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Emerging Markets Too Risky; Mull Europe Instead

One of the best-known international stock fund managers is moving money out of emerging markets and into undervalued large-cap stocks in Europe.

David Herro, chief investment officer at Harris Associates, likens the current euphoria in emerging-market stocks to the bubble in the so-called Asian Tiger markets 10 years ago.

Speaking in Chicago an a conference sponsored by the stock and fund research company Morningstar (MORN), Herro noted that when the Asian markets hit their peaks in 1997, portfolio and fund managers were recommending that investors hold 15% of their portfolios in Asia.

But after more than 70% of the value of the Asian markets was wiped out, those same managers said investors should reduce their holdings to 0%, says Herro.

"We are now getting to a stage where there is a lot of euphoria," says Herro, the portfolio manager for the Oakmark (OAKIX)International Fund (OAKIX). "Everyone is saying hold 10% or 15% of their portfolios [in emerging markets]. That says to me this is a time to be cautious." (For a list of stocks in this fund and discussion about them, click here for the Stockpickr portfolio.)

Herro had the audience at the international stock fund panel to himself, as inclement weather derailed the travel plans of the two other managers scheduled to speak, Jean-Marie Eveillard of First Eagle Funds and George Evans of Oppenheimer Funds.

Herro says emerging markets and their equities continue to exhibit a collection of high risk factors. He cited lack of transparency, unclear ownership structures, government regulations and high prices. "These stocks look less attractive from a price perspective," he says. "We like to wait to see them beat up a bit before we'll buy them."

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