Insights and enhancements | International equity market commentary 3Q 2025

Theme and Background

This chapter is a transitional communication letter written by Oakmark's new Co-CIO International (who has been at Harris for over 26 years) to clients in the third quarter of 2025. The core context is the initiation of David Herro's succession plan, and the author uses this opportunity to address the three questions clients care about most: personnel changes, investment process improvements, and portfolio construction optimization. Regarding the market environment, the author emphasizes country-specific differences in international markets (governance standards, legal frameworks, political dynamics) but argues that economic and competitive logic knows no borders.

Core Views

• Succession planning focuses on "what to do" rather than "when to do it": No specific retirement date is set; only a commitment to provide at least six months' notice is made, avoiding negative externalities caused by rigid timelines.
• Investment process improvements are "evolution" rather than "revolution": The existing team and processes are already excellent; the direction of improvement is to introduce "mistake management" and "de-bottlenecking the idea factory."
• The direction of portfolio construction optimization is to more closely align with the equal-weight characteristics of the "approved list": Based on 20 years of data backtesting, the equal-weight approved list itself has performed exceptionally well, and the portfolio should more closely replicate its attributes.

Key Arguments and Data

1. Mistake Management Mechanism:

• When intrinsic value growth lags initial expectations by 10%, the internal process "turns up the volume," engaging with management and reassessing.
• If it lags by another 10% (cumulative 20%), a mandatory "devil's advocate" review is triggered to fully verify the bearish logic.
• If the analyst loses their "voice" (unable to firmly support or oppose), coverage is reassigned to another person.
• Significant upward valuation adjustments also require more cautious monitoring (conservative errors are equally costly).
• This mechanism has been fully implemented, with cases involving all three levers in the past two quarters.

2. De-bottlenecking the Idea Factory:

• Historical data shows that the analyst team's performance "batting average" is excellent, but the number of new recommendations per person has been steadily declining.
• After setting simple and clear time allocation guidelines, annualized new idea output increased by over 100% within 90 days compared to the past few years.

3. Portfolio Construction Optimization:

• Research on nearly 20 years of international portfolio and approved list data reveals a core finding:
• The equal-weight approved list itself has performed "very well."
• The portfolio should more closely represent the attributes of the entire approved list.

Companies/Assets Involved

• Harris | Oakmark: The author's institution, emphasizing team stability (the author has been at the firm for over 26 years and has worked with David Herro for over 10 years).
• David Herro: The retiring CIO International, with a succession plan that sets no specific date.
• Oakmark International Fund: The author was appointed co-manager at the beginning of this quarter.

Investment Implications

• Process improvements are a positive signal: The mistake management mechanism systematically identifies errors through quantitative thresholds (10%/20%) rather than relying on price-based stop-losses, which helps reduce portfolio tail risk. Doubling idea output means more high-quality candidates are available in the future, potentially enhancing portfolio optimization.
• Portfolio construction becomes more balanced: Moving toward the equal-weight attributes of the approved list may reduce the risk of overconcentration in individual heavy positions, but attention should be paid to whether this sacrifices sources of excess returns (e.g., concentration premiums from deep-value stock selection).
• Succession risk is manageable: The six-month notice mechanism and gradual transition reduce the impact of David Herro's retirement on the portfolio. However, investors need to continuously track the actual execution of the new processes, especially whether the "devil's advocate" review truly changes position decisions.