As U.S. stock prices and indexes continue to fall, an overall economic rebound seems far off. Enron, WorldCom, and other large American firms have contributed to billions of lost investor dollars and, more significantly, lost investor confidence. Meanwhile, there’s plenty of partisan talk but little action coming out of Washington, and the markets reflect the dour mood of investors.
So where does this leave your clients? Fear not, for their diversification options are not as limited as one might think. Perhaps the answer to some portfolio woes won’t be found in some domestic undiscovered mom-and-pop company, but rather across the ocean in Europe.
“Europe is in a big bear market, but it’s a major economic zone of activity,” says David Winters of Mutual European Fund. “And any sensible investor should invest in Europe because it just gives you more opportunities to find good deals.”
Winters is a fund manager who prides himself on the research this fund requires. As the lead manager for Mutual European Fund, and president, CEO, and chief investment officer of Franklin Mutual Advisers, LLC (Mutual Series), he can’t afford to do things any other way in this “strange industry.”
Last May, Winters took over as lead manager of the Mutual European fund after 15 years of holding every position from analyst, to bond trader, to portfolio manager of other Franklin funds, to director of research. “I’ve been involved with Mutual European since its inception (1996),” he says. “So I’ve been an idea generator since then.”
Given a five-star rating by S&P and Morningstar, the Mutual European fund is up when the rest of the world is down. In S&P’s market comparison, Mutual European Fund/Z had an average annualized total return of 15.9% for the five-year period ended May 31, 2002, versus a total return of 0.8% for the FTSE Actuaries World Index (excluding U.S). This fund also ranks seventh within the International Equity category of 971 funds, and ranked second within the 83 funds in its peer group.
What’s the secret behind his fund’s success? “Today you have tremendous fear in the financial markets,” he says. But by adapting a three-pronged approach to choosing his European investments–he seeks out companies that have undervalued common stocks, that practice arbitrage, and are in bankruptcy–Winters says he is confident in the European Fund’s future. Mutual European has followed this same strategy throughout its history.
Characterizing the fund as “more a developed Europe fund than a developing Europe fund,” Winters focuses his investments in Western European companies of all caps, with a particular focus on the United Kingdom and Scandinavia.
The fund’s top holdings are in food, beverage, and tobacco, and also includes companies in a wide variety of industries, including railroads, candy, timber, media, and consumer goods. “We have a few U.S. companies,” he adds, “but it is a pan-European value sector fund and we want to maximize our ability to find good companies.” But as a European fund, Winters concedes that his limited domestic investments were only kept because of previous fund manager’s practices. “Historically, we owned a few U.S. stocks that we thought were incredibly compelling,” he says. “But today the U.S. portion of the fund is a couple percent, and candidly, we might eliminate it. All it does is make people ask us questions as to why it’s there.”
Today, the Z-share class of Mutual European is closed, but the fund’s A, B, and C classes are open and carry similar investing styles. Mutual European/A is front-end loaded 5.75%, the B-share class deferred load is 4%, and the C-share class front-end and deferred loads are 1%.
We recently spoke with Winters about his fund’s strong performance, and the challenges of researching European-based companies.
What makes you an expert on European businesses? I’ve always been fascinated with Europe. One of the first stocks I ever bought in my personal account was a European stock. I have been studying European companies, investing in them, and visiting Europe for many years. European companies used to trade at a bigger discount than a comparable company would in the States. So there was a lot of opportunity to buy good companies very cheaply.
Is doing research on European companies different than U.S. companies? It’s even harder work. In many respects there is less information–although ironically, with the plethora of information in the United States, lately it’s been pretty worthless because so much of it’s wrong. But it’s harder, because you have to dig even deeper and it is just more complicated. For example, we own shares in Carlsberg A/S in Copenhagen. Carlsberg is a company that has two classes of stock, and is controlled by a foundation created by Jacob Carlsberg 150 years ago to benefit Danish cultural institutions. Its principal asset is 60% of the Carlsberg brewery. Carlsberg is just waking up to all the issues of the 21st Century and behaving like a proper business, like caring about its shareholders. It is actually a good company but it’s been in a different world for the last 100 years. So to research Carlsberg and figure out its people was very complicated. It is not like reading the Anheuser-Busch annual report. I could give you 10 examples of things that we own in similar situations. We are special situation investors; we are not going for the big, well-known blue chips. Occasionally we will if they are really cheap, but we have to do more research. But the irony of the whole European thing is this: we are based in Short Hills, New Jersey, and we’ve done a good job managing money in Europe. And I am convinced that having some distance between them and us is a good thing.
Is Europe a hard sell for American investors? What can be done to change Americans’ perceptions of investing in Europe? I think it is going to become an easier sell with the weaker dollar. But I don’t know how to change people’s perceptions. Hopefully people will start to take notice that this is a great fund, it’s a nice size at $1.1 billion [for all the fund's share classes, combined], and I am amazed it’s not bigger. It seems to me that individuals and institutions should all be investing in Europe.
What is it about your fund that makes it so unique? We don’t think with the crowd and we do a lot of detailed work. We carry out a three-pronged approach and have a willingness to hold cash when we can’t find enough [good companies] to buy. I have a material portion of my net worth invested in the fund so I’m not just shooting to beat the index. I think that smart investors–those who didn’t get sucked into the mania–should be carefully making smart investments, especially now that securities prices are low, or rather, lower than they were. Bear markets are where the great wealth is created if you’re a buyer. That doesn’t mean that the market can’t go lower, bur we’ve kept people’s capital intact and have been able to find some great opportunities in this mess.