Morningstar in 1993. Before assuming her current role she served as a mutual fund analyst and headed up Morningstar’s team of fund researchers in the U.S. She also served as editor of Morningstar Mutual Funds and Morningstar FundInvestor.

She is a frequent public speaker and is widely quoted in the media, including The New York Times, The Wall Street Journal, Barron’s, CNBC, and PBS. In 2020, Barron’s named her to its inaugural list of the 100 most influential women in finance; she appeared on the 2021 list as well. In 2021, Barron’s named her as one of the 10 most influential women in wealth management.

She holds a bachelor’s degree in political science and Russian language from the University of Illinois at Urbana-Champaign.

Dan Lefkovitz

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Dan Lefkovitz is strategist for Morningstar Indexes, responsible for producing research supporting Morningstar’s index capabilities across a range of asset classes. He contributes to the Morningstar Direct℠ Research Portal, authors white papers, and frequently hosts webinars on index-related topics.

Before assuming his current role in 2015, he spent 11 years on Morningstar’s manager research team. He held several different roles, including analyst and director of the company’s institutional research service. From 2008 to 2012, he was based in London, helping to build Morningstar’s fund research capability across Europe and Asia. Lefkovitz also participated in the development of the Morningstar Analyst Rating™, the Global Fund Report, and edited the Fidelity Fund Family report from 2006 to 2008.

Before joining Morningstar in 2004, Lefkovitz served as director of risk analysis for Marvin Zonis + Associates, a Chicago-based consultancy. During this time, he coauthored The Kimchi Matters: Global Business and Local Politics in a Crisis-Driven World (Agate, 2003).

Lefkovitz holds a bachelor's degree from the University of Michigan and a master's degree from the University of Chicago.

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