In his latest shareholder letter, Morningstar’s International-Stock Fund Manager of the Decade David Herro says that he remains “convinced there are still outstanding opportunities for long-term investors”.
“Not only have equities returned less than their long-term averages over the past 21 years, we view their valuations as quite compelling,” Oakmark’s Herro writes. “As of November 30, 2010, the MSCI World Index yielded 2.5% and was selling at less than twice its book value and less than nine times its cash flow (the MSCI EAFE Index, which excludes North America, is yielding over 3%). Again, this arises at a time when 5-year Treasury notes yield less than 2% and when the global macro economy is expected to grow more than 4%.”
Herro also says that the past couple years have shown that trying to time the market based on macroeconomic trends doesn’t work for long-term investors. “We try to ‘invest above the fray,’ meaning we value businesses through the economic cycle and beyond,” he says. “As such, when investors dump good businesses because of short-term macroeconomic conditions, we view it as an opportunity. Of course, investing in this way takes patience and discipline, but we believe that it has been one of the keys to our long-term investment success.”
Herro says there are and will always be imbalances in the global economy. “But ultimately, positive investment results over time depend on low valuations and a fertile environment for stronger corporate profitability. And today, despite the global macro issues, we remain convinced that the conditions necessary for acceptable equity returns are present.”