Morningstar - Q4 2023 - 62

Investors
A Top Manager's Biggest
Investing Mistake
Oakmark's David Herro waited years for
Credit Suisse to deliver. It never did.
SPECIAL REPORT
Gregg Wolper
Professional investors make mistakes all the
time. It's part of the job. But some matter more
than others.
When David Herro, lead manager of Oakmark
International OAKIX, sold the last of the
fund's shares in Credit Suisse earlier this year, it
was no ordinary transaction. This was not
a bottom-of-the-portfolio bet that happened to fall
short. Credit Suisse had once been a leading
Swiss bank. Herro had owned it for two decades.
For much of that time, he was one of its most
prominent supporters. Often, he provided an
optimistic take on Credit Suisse when most other
investors harbored doubts.
But by the end, Credit Suisse had become
notorious, associated not with respectable wealth
management but with scandals, missteps,
regulatory penalties, and a plummeting share
price. When Herro disposed of those final shares,
a long, fraught relationship marked by
disappointment and controversy had reached its
end. No wonder he recently told Morningstar
that, after the final sale, it felt as if an immense
weight had been lifted from his shoulders.
Herro, who has managed Oakmark International
since its 1992 inception, is known as a value
investor-one who seeks companies whose
share prices are depressed because the firms are
small or obscure, have unrecognized potential,
or face real but fixable issues. Herro placed
Credit Suisse in the latter camp and stuck with it
62
Morningstar Q4 2023
through its travails. With many other holdings
over the years, Herro's contrarian instincts-
his willingness to flout conventional wisdom-
paid off. Not this time.
A Remarkable Panoply of Woes
Herro first bought Credit Suisse for the fund
in the summer of 2002. Given the size of
Oakmark International's asset base, and because
other Oakmark vehicles also owned it, Harris
Associates-Oakmark's advisor-became one
of the bank's top shareholders, in later years
holding more than 8% of its shares. Herro became
one of Credit Suisse's most visible backers
(except for the times he became its most vocal
critic). He didn't just opine from the sidelines,
either; he met regularly with bank management.
The initial years went swimmingly-the shares
soared in the four years or so after Herro
bought them. But over the remainder of Oakmark
International's two-decade relationship
with Credit Suisse, a remarkable panoply of woes
dogged this once-respected Swiss bank. While
none quite matched the spectacle of Nissan
CEO Carlos Ghosn's stealth escape from Japan
hidden in a crate, some came close. The
number and variety of these incidents were so
vast that we struggled to find room for all of them
on our three-year timeline in EXHIBIT 1 .
The misdeeds span quite a range. They include
violating U.S. sanctions against Iran; enabling tax
evasion in Germany, Italy, and the United
States; failing to catch money laundering by a
Bulgarian drug ring; hiring private detectives
to spy on a recently departed colleague and
others; a bribery scandal involving Mozambique
loans-aka the " tuna bonds " affair; and in
2021, disastrous involvements with the failed U.S.
hedge fund Archegos and the U.K. lender
Greensill. (We could go on.)
Credit Suisse's reputation fell dramatically
throughout the period, and its share price
nose-dived (EXHIBIT 2 ).
Credit Suisse was by no means the only
major bank engaging in dubious or illegal activities
during this time. But the level and frequency
of its misconduct stood out even when placed in
that disheartening context.
Why Herro Owned-and Continued
to Own-Credit Suisse
Herro held Credit Suisse for more than two
decades. Although it usually sat near the top of
the portfolio, it wasn't an outlier. It rarely
had the highest weighting, and it was consistently
joined in the portfolio's top 10 by other European
banks-most notably BNP Paribas BNP:FR,
Intesa Sanpaolo ISP:IT, and Lloyds Banking Group
LLOY:GB. The four banks typically had roughly
similar weights in the portfolio.
While not free of misconduct themselves,
those other banks never attracted the waves
of notoriety that engulfed Credit Suisse. Thus,
even given its relatively modest weights,
Herro's lengthy attachment bears investigation.
What kept him attracted to a bank that
continually made the news for its problems
rather than its achievements?
Fortunately, Herro has often made clear his
thinking. His initial purchase, he recently
explained to Morningstar, occurred when the
share prices of many European banks had
been pummeled owing to their exposure
to technology firms that were struggling in the
early 2000s' growth-stock rout. He thought
the banks had adequately dealt with that issue.
A rebounding franchise seemingly available
at a bargain price is a value investor's dream.
Herro dove in.
It was a wise move: The stock performed
remarkably well over the next several years-until
its price sank during the global financial crisis.
https://www.morningstar.com/funds/xnas/oakix/quote https://www.morningstar.com/funds/xnas/oakix/quote https://www.morningstar.com/stocks/xpar/bnp/quote https://www.morningstar.com/stocks/xmil/isp/quote https://www.morningstar.com/stocks/xlon/lloy/quote https://www.morningstar.com/stocks/xlon/lloy/quote
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