NEW YORK (CNNfn) - International fund manager David Herro follows his gut, regardless of where everybody else is heading.
When most fund managers were scrambling to get out of Asia and Latin America in 1997, he was buying stocks in Singapore, Australia and Brazil.
When the British tabloids labeled him "a tall sinister man who walks with a limp" after he took on a powerful London ad executive, he shrugged it off.
He even played offensive line in college football, despite the fact that he weighed just 185 pounds and had a bum knee.
"We go where there is value, not where everyone else goes," Herro said recently. "Sometimes the best value is where no one else is at."
Herro, 38, is manager of the Oakmark International Fund and the Oakmark International Small Cap Fund, which are both top performers this year.
The International fund, with $906.7 million in assets, is up 34.01 percent year to date as of July 29, according to fund-tracker Morningstar. It is ranked in the top two percent of foreign stock funds. The small cap fund, while smaller with $143 million in assets, is up 56.15 percent in the same time, putting it in the top one percent of the category.
Herro, 38, graduated from University of Wisconsin-Plattville in 1983 and spent a year as a meat salesman for Hormel before getting his master's degree in economics at the University of Wisconsin-Milwaukee. He had aspired to get a doctorate so he could teach economics, but became disillusioned with ivory-tower attitudes.
"What changed my mind about getting a doctorate is the university stressed research over teaching," Herro said. "I wanted to teach."
He was international portfolio manager for the State of Wisconsin Investment Board and the Principal Financial Group, and came to Harris Associates, the financial adviser of Oakmark funds, seven years ago.
A bachelor, Herro spends about half his time visiting companies around the globe. He has two Persian cats, named Itchy and Scratchy after characters from "The Simpsons," and a 200-gallon tank filled with tropical fish.
An avid scuba diver, he often takes his equipment on the road with him. But he denies investing in Australia so he could dive the Great Barrier Reef.
A career in international markets
Herro has seen significant changes in international investing since he started in 1986. The biggest difference is that managers are afraid to deviate from the MSCI EAFE Index -- a benchmark many international managers use to compare their performance -- and what their peers are buying.
"Managers, instead of following their convictions, are following the crowd," Herro said. "There is a herd instinct."
For example, at the beginning of the year, the average international fund had 80 percent of its assets in Europe and ignored Asia, the Pacific Rim and Latin America.
"Europe has done well, so they are all in Europe," Herro said. "We believe our shareholders pay us to make investment decisions. They don't pay us to look like the index."
The International Fund and International Small Cap Fund both have a sizable chunk of their assets outside Europe.
"You'd be hard-pressed to find that somewhere else," Herro said.
The International fund has 30 percent in the Pacific Rim, 25 percent in western Europe, 23 percent in the United Kingdom, and 15 percent in Latin America - with the rest in cash. The small cap fund has 36 percent in the Pacific Rim, 27 percent in the United Kingdom, 21 percent in western Europe, 3 percent in Canada, 1 percent in central Europe, and the rest in cash.
Herro said it's hard to generalize about types of companies he likes, since he takes a "bottoms-up" approach. But one winner has been Solution Six, an Australian software company. He started buying it at about 38 cents a share, and now it is worth about $2.68 a share.
He also likes Krones of Germany, a maker of bottling equipment for the beverage industry; Uno Banco, the fourth-largest bank in Brazil; and the Latin American Export Bank, known as Bladex, a Latin American trade financing bank based in Panama that trades at a price-earnings ratio of 6.
(The price-earnings, or p/e, is the price of a stock divided by its earnings-per-share. For comparison, Microsoft's p/e is 65).
"I continue to think that, as a region, the Pacific Rim looks good," Herro said. "Brazil is still undervalued. Stocks from the U.K. and New Zealand are undervalued."
He has a big presence in the United Kingdom because he thinks the nation has lagged other countries in Europe with interest-rate cuts that helped trigger rallies.
He's lightened up in Japan, which is leading the way for returns, but only because prices have appreciated so much. In the small cap fund, for example, he has reduced his Japan holdings from 20 percent at the start of the year to 7 percent.
Herro said he hasn't gotten involved in any shareholder activities following his well-publicized battle in the mid 1990s to oust Maurice Saatchi, the former chairman of U.K. advertising giant Saatchi & Saatchi.
According to Herro, Saatchi in 1994 was using his position to promote his own agenda rather than the shareholders. Saatchi, among other things, orchestrated a press campaign against the chief executive at the time and tried to stack the board with his friends. Herro's two funds together were the biggest shareholder in Saatchi.
Efforts to reach Maurice Saatchi for comment were unsuccessful.
"We rallied the shareholders to vote out Mr. Saatchi, and then we told the board we were going to vote them out," Herro said. The board, backed into a corner, voted in December 1994 to remove Saatchi.
Besides calling Herro tall and sinister, the British tabloids wrote that "American farm boy topples advertising giant," he recalled.
The London Times in 1994 called Herro "clearly a shrewd cookie" in a scathing editorial that predicted Herro would lose money on the investment. The article's headline was "A Herro from Zero?"
"Maurice Saatchi cultivated the press instead of the clients," Herro said.
Saatchi & Saatchi demerged a few years after Maurice Saatchi's departure, and since then the stock market value of the two surviving companies, Cordiant PLC and Saatchi & Saatchi PLC, is three and a half times what the original company was during Maurice Saatchi's tenure, Herro said.
"The shareholders have done very well since he left," Herro said. "We probably tripled our original investment over seven years."
Kunal Kapoor, an analyst at Morningstar, praised Oakmark's international team for being good stock pickers.
"Overall, I'm a big fan of Oakmark funds," Kapoor said. But what is unusual about the fund is that it has "peaks and troughs," in its performance, Kapoor said. The reason for the volatility is the commitment to emerging markets, he said.
The International fund, for example, earned 53.58 percent in 1993; lost 9.06 percent in 1994; gained 8.32 percent in 1995 and 28.02 percent in 1996. It eked out a 3.33 percent gain in 1997 but lost 7 percent in 1998.
But the fund has a five-year average of 11.41 percent and a three-year average of 13.09 percent.
"You have to be able to stomach volatility," Kapoor said. "If you've held (the funds) for the long term, then you get rewarded. But not all shareholders have stayed around for the party."
Mark Groesbeck, director of financial planning at the Stanford Group Co. in Houston, an international investing specialist, said the two funds - particularly the small cap fund -- have an interesting mix of developed and emerging markets. He also likes Herro's value-oriented strategies.
"That gives the fund a lot of flexibility," Groesbeck said.
The small cap fund has a small enough asset base that a good idea can have a dramatic impact on returns. The Solution Six investment, for example, accounts for a large part of the fund's returns, he said.
"As a firm, we've been looking more at international small cap funds instead of pure emerging markets funds," Groesbeck said.
Not everybody agrees. Howard Baron, a certified financial planner at Lincoln National in Hollywood, Fla., said Oakmark is too risky for his clients.
"This year he's going gangbusters," Baron said of Herro. "But it looks like it's for people who take a high risk for a high reward."
Herro, meanwhile, is content to continue following his instincts instead of whatever way the wind is blowing for international investors.
"If somebody gives me a job to do I'm going to do it, and not give them someone else's work."
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