Herro believes finding specific emerging markets companies that meet his criteria is difficult.
He looks for companies with “clear and transparent corporate governance, good profitability and good business models and whose stocks sell at attractive prices”, which are hard to come by.
Instead, he gets emerging markets exposure through European companies. For example, Daimler, the parent of Mercedes-Benz; Diageo, the spirits company; and Richemont which owns luxury brands like Cartier, Piaget and JaegerLeCoultre.
“All of these companies are well exposed to the emerging markets consumer, especially in Asia. And, these stocks appear very cheap right now.
“As bottom-up investors, our decisions to invest in a company are based on its valuation and quality rather than its country of domicile. I am currently finding many investment opportunities in Europe, and continue to have little exposure to companies domiciled in emerging markets.”
Decreased Japan exposure
In contrast to the many Japan bulls, Herro said he has decreased exposure to Japan over the last couple years.
Stock prices have increased too sharply for his taste, “and while company values have also gone up, they haven’t done so at nearly the rate of the market”.
His international portfolio today has about 10% exposure to Japan compared to 25% two years ago.
“Our two big positions are Honda and Toyota, both of which are significant beneficiaries of the weak yen, have excellent emerging-markets exposure, and have company-specific reasons that may lead to improved profitability.”
