Despite Setbacks, Europe Is Still in Vogue

Good returns for mutual funds and ETFs

Given the political and economic uncertainty facing Germany and the European Union, should Americans still be investing in the region?

The answer, money managers and others say, is, "Yes."

Stocks on the continent continue to be cheaper than those in the U.S., and prospects for economic growth in at least parts of the old country seem a bit brighter than on this side of the Atlantic, observers say.

In addition, they doubt that the election of a new German chancellor and the earlier rejection of the proposed EU constitution by French and Dutch voters will have any significant effect on European companies, at least in the short term.

"There is value in European stocks," says Clive McDonnell, a strategist for Standard & Poor's who follows Europe. Historically, these stocks have carried lower price-to-earnings ratios than U.S. equities, but because the American economy is likely to slow down, European stocks look more attractive, he says.

McDonnell's thoughts are echoed by Kurt Umbarger, a portfolio specialist for non-U.S. equities with T.Rowe Price Group (TROW). European stock valuations are "probably the most attractive in the developed world," and "they're certainly more inexpensive than what you find on a case-by-case basis here in the states," he says.

In terms of performance, European stocks have been topping their U.S. counterparts lately. The S&P 500 index, a broad gauge of U.S. stocks, was down 2% this year through Monday, while the S&P Europe 350 index was up 16.1%.

Umbarger also maintains that corporate earnings by European companies have been surprisingly good for more than a year, in part because they have been restructuring their operations, and strengthening their balance sheets.

Looking at the deal that would allow Angela Merkel, leader of the conservative Christian Democrats, to become Germany's chancellor in a coalition government, McDonnell sees the deal having no short-term impact on stocks there.

Under the agreement, key ministeries like finance and labor will continue to be controlled by the Social Democrats. That "could be perceived negatively by the market," in the long run, "but we'll wait and see," McDonnell says.

Similarly, Penny Dobkin, who manages the $8.6-billion Fidelity Advisor Diversified International Fund/A (FDVAX), sees the end of Germany's political deadlock having little impact on stocks there. "It's not necessary to be bullish on Germany," Dobkin says of the deal enabling Merkel to become the country's first woman chancellor.

McDonnell, Dobkin and Umbarger also say they do not view the outcome of the French and Dutch referendums on the proposed EU constitution as a significant issue for investors. McDonnell noted that the union has started negotiations to include Turkey as a member, indicating that it can function without the new constitution.

Looking at economic growth in Europe, Umbarger says that although it has been anemic in France, Germany and Italy, "peripheral markets" like Greece, Ireland and Spain have been expanding more robustly.

Dobkin says France and Germany have been able to generate more sustainable growth than had been expected.

In Germany, the slowdown resulting from the reunification of the Eastern and Western parts of the country in the 1990s has pressured many companies to cut costs, she says. That, combined with recent increased demand for products by China, has benefitted German companies. German growth has in turn helped French businesses and industries, as has government deregulation, Dobkin says.

Two of Standard & Poor's current top stock picks in the U.K. and Europe are Royal Bank of Scotland, and Unilever N.V. (UN).

Royal Bank of Scotland is one of the largest banks in the world in terms of market capitalization, has the highest U.K. profits of any bank, and is among the cheapest European banking stocks, McDonnell says.

Unilever, the Anglo-Dutch food and consumer goods conglomerate, sports an attractive stock valuation relative to its peers. The company also looks good, he says, because it has been culling poorly performing products, enabling it to strengthen its top line.

Elsewhere in Europe and the U.K., Standard & Poor's likes AstraZeneca ADS (AZN), BP p.l.c. ADS (BP), Burberry, GSK, and Tesco Corp. (TESOF).

The top European holdings among Price's international and global stock and bond funds, which have about $21 billion in assets, include GlaxoSmithKline plc ADR (GSK), Total `B` ADS (TOT), UBS AG (UBS), and Nestle S A ADS (NSRGY), Umbarger notes.

Price also has a stake in National Bank of Greece, which the investment management firm sees benefitting from the country's economic expansion, which has fueled a demand for capital, Umbarger said.

Price, Umbarger said, does not expect European economic growth to exceed that of the U.S. in the near term. "But we do see actual stability," and "that's an encouraging sign that" there won't be a contraction at the start of 2006, he said.

Outside of buying individual securities, another way to get exposure to Europe is through mutual funds and, more recently, exchange-traded funds. ETFs that offer broader exposure to Europe include BLDRS Europe 100 ADR Index Fund (ADRU), iShares MSCI European Monetary Union Index Fund (EZU), iShares S&P Europe 350 Index Trust (IEV), streetTRACKS DJ EUROSTOXX Fund (FEZ), and Vanguard European VIPERS (VGK).

Below is a list of the top performing mutual funds and ETFs that invest in Europe or individual European countries over one-, three-, and five-year periods. While single-country Europe ETFs have been particularly strong performers, investors should keep in mind that they also court country- and in many cases industry-specific risk.

Europe Mutual Funds

One-Year Return (%)

Expense Ratio (%)

AIM European Small Company Fund/A (ESMAX)

+61.0

2.00

DFA Invest Grp Continental Small Company Port (DFCSX)

+42.6

0.73

Fidelity Nordic (FNORX)

+39.8

1.24

FTI European Smaller Companies Fund (FESCX)

+39.3

1.58

Fidelity Europe (FIEUX)

+36.4

1.05

Average European Fund

+27.1

Three-Year Ann. Return (%)

Expense Ratio (%)

AIM European Small Company Fund/A (ESMAX)

+49.0

2.00

Henderson European Focus/A (HFEAX)

+42.5

2.00

DFA Invest Grp Continental Small Company Port (DFCSX)

+40.8

0.73

Ivy Fund:European Opportunities/Adv (IEOVX)

+35.8

1.36

Fidelity Europe (FIEUX)

+35.2

1.05

Average European Fund

+26.6

Five-Year Ann. Return (%)

Expense Ratio (%)

DFA Invest Grp Continental Small Company Portfolio (DFCSX)

+18.9

0.73

AIM European Small Company Fund/A (ESMAX)

+18.7

2.00

Mutual European Fund/Z (MEURX)

+10.7

1.07

ICAP Funds:International Fund (ICEUX)

+9.4

0.80

ICON European Region Fund (ICSEX)

+9.2

2.24

Average European Fund

+4.6

Europe ETFs

One-Year Return (%)

Expense Ratio (%)

iShares MSCI Austria Index Fund (EWO)

+53.4

0.77

iShares MSCI Spain Index Fund (EWP)

+33.8

0.80

iShares MSCI Italy Index Fund (EWI)

+26.5

0.83

iShares MSCI EMU Index Trust (EZU)

+26.3

0.79

iShares MSCI Germany Index Fund (EWG)

+25.2

0.80

Three-Year Ann. Return (%)

Expense Ratio (%)

iShares MSCI Austria Index Fund (EWO)

+53.4

0.77

iShares MSCI Sweden Index Fund (EWD)

+41.7

0.92

iShares MSCI Spain Index Fund (EWP)

+36.9

0.80

iShares MSCI Belgium Index Fund (EWK)

+34.6

0.78

iShares MSCI Germany Index Fund (EWG)

+30.2

0.80

Five-Year Ann. Return (%)

Expense Ratio (%)

iShares MSCI Austria Index Fund (EWO)

+29.9

0.77

iShares MSCI Belgium Index Fund (EWK)

+11.4

0.78

iShares MSCI Spain Index Fund (EWP)

+10.2

0.80

iShares MSCI Italy Index Fund (EWI)

+6.5

0.83

iShares MSCI Switzerland Index Fund (EWL)

+4.5

0.79

Source: Standard & Poor's. Total returns include reinvested dividends. Preliminary data as of 9/30/05.

InvestmentAdvisor.com has more mutual fund news from Standard & Poor's available here.

Reprints Discuss this story
This is where the comments go.