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Value Line’s European Equity objective group is comprised of mutual funds that are mandated to invest at least 50% of their net assets in equity securities of European companies, though most of these funds typically have more than that percentage invested in the region. The funds in this category normally have a broad focus, without highlighting any specific country within Europe. There are, of course, a select number of funds, such as Fidelity Nordic Fund (FNORX), that break this mold. Differentiation on the objective level is mostly on the market-cap focus, and there are several European equity funds that invest in small-company stocks (Invesco European Small Company AESMAX). 

Thus, most of the European Equity funds Value Line covers are “generalist” in nature, with the latitude to own both growth and value investments across the market capitalization spectrum from small to large. That said, each management team has its own focus, so there are clear differentiating factors among the funds about which investors need to be aware. As usual, funds that follow an index approach are also available, including Vanguard European Stock Index Fund (VESSX).

Although Europe is relatively small compared with other geographical areas in terms of size, its historical and ongoing significance is outs ized relative to some of the larger, but often less developed, continents and countries. Also of interest is the diversity of nations that make up Europe. Indeed, Europe is very different from the United States, in that each country has its own distinct legal, political, and social systems—while each state in the United States is roughly indistinguishable in those respects. This is important to understand, as the distinctions can lead to many complications on the investing front. It is also why expense ratios for funds in this objective group are often higher than for domestic-focused ones. Another factor to consider here is the use of hedging to offset exchange-rate fluctuations; depending on where one believes the price of the dollar is going, this practice can be viewed as good or bad. 

Over the long term, the European Equity objective group has been an above-average performer relative to the markets of developed economies around the world, as measured by the MSCI WORLD Index. For the 10-year period ended May 31, 2011, the group had an annualized return of 6.0%, while the MSCI WORLD Index rose at an annualized rate of 3.0%. For the five- and three-year periods through May, the group had a gain of 1.9% and a loss of 3.5%, respectively, while the Index reported an annualized gain of 0.5% and a decline of 3.9%, respectively. During the past year, the European Equity group reported a huge gain of 36.2% compared with a gain of 25.4% for the MSCI WORLD Index. Year to date through May 31, 2011, the European Equity objective group again outperformed the MSCI WORLD Index. It reported a gain of 8.9% compared with a gain of 5.8% for the Index. The group has a Risk Rank of 4, indicating that funds in this group might not appeal to risk-averse investors. That said, there is a benefit to geographically diversifying investments. 

One fund with a relatively excellent year-to-date return for the five months ended May 31, 2011 is MFS European Equity Fund (MEEAX).  This fund’s investment objective is capital appreciation.

The fund pursues this objective by investing at least 80% of its assets in European equities and other investments that are tied to the Continent’s economy. Some of these have exposure to developing nations in Eastern and Central Europe. From time to time, a substantial portion of its assets may be invested in companies domiciled in a single country, but no more than 35% of assets may be invested in any one industry.

The fund uses a bottom-up investment strategy, seeking companies believed to have above-average earnings growth potential as well as those determined to be undervalued compared to their perceived worth. Managers are not restricted by market-cap size, and they may invest in options and derivatives to enhance returns and reduce risk. As of May 31, 2011, the fund held 75 positions; about 92% of which represented stocks from 10 European countries; and its top 10 holdings account for about 34% of its assets. 

Another fund with a relatively good 2011 year-to-date return, and an above-average five-year total return, is T. Rowe Price European Stock Fund (PRESX). This fund’s objective is long-term growth of capital. 

To achieve this objective, the fund normally invests at least 80% of its assets in securities of European companies. Fund managers invest in stocks of at least five countries. It may purchase companies of any size market cap.

The fund seeks to purchase stocks with leading market positions, attractive market niches, quality management, strong earnings and/or cash flows, and may invest in both growth and value stocks. Management selects stocks that have the most favorable combination of company fundamentals, earnings potential, and relative valuation. As of April 30, 2011, stocks in its top-five countries accounted for about 81% of the total portfolio. The fund may sell securities for a variety of reasons, such as to secure gains, limit losses, or redeploy assets into more-promising investments.

A third fund with an above-average 2011 year-to-date return is Invesco European Growth Fund (AEDAX). This fund’s primary objective is long-term growth of capital. 

To achieve this goal, the fund invests its assets in the equity securities of European companies in both developed and emerging markets with varying market capitalizations. The portfolio construction is driven by a bottom-up approach. The chosen stocks reflect companies with excellent revenue growth, successful cost-saving efforts, and/or new product releases. Issues purchased using these criteria generally have a two- to three-year investment horizon. Finally, all fund holdings must trade often enough to allow any position to be completely sold in fewer than eight days. A stock is sold if earnings growth is deteriorating, fundamentals are weakening, or if its current price exceeds its target. As of March 31, 2011, the fund’s top holdings by country were the United Kingdom with 36% of assets; Switzerland, 11%; France, 8%; Germany, 8%; and Sweden, 5%.

In the table below, we have listed 10 top-performing funds through May 31, 2011 that we follow in our Fund Advisor database.

10 Top European Equity Funds Performance

Fund Name

Ticker

% Year-to-date

Total Return

% 1 Month

Total

Return

% 3

Month

Total

Return

% 6 Month

Total

Return

% 5 Year

Total

Return

Annualized

MFS European Equity A

MEEAX 

13.92

-1.22

6.60

23.82

 

 

T. Rowe Price European Stock

PRESX 

12.87

-2.70

6.48

24.43

5.28

Invesco European Growth A

AEDAX 

11.52

-1.38

7.63

20.06

4.43

Henderson European Focus A

HFEAX 

11.49

-2.43

3.06

19.82

10.30

 

DFA Continental Small Company

DFCSX 

11.35

-3.41

6.55

25.81

5.00

Virtus Greater European Opportunity A

VGEAX 

10.81

-0.79

8.63

18.36

 

DWS Europe Equity A

SERAX 

10.91

-0.75

4.73

18.05

-1.10

BlackRock Eurofund A

MDEFX 

10.45

-3.39

3.03

19.68

-0.89

ICON Europe A

IERAX 

10.02

-3.57

4.84

19.95

 

MorganStanley European Equity A

EUGAX 

9.94

-2.55

2.87

17.60

2.73

European Equity Objective Group

 

8.90

-2.86

3.29

17.75

1.88

 

 

At the time of this article's writing, the authors did not have positions in any of the companies mentioned.