Credit Suisse (. Shares of all European banks have been shadowed by worries that post-crisis regulations will hurt profits. But the cloud hangs especially low over "too big to fail" institutions like Credit Suisse, Herro says, which are deemed most likely to be reined in. "People are overreacting." The bank has gathered plenty of capital to satisfy regulators, he says. And its thriving private and investment banking operations will help grow earnings 5% to 10% for several years to come. )
Daimler (. To Herro, the German carmaker is a well-oiled machine with a full tank of gas -- and investors are too focused on the scratched fender. "The market doesn't like its Europe exposure, the fact that it was behind in China, and that its margins have been lower than BMW's," he says. But Europe is on the mend. The company's once-struggling China operations are gaining traction. (Sales there are up 15% in the past year.) And a big push to streamline production has boosted margins. )
AMP (AMP.AX). Australia's largest standalone wealth management firm, says Herro, has a vast network of financial advisers poised to help folks navigate the country's compulsory retirement-savings system. Demand for such advice has grown since 2011, when the Reserve Bank of Australia cut interest rates, sending retirees scrambling for higher yields. But even with rates down to 2.5%, he says, Australia's central bankers have more ammunition to stimulate growth than their counterparts in the U.S., where rates are near zero.
HIS STRATEGY: Still betting on Europe's recovery
At the height of 2012's European debt crisis, amid panicked headlines about Greek defaults and soaring Spanish borrowing rates, Herro believed a full-on banking collapse was unlikely. So he bet heavily on European financials. The sector is up 50% since then.
Indeed Herro, named Morningstar's international manager of the decade in 2010, has built his extraordinary record by ignoring conventional wisdom. He seeks strong companies selling at a discount because of what he sees as short-term or superficial problems. As he puts it, "We want to own what's cheap."
So why, despite the run-up, has Herro remained committed to European bank stocks, including his top four holdings? "There's still an undeserved stigma surrounding them," he says. His confidence extends to European carmakers, technology companies, and retailers as well. Virtually nothing, meanwhile, is invested directly in emerging markets. "It's too tough to find value there," he says. Likewise, Herro has unwound much of his fund's position in Japan now that economic stimulus has driven equities up by almost 75% in 13 months. For value beyond Europe? Look to Australia, he says.
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