On January 14, 2025, the CFA Society Chicago hosted a Distinguished Speaker Series event presented by the Distinguished Speaker Advisory Group featuring a conversation with David Herro, CFA, Chief Investment Officer of International Equities and Deputy Chair of Harris Associates. Herro is also Vice President for the Oakmark Funds, and the portfolio manager for the Oakmark International Fund, Oakmark International Small Cap Fund, Oakmark Global Fund and Oakmark Global Select Fund. Cosmin Lucaci, CFA, Director of Research at Brownson, Rehmus & Foxworth, served as the moderator for the discussion.
The event started with welcome remarks from Chris Vincent, CFA, President & Chief Executive Officer of CFA Society Chicago. Chris highlighted that CFA Society Chicago is celebrating its 100th year in 2025 and will also be the host of CFA Institute LIVE 2025 beginning on May 4 this year.
Herro started by congratulating CFA Society Chicago on its 100th anniversary and noted that milestone as a testament to the longevity of the organization and the investment industry in Chicago. Herro recapped his start in the investment industry in the mid 1980’s at Bankers Life Insurance Company in Des Moines, IA. He found that first opportunity by driving to UW Madison to look at the jobs board listing and then responding to an advertisement for a job posting from a 3×5 index card. From there, he got more involved in the company’s asset management and helped manage its international equity fund. Eventually, the company wanted to rebrand itself and bought a group of mutual funds called The Principal Funds and used that to shift to what we now know today as The Principal group of companies. Herro ran the group’s world fund and noted that international investing was not incredibly prominent among investment management in the late 1980’s, but he was a fan of not limiting overall investing to just the U.S. market.
When asked about the general approach to investing in the Oakmark Funds, Herro noted that the idea of value investing is prominent – to find investments that are undervalued and to look for factors that will have a positive future impact on price increases. Key to this strategy is returning to some basic ideas that there is a need to study the business and measure how management is turning the operations into a cash flow stream. He contrasted that strategy to other current approaches where money flows into “mania” to try to stretch for returns. Harris’ approach focuses on the fundamental values of the company.
Herro noted that one key reason to invest in international equities is that there is historically a value compression for these investments. Foreign assets often trade at a discount as they may be perceived to be less efficient investments. In addition, since shares are owned in foreign currencies, there can be some opportunity as currency exchange rates move. Today the U.S. dollar is in a huge, long bull market run, with the Euro exchange moving down from over 1.40 to near parity, but the pendulum can definitely swing.
Herro was asked about today’s culture where momentum and crowd investing often dominate, as compared to his value investing approach. Some investors out there are still buying high and selling low, so is there some sort of mental disconnect? Herro noted that there is a form of psychology in investing, and often people don’t want to go to the “sale rack” to purchase. When people head out to a cocktail party, they want to be in on the latest craze and follow the trend rather than compare prices. People often do want to compare prices in other everyday purchases but seem to be less so in business and investing. Herro noted a value approach might not perform as well in short periods of time but can offer strong returns in the long run. Herro explained that in recent times international investments may be at a large discount to their true value. Part of this equation is noting what he thinks the overall value is. Conventional thinking over a long period of time might describe value as a 10x Price/ Earnings ratio. In this context, many international investments would be seen as having deflated prices and as attractive value investments.
Herro was asked where he currently sees value across different international components, such as specific countries, regions, or industry sectors. He noted that one of the most generally unloved markets is Europe as it is tougher on regulation and has some election instability as an additional risk. People may not like the sound of Europe as it is more associated today with war and conflict issues and a range of political risks. That may imply that that market deserves some discount but also may not be as large as what the market is indicating right now. He noted, however, that there are sectors that have some good opportunities such as pharmaceuticals, beverages, and luxury goods. Luxury goods are benefitting from conspicuous consumption trends. Value can be found in places where investments might trade at 15 – 20 times, a level of depressed earnings. He cautioned about stretching to investments that might be priced at 25 times inflated earnings.
With a range of macro world events going on, Herro was asked if these events are important and considered within the investment philosophy, or does he focus on just value alone. Herro noted that the macro environment does matter, but especially in how it impacts individual companies and businesses such as how it impacts their sales and cash flow. COVID was a major event and initial shock, but the Harris team viewed the opportunity through a lens that it would ultimately pass. He noted an example in Mercedes Benz, where the stock was down as much as 60% during the COVID era but still had a strong balance sheet, and there was an expectation that, at some point, there would be demand for vehicles again.
Herro was asked about growing levels of technology, and if there was a view on how artificial intelligence (AI) might be impacting businesses and investment philosophies. Herro noted that he expects AI to be a helpful tool with good business applications that can
focus on efficiency. Companies are able to access data and sources more quickly, and it can also assist in making more efficient business operations. Some additional benefits noted will be for businesses to make better decisions on asset placement and deployment, improved target advertising, and for business investigation such as oil exploration.
The conversation concluded with Herro being asked questions of advice for the next generation of portfolio managers and if he had to start with a blank page would he start with international investment in the portfolio. He noted that without question, international investments should be part of an overall portfolio and to do so in a diversified way. Value is always important, but also keep an eye on appropriate diversification techniques. He continued the encouragement of looking for opportunities with low Price/Earnings ratios, high cash flow trends, and for companies that are turning those free cash flows into successful businesses. He continued with words of encouragement that investment managers needed to be excited about their work and continue to look for ways to self-enrich themselves with knowledge and to stay with what makes them happy. There is a need for investment managers to avoid being mentally drained and need to be happy and committed to enjoying the work they do.
Final questions from the audience revolved around whether there might be some places where international investing could go wrong in the future, and what might be items to watch within the U.S. economy. Herro noted that property rights are always a risk within international investing, with some markets having different approaches to the way their laws are set up with these rights. If businesses have the risk of property being taken away from them or potentially confiscated, then it can be a challenge in some markets. Capitalism runs on the premise of being free of these types of risks, so in international investing portfolio managers need to be aware of these situations. Herro noted that the U.S. fiscal situation has some current challenges, where GDP growth is strong at 3% but running spending at a 7.5% deficit. With strong growth, he noted that this should be a situation where a country should run a surplus rather than a deficit, with focus spending on items for future investment rather than for the here and now, and it will take courage to tackle the current situation.
The event concluded with thanks to Herro and Lucaci for a great discussion and helpful insights on international investing.