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European Bank Bets Crush Returns for Herro, Other Managers

Harris Associates LP chief investment officer David Herro. Photographer: Matthew Staver/Bloomberg
Harris Associates LP chief investment officer David Herro. Photographer: Matthew Staver/Bloomberg

July 21 (Bloomberg) -- David Herro, a Morningstar Inc. manager of the decade, Fidelity International’s Sanjeev Shah and Marc Halperin of Federated Investors Inc. beat 80 percent of rivals over five years. Then they bet on European banks.

The investments on lenders including BNP Paribas SA, Intesa Sanpaolo SpA and Lloyds Banking Group Plc have plunged the three managers into the bottom third of their peer-group rankings, according to data compiled by Bloomberg. Today’s European summit in Brussels may be critical to improving their returns.

“How many times have we gone through a period like this when there’s blood in the streets and sheer panic?” said Marc Halperin, manager of Federated’s $400 million International Leaders Fund. “We’ve stayed the course, not panicked, and held onto the highest quality companies at the most attractive valuations. We’ve emerged out of every crisis even stronger.”

European banks this year dropped to their cheapest relative to earnings since Lehman Brothers Holdings Inc. collapsed in 2008. That tempted some of the world’s best-performing fund managers to purchase stocks that would benefit from a resolution to the European debt crisis and an upturn in global growth. After failing so far this year, the success of the strategy may hinge on today’s meeting that Greek Prime Minister George Papandreou said is “make-or-break” for the region.

Bond Yields Rise

“There are going to be things that aren’t good,” Herro said in a Bloomberg Television interview by Erik Schatzker on “Fast Forward” on June 9. “But the worst case scenario, contagion, the collapse, I think is a very low probability.”

European lenders’ stocks dropped below the value of their assets this week for the first time in two years after last week’s stress tests failed to reassure investors banks could withstand the region’s debt crisis. Lloyds fell 31.9 percent this year while BNP Paribas is down 3.5 percent and Intesa Sanpaolo is 13.6 percent lower.

Yields on Italian and Spanish government bonds rose, driving down the STOXX 600 Banks Index on July 18 to its lowest in since April 2009. The index is down 11.4 percent this year compared with a 3.6 percent decline in the broader STOXX Europe 600 Index. It rallied 3.7 percent yesterday to 174.8 points, its biggest gain since January, before today’s meeting in Brussels.

Manager of Decade

Herro’s Oakmark International Fund, which has $8.5 billion of assets, has beaten 81 percent of rivals over the past five years and its longer-term performance earned him Morningstar’s International Fund Manager of the Decade award last year. This year, investments in European banks have plunged the fund into the bottom 11 percent of its peers, according to data compiled by Bloomberg.

“It doesn’t look like the timing was very good,” said Russel Kinnel, director of mutual fund research at Chicago-based Morningstar. “If you’re a deep value investor, one of the chief risks you run is that a bad situation gets worse. You’re betting on reversion to the mean that the problems will be brought under control and the company will revert back to past levels.”

Herro, who declined to be interviewed for this article, had four of his top 10 holdings in European banks -- Zurich-based Credit Suisse Group AG, BNP Paribas based in Paris, Spain’s Banco Santander SA and Intesa Sanpaolo of Italy -- on March 31, the latest date for which information is available.

Credit Suisse’s “business value has continued to go up and up and up, its price is going down, down, down, which means that the value gap has opened up,” Herro said in the Bloomberg TV interview. “And so that’s O.K. As long as that business value continues to be created we won’t lose patience.”

Fidelity’s Shah

Sanjeev Shah, who took over Fidelity International Ltd.’s Special Situations Fund from Anthony Bolton in 2008, is another so-called value investor who’s being hurt by declines in bank stocks. Lloyds and Royal Bank of Scotland Plc, both bailed out by the British government in 2008, are two of Shah’s 10 largest holdings. HSBC Holdings Plc, Europe’s biggest bank, was his top position on March 31.

“I’m a contrarian value investor so the fact that the banks are disliked by the sell side, under-owned by most institutional investors does interest me,” Shah, 41, said in an interview last month posted on Fidelity’s website. “The banks are at the low end of their historical range in terms of valuations which is very attractive.”

While Shah’s 3 billion-pound ($4.8 billion) fund has beaten 84 percent of rivals since 2006, its performance has dropped into the 12th percentile this year, having lost 4 percent since Jan 1. The FTSE All-Share Index is down 1.1 percent in 2011. Bolton delivered annual returns of 19.5 percent for the 28 years to 2008. Shah declined to add to his comments last month.

Philippe Chaumel

Another top manager betting on a bank recovery is Philippe Chaumel of Paris-based Rothschild & Cie Gestion. His 720 million-euro ($1 billion) Elan Euro Valeurs fund is down 6.4 percent this year, putting it in the bottom 12 percent of its peers, according to data compiled by Bloomberg. It has beaten 83 percent of its rivals over the past five years.

Chaumel, who declined to be interviewed, had Societe Generale SA, Intesa Sanpaolo and BNP Paribas as three of his four biggest holdings at May 31.

Federated’s International Leaders Fund, run by Halperin, beat 81 percent of its peers over the last five years, according to data compiled by Bloomberg. This year, investments in HSBC, Credit Suisse and BNP have caused it to fall into the lowest 7 percent of its peer group this year.

“They’ve taken such a hit in the last month,” Halperin said. “But we’re continuing to hold these names. The valuations are attractive. There’s a sentiment of capitulation out there at the moment.”

Today, European leaders will debate ways to prevent such a capitulation. Measures being considered at the meeting include guaranteeing Greek bonds in the event of any default, making it easier for the country’s banks to keep tapping the European Central Bank for emergency funds, according to two officials with knowledge of the talks, who declined to be identified.

“I can’t imagine they allow the whole euro system to simply unravel,” Halperin said.

To contact the reporter on this story: Kevin Crowley in London at

To contact the editor responsible for this story: Edward Evans at;

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