Foreign-Stock Fund Managers Split on Europe
There are accomplished investors on both sides of the debate.
There are accomplished investors on both sides of the debate.
"To understand Europe, you have to be a genius--or French." Madeleine Albright
Many fund managers are trying to figure out Europe these days. The Continent's markets have been battered in 2011 as investors fret about its prospects. Most of their concerns are related to the debt loads that European governments (especially Greece) face and the implications of that for future economic growth.
Too Cheap to Pass Up
Some foreign-stock fund managers argue that many companies in Europe represent compelling values. There is data to support that conclusion, at least on a relative basis. European stocks have lagged their sexier counterparts in emerging markets for a long time now: Over the trailing three, five, and 10 years through Sept. 26, 2011, the MSCI Europe Index has lagged the MSCI Emerging Markets Index by respective annnualized margins of 10, 9, and 11 percentage points. Meanwhile, managers of large-cap foreign-stock funds, who a decade ago stashed 69% of their assets in Europe, have trimmed that stake to a recent 61%. That shift suggests that Europe may be an attractive contrarian play.
Managers David Samra and Dan O'Keefe of Artisan International Value (ARTKX), who have racked up a sterling record since the fund's 2002 inception, have added substantially to the fund's holdings in Europe over the past year. (It held a 70% stake at the end of June.) They acknowledged in a recent shareholder report that prospects as a whole aren't exactly bright: "European governments are pushing through budget cuts and tax reforms, though because these countries are tied to a common currency, they have less flexibility and more systemic risk than the U.S." They've also steered clear of most European banks. But some stocks have become too cheap to ignore. They've purchased giant insurer ING and British property firm Land Securities, for example.
Oakmark International's (OAKIX) David Herro doesn't have quite as big a stake in Europe, but the fund's weighting is above average at 66%. And he's taking a bolder tack in a way, adding to the fund's holdings in European banks that have been hammered in 2011 over sovereign debt concerns. BNP Paribas of France and Italy's Intesa Sanpaolo (both among the fund's top 10 holdings) are each down 40% through Sept. 26, but Herro believes that "there will not be huge writeoffs at the major banks in Europe." That said, he's focusing on banks with asset-management divisions (which gave more stable revenues) or strong deposit franchises, and points to BNP's diversified revenue base and double-digit returns on capital.
Where's the Growth?
On the other end of the spectrum are managers who are wary of Europe and hold below-average stakes in it, such as Brent Lynn of Janus Overseas (JAOSX). That fund has the lowest exposure to European stocks among diversified foreign large-cap funds--just 15% of assets at the end of June. Lynn is a huge fan of emerging markets and believes they'll keep up their recent history of strong growth. "I expect economic growth in China, India, Brazil and other key emerging markets to significantly outpace the U.S. and Western countries for many years," he recently said. Meanwhile, only two European stocks crack the fund's top 15 holdings: Banco Bilbao Vizcaya of Spain and Deutsche Bank, both of which Lynn owns as part of a larger contrarian play on banks he believes have been overly punished by investors.
Mark Yockey of Artisan International (ARTIX) has moved in the opposite direction of colleagues Samra and O'Keefe at Artisan International Value. After a foray into European banks in 2010 that put a big dent in returns, he reversed course when their issues turned out to be more severe than he expected. Yockey, who tends to own a mix of growth stocks and cheaper turnaround plays, has generally reduced the fund's stake in Europe over the past year as he's become more attracted to leisure and real estate plays in China and Hong Kong. He believes higher capital requirements will limit European banks' profits for a long time, while new austerity measures will hinder consumers' ability and willingness to borrow money. "The growth is in Asia still and will be going forward. It'll be slow in the U.S. and Europe," he recently said. However, he still has roughly half the fund's assets invested in Europe. Its top holdings based in the continent, however, are companies that crank out relatively steady revenues and have global customer bases such as Swiss food giant Nestle, Anheuser-Busch InBev, and French beverage maker Pernod Ricard. Such firms shouldn't be affected too much by Europe's arguably gloomy prospects.
Senior fund analyst William Samuel Rocco also contributed to this article.
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