Oakmark’s David Herro: European Stocks I’m Buying
There hasn’t really been any place for stock investors to hide in the early going for 2014. But if you’re into relativity, European stocks have actually held on better than other regions. This chart shows the performance of the largest Eurocentric ETF, the Vanguard FTSE Europe ETF (VGK) compared to leading ETFs concentrated in other geographic regions.
And the deep-value Oakmark fund family just took the time to reiterate its interest in Europe. In a short note, Finding Quality In Europe, the team made it clear that while some investors may be in intense hand-wringing mode over macro issues, they are having a fine time investing in Europe via their bottoms-up approach: “Other investors’ hesitation to invest in the region has provided us with the chance to purchase high quality stocks that are undervalued simply due to geography.”
That patient value approach has paid off for Oakmark investors. The $28 billion Oakmark International fund gained 29% last year; that was more than six percentage points better than the MSCI EAFE index. Over the past 15 years the fund’s 10.8% annualized gain is more than double the 4.2% gain for the MSCI EAFE index.
Oakmark International currently has nearly 80% of its assets parked in Europe. Another 12% is in Japan. Emerging markets have not been on the fund’s radar for some time.
In a year-end note to shareholders Oakmark International lead manager David Herro noted that while the deep bargains available post-crisis are long gone, he and co-manager Robert Taylor are not hurting for ideas. “With stock valuations that are still attractive, I believe there are reasons to be confident that global equities will continue to be an attractive asset class,” wrote Herro.
As of the end of the year the five largest holding in Oakmark International (each representing more than 3% of fund assets) were Credit Suisse (CS), Intesa Sanpaolo (ISNPY), Allianz (AZSEY), Daimler (DDAIY) and BNP Paribas (BNPQY). Intesa Sanpaolo,, an Italian retail bank, and BNP Paribas were trimmed slightly in the fourth quarter. Among the top 5, Credit Suisse saw the biggest addition in the fourth quarter, as the managers boosted their share count by nearly 17%. The fund’s 5% position works out to nearly $1.5 billion riding on the bank/investment bank/wealth management firm.
Oakmark International has owned Credit Suisse for more than a decade. It is also the second largest position in Oakmark Global Fund, behind Intel (INTC).
About 18 months ago, when European banks were even more reviled than now, Herro was making the case for Credit Suisse stock as a guilty-by-association bargain where the investment banking/wealth management segment of its operation was being undervalued. At the time the stock’s earnings per share and ROE were in a bit of free-fall, along with the share price.
Since then, the stock is up more than 80% and while price-to-book value ratio has followed along, it is still just barely over 1x book.
Diageo (DEO) was another sizable increase for Oakmark International in the fourth quarter. The managers boosted their share count in the dominant spirits manufacturer (Johnnie Walker, Guiness, Smirnoff) by more than 40% to about 2% of assets. The analyst covering Diageo for the firm obviously made a strong case last quarter, as both Oakmark Global and Oakmark Global Select also increased their Diageo stakes by 60%.
The current quarter has not been kind to Diageo, in large part due to its sizable emerging markets exposure. In the fourth quarter of 2013 Asia Pacific sales fell 10%, with most of the hurt coming from China.
Still, this is not some imploding basket-case. Earnings per share grew 4% in the six months through December on net total global revenue growth of 1.8% (The Americas are in fact doing quite well; North American sales grew 5% in the second half of 2013 and Latin America 8%). And Oakmark called out Diageo in its recent Europe note as an example of where it’s finding compelling valuations.
Diageo has a wide-moat rating from Morningstar (MORN). Morningstar recently raised its fair value price to $128, about 7% ahead of where Diageo is trading. The average wide moat stock in Morningstar’s database currently trades at a 4% discount to fair value. (Full disclosure: Morningstar is an investor in YCharts.)
One other interesting Euro stock owned by multiple Oakmark funds is Danone (DANOY). Oakmark International increased its stake by more than 40% last quarter to 2% of fund assets and Oakmark Global initiated a new position of more than 2%. This is another company with significant emerging market exposure (more than 50% of sales) that is for the patient minded who get the long-term growth story in EMs, especially as it pertains to consumer spending.
Oakmark Global jumped in when Danone stock got slammed after last summer’s recall of baby food in eight Asian markets, followed by claims of price fixing in China that subsequently led to a management change at the subsidiary at the heart of the claims. The stock has yet to recover the 2013 give-back but the Oakmark funds obviously see that as an opportunity to buy in at a steep discount to what Oakmark values the business at. Unleash some financial advisor tools on European stocks if you're intrigued.
Carla Fried, a senior contributing editor at ycharts.com, has covered investing for more than 25 years. Her work appears in The New York Times, Bloomberg.com and Money Magazine. She can be reached at firstname.lastname@example.org. Read the RIABiz profile of YCharts. You can also request a demonstration of YCharts Platinum.
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