Investors should consider Oakmark International and Oakmark International Small Cap, which had a rough 2007 but should bounce back. By Steven Goldberg, Contributing Columnist January 8, 2008 Not every smart value manager migrated into growth stocks last year. David Herro, one of the premier pickers of foreign stock managers over the past 15 years, stuck with bargain-priced stocks -- and paid a big price for it.Oakmark International (symbol OAKIX) fell 0.5% in 2007, lagging the MSCI Europe, Australasia and Far East index of foreign stocks by almost 12 percentage points. Oakmark International Small Cap (OAKEX) lost 8.3%. That made Herro one of the poorest performing foreign-fund managers of 2007. The silver lining: Money gushed out of Herro's funds, prompting Oakmark to reopen both to new investors. I think this is a good time to start putting some money to work here, particularly in Small Cap. Don't be in a rush -- instead begin averaging in a little bit every month over a year or so. Why invest in such sad sacks? Because they'll almost certainly bounce back. Advertisement Herro, 47, has been managing money for 21 years. He's had two bad patches like this before -- one in 1994 and the other in 1998. Both times he rebounded strongly. Even with last year's rotten performance, Oakmark International has returned an annualized 12% over the past ten years, beating the EAFE index by more than three percentage points per year, on average. Small Cap has done even better, returning an annualized 17% during the past ten years, putting it in the top 4% among foreign funds that specialize in undervalued small and midsize companies, according to Morningstar. Herro hardly sounds depressed about his performance. "These things happen," he says. "You can't just keep having good year after good year." Advertisement But he's confident that his stocks will be long-term winners. Indeed, he just added more than $1 million of his own money to Small Cap and plans to invest even more. Why the bad year? Herro points to energy, which he shunned, and financial stocks, which he loaded up on, as the chief culprits. "A value investor should be looking at what hasn't done well," he says. "And, as usual, we're a bit early." Over time, he says, gas and oil prices will decline -- as businesses and consumers conserve more energy and as new supplies come online. Meanwhile, he thinks he's found some terrific financial stocks that have been dumped imprudently by panicked investors. Favorites include two Swiss investment banks, UBS (UBS) and Credit Suisse Group (CS). "What's being obscured is this printing press known as asset management," he says. Both firms boast global asset-management businesses that include mutual-fund operations. Advertisement Equally important, Herro says that some subprime-mortgage and related securities have already been marked down too far: "This is an example of headlines spreading the contagion. You're going to see big defaults in subprime, but you're not going to see the death and destruction that some people are predicting, and the stocks are going to turn around before we see tangible signs of improvement." Typically, stocks move ahead of business developments. Another favorite stock is drugmaker Novartis (NVS), which has a promising pipeline of new drugs. It yields 2.5% and sells at just 15 times estimated 2008 earnings. Ever the contrarian, Herro sees the dollar close to or at a bottom relative to the euro and the pound. Although he has rarely used hedges in his funds, he's currently partially hedged against any declines in the pound, the euro and the Swiss franc. Close to 15% of each fund is in emerging markets, but Herro says he's getting more selective in those stocks. Most of his emerging markets holdings are in South Korea and Mexico. Advertisement After a long run of solid performance, Herro no longer sees European stocks as great buys compared with U.S. issues. Although they still sell at roughly a 10% discount to U.S. stocks on such measures such as price-earnings ratios and dividend yields, U.S. companies are, on average, more profitable. But Herro is beginning to turn bullish on Japan. He says Japanese companies are steadily becoming more shareholder friendly. He says Chinese stocks represent a bubble waiting to burst: "There are more IPOs every week, and the companies are still controlled by state. Meanwhile, the place is an environmental nightmare." Labor costs are rising, and the country will have to spend more to control pollution, he argues. Both developments will slow growth. "The boom years are over," Herro says. "Growth will continue, but not at 10% or 11% annually." My bottom line: Herro is a good investor who is often at odds with conventional wisdom. As he says, he's often early. His small-cap fund is arguably the best in the category. Assets are less than $1 billion, and you can count on Herro to close the fund before it gets too big. With small-cap value stocks out of favor, the fund may not bounce back right away. But it will eventually do so. Oakmark International is also one of my favorite foreign funds. But Dodge & Cox International (DODFX) boasts a lower expense ratio, a team of great managers and a better record.