Europe Funds in Flux

The Europe fund category is looking more like the Japan group these days--and that's not welcome news for investors.

For several years now, Morningstar's Japan-stock category has held little appeal. That's not because of any pessimism about the Japanese stock market, but because of the shortcomings of the individual funds. In fact, with so many Japan funds saddled with manager changes, high fees, narrow mandates, or uninspiring performance, we can't find even one standout to designate as a Morningstar  Analyst Pick.

The Europe group is in better shape than that. But as we wrote in May, the category isn't all that attractive for investors seeking either a core international fund or a supplemental one. Sure, there are a handful of solid choices in the group, but a number of events in recent years, including some in the past two weeks, has further shortened the roster of worthwhile offerings.

In fact, two of the most prominent Europe funds have just undergone management changes.  Putnam Europe Equity  is now on its third lead manager in less than a year. It lost longtime leader Omid Kamshad in late 2003 after he was implicated in Putnam's market-timing scandal. Heather Arnold, a newcomer to Putnam, took his spot. But at the end of August 2004, Mark Pollard--who had worked with Kamshad at Putnam in the 1990s, then moved to two other firms, and returned to Putnam this summer--was named lead manager of the Europe offering. (Arnold remains on the team.)

Pollard has experience in spades, but so many changes in such a brief span can't help but reduce our comfort level with this fund.

Even more question marks surround  Scudder Greater Europe Growth , where lead manager Alexander "Sandy" Black and several of his comanagers were replaced just a week ago. Black and company had been installed by Deutsche Asset Management when that firm became advisor of the fund in spring 2002. Now in charge are two new managers. One of them just recently joined Deutsche; the other arrived last year and was installed on this fund's team three months ago.

Like the Putnam offering, the Scudder fund has a history. In the second half of the 1990s--before Deutsche ran it--it was one of the Europe category's best choices. Under Black, its record had been so-so. The latest change raises further concerns.

Meanwhile, two other Europe funds from well-known families had already undergone management changes in 2003, and thus they too lack long-tenured leaders.  Fidelity Europe's (FIEUX) manager has been in his chair only since January 2003.  Merrill Lynch EuroFund   rearranged its management team just a month after that, installing a new manager in the lead role.

Finally, there's the unhappy tale of  AIM European Growth (AEDAX). That unusual fund has one of the better records in the category, and its lead manager has been in place nearly seven years. So what's the catch? The cost. The expense ratio on this fund has risen sharply and steadily in the past few years, inching above 2% for the fund's fiscal 2003 before falling ever so slightly to 1.91% for the first half of fiscal 2004. That's a hefty charge under any circumstances, and the fact that until very recently the trend was heading in the wrong direction--and couldn't be blamed on a declining asset base--is even more disconcerting.

All in all, our bottom line on this category remains the same as in our May article: If you're interested in investing in Europe, consider choosing a broader international fund that invests all over the world outside the United States. Those funds typically devote about two thirds of their assets to Europe, yet they can take advantage of opportunities elsewhere--and they generally cost less to boot. If you want Europe and Europe alone, take a look at the three funds we highlighted in May, all of which, fortunately, remain attractive. Beyond those, though, the pickings in the Europe-stock category are getting mighty slim.