Are fundamentals starting to matter again outside the U.S.? | International equity market commentary 2Q 2025
Oakmark is the mutual fund family launched in 1991 by Harris Associates, the Chicago deep-value firm founded in 1976 (about $105bn AUM). Bill Nygren runs the flagship Oakmark Fund and David Herro the Oakmark International Fund, buying businesses at large discounts to intrinsic value and holding them like owners — publishing quarterly fund commentaries, market commentaries and insight articles.
In plain words
This report says U.S. growth stocks have dominated for years, but in 2025 the trend is reversing: the dollar is weakening, Europe's economy is improving, and money is flowing to cheaper international stocks (value investing). For everyday investors, it means don't just chase U.S. hot stocks—look at undervalued markets like Europe. The author argues value investing is making a comeback, and the gap between cheap and expensive stocks is still huge, so this shift may have a long way to go. Worth a read because it challenges the idea that value is dead, backed by data.
Oakmark's Q2 2025 International Equity Report notes that U.S. growth/momentum stocks are overvalued and the U.S. dollar is weakening, while European fundamentals are improving, signaling a reversal in the value investing paradigm. The Oakmark International Small Cap Fund returned 16.99% for the quar
Theme and Background
This chapter discusses whether international equity markets are undergoing a fundamental-driven paradigm shift. The report notes that over the past decade, U.S. growth/momentum stocks have consistently outperformed due to a strong dollar and valuation expansion. However, this trend has begun to reverse in 2025: the dollar is weakening, valuations of U.S. growth stocks are declining, while improving fundamentals in Europe are attracting capital inflows.
Core Thesis
Author David Herro argues that the value investing paradigm is returning, and this shift is based on fundamentals rather than short-term volatility. The core judgment is: the current valuation gap remains enormous, so the value reversion process is far from over. Counterintuitively, despite value stocks lagging for the past decade, the author has consistently believed this trend was unsustainable, and market performance in 2025 is validating this view.
Key Arguments and Data
- Performance: The Oakmark International Small Cap Fund posted a quarterly return of 16.99%, outperforming its benchmark (MSCI World ex USA Small Cap Index) by 16.82%; the Oakmark International Fund posted a quarterly return of 12.64%, outperforming its benchmark (MSCI World ex USA Index) by 12.05%.
- Long-Term Return Comparison:
Since inception, the fund has an annualized return of 8.70%, a one-year return of 20.97%, a three-month return of 12.64%, and an expense ratio of 1.05%
| Fund/Index | 1 Year | 3 Months | 5 Years | 10 Years | Since Inception |
|---|---|---|---|---|---|
| Oakmark International Fund | 20.97% | 12.64% | 11.54% | 4.92% | 8.70% |
| Oakmark International Small Cap Fund | 26.22% | 16.99% | 15.36% | 6.73% | 8.98% |
- Macro Drivers: The dollar's bull market of over a decade is beginning to weaken; valuations of U.S. growth/momentum stocks are retreating from highs; fundamentals in Europe (which the author considers the cheapest region globally) are improving.
- Historical Logic: The author emphasizes that the larger the valuation gap, the harder it is to maintain the status quo. The current gap remains wide, so the reversion will persist.
Companies/Assets Involved
Since inception, the fund has an annualized return of 8.98%, a one-year return of 26.22%, a three-month return of 16.99%, and an expense ratio of 1.33%
- Oakmark International Fund: Managed by author David Herro, with Tony Coniaris added as co-manager (effective July 1, 2025). Coniaris was also appointed Co-CIO of International Equities (effective April 1, 2025).
- Oakmark International Small Cap Fund: Also performed strongly, with a quarterly return of 16.99%.
- Mike Manelli: A 20-year veteran manager who will leave the firm at the end of 2025 and will no longer serve as co-manager on any fund as of July 1. The report highly praises his contributions and emphasizes that his departure will not affect the team's capabilities.
Investment Implications
- Directional Judgment: The author is clearly bullish on non-U.S. markets (especially Europe) value stocks, arguing that a weaker dollar and improving European fundamentals will drive capital flows from U.S. growth stocks to international value stocks.
- Specific Actions: Investors should focus on regions where the valuation gap remains large (e.g., Europe) rather than chasing U.S. growth/momentum stocks that are already at elevated levels. The value investing strategy has the potential for sustained gains in the current environment.
- Personnel Changes: The addition of Tony Coniaris is seen as strengthening the team's capabilities, not weakening them. Investors need not worry about the stability of the fund's strategy due to Mike Manelli's departure.