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."

Herro also manages the Oakmark ( OAKEX) International Small Cap Fund (OAKEX) and the ( OAKWX) Global Select Fund (OAKWX). (For a list of stocks in the Global Select fund, click here for the Stockpickr portfolio).

The manager says he has lowered the emerging-market exposure in his three funds to just 9%, with 6% held in two South Korean stocks, SK Telecom ( SKM) and Samsung Electronics. He describes both as "great companies in a somewhat emerging market."

Meanwhile, Herro sees a lot of attractive value stocks in Europe because European companies are paying more attention to profitability. He says a lot of global franchises are selling cheaply because these sleepy companies had made some bad acquisition decisions. He likes Cadbury Schweppes ( CSG), Nestle and Diageo ( DEO) because these are strong franchises with constant earning streams.

The second-largest position held by Herro's funds is GlaxoSmithKline ( GSK). It had been trading at 20 times cash flow and 30 times earnings, according to Herro, but the recent scare with Avandia, its diabetes drug, knocked the stock down to 10 times cash flow and 12 times earnings.

"Glaxo has a well-diversified business," says Herro. "They have a good pipeline and great consumer products, but because of the diabetes thing, the science is not being priced in, the strength is not being priced in, nor the quality."

The Oakmark funds recently added HSBC Holdings ( HBC), which Herro says is trading at one times book value and 11 times earnings but is yielding 3%. Herro said the stock is down because investors are focused on a small part of the business involved in subprime lending. The subprime lending industry has been taking a hit as housing bubble begins deflating.

"The market is completely missing the other 91% of business," Herro said. "They are all preoccupied with subprime, but what about the 35% in Asia? These big global financial institutions have strong cash flow, profits and better capital management than Chinese banks, and the stocks are cheap."

Herro says the reason Oakmark launched the Global Select fund last year is to specialize in large-cap global stocks. "There is still value here," says Herro. "I don't think quality or risk is being priced the way it should be. When small-caps were in the doldrums, it only took a year or two to rebound because they are small. Large-caps will take time to rise because they are large, but I think this is a great opportunity."

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