For Those Daring to Brave Europe, Try These Funds

The eyes of the financial world are on Europe these days--its capitals and banks, to be precise. The continent continues to struggle to control debt problems that have led to steep government spending cuts, high unemployment rates, social unrest, and credit rating downgrades for some of its biggest economies, including France, Italy, and Spain. And despite a new bailout agreement designed to prevent Greece from defaulting, risks remain.

Not exactly the sort of environment that screams "economic boom," perhaps, but some investors might consider Europe's dark days an invitation to buy distressed stocks. True, European stocks have already staged quite a comeback so far in 2012: The MSCI EAFE index, which tracks stocks in developed markets in Europe, Australasia, and the Far East, is up more than 11% year to date, and the MSCI Europe Index, which tracks just European stocks, has gained a bit more than that. Nonetheless, both indexes are down more than 7% for the past-12-month period. As of Feb. 20,  Morningstar's ETF Valuation Quickrank showed that the stocks in BLDRS Europe 100 ADR Index  are trading at a discount of roughly 15% to our analysts' estimates of their fair value, a bigger discount than most ETFs that focus on U.S. equities.  

For investors who would like to add exposure to Europe, inexpensive, focused vehicles such as  Vanguard MSCI Europe ETF (VGK) are a reasonable starting point; Morningstar also has a few favorite actively managed funds in the Europe-stock category, such as  Mutual European (TEMIX). At the same time, it's worth noting that many geographically diversified foreign-stock funds have substantial exposure to Europe, too. For example,  Fidelity Spartan International Index , which tracks the MSCI EAFE Index, has more than 40% of its portfolio in stocks from continental Europe's developed markets and another 21% in U.K. equities.

Those investors who would like to make a focused play on Europe's beaten-down names, however, might opt for an actively managed fund run by a value-oriented stock-picker who is tilting more heavily toward Europe than the index.

To help identify such options, we used  Morningstar's Premium Fund Screener to search for no-load foreign large-value funds with European weightings higher than that of the category average. Each of the funds below has a Morningstar Analyst Rating of Gold or Silver, meaning that our analysts think the funds have a good shot of outperforming their peers in the future. Premium users can click  here to run the screen themselves. Here are two that made the cut.

 Oakmark International (OAKIX)  (
)This fund has been on a tear so far in 2012, having already gained nearly 15%, which is about five points higher than the MSCI EAFE and the foreign large-value category average. David Herro has piloted the fund since its inception in 1992, during which time the fund has consistently been among the top performers in its category. Herro and comanager Rob Taylor focus on a company's absolute value rather than on whether it's trading cheaply relative to its peers or some other metric. The fund typically outperforms in down cycles while providing average results during rallies. The fund has nearly half its assets invested in financials and consumer cyclicals. Seventy-two percent of its holdings are in Europe, well above the category average of 61%. The fund's expense ratio of 1.06% is average for the category.

 Tweedy Browne Global Value (TBGVX) (
)Unlike Oakmark International, this fund is currently light on financial stocks, investing about half its assets in consumer defensive and consumer cyclical stocks. The fund's 72% stake in European companies favors financially strong firms with good franchises, such as  Nestle (NSRGY) and  Philip Morris International (PM). Its underweighting of financials has contributed to recent underperformance, as the sector has rallied after big losses in 2011. But it has beaten the category average by at least four points each of the past four years. One drawback here is fees, which are on the high side at 1.39%.

Performance data as of Feb. 20 for indexes and as of Feb. 17 for funds.