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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 typically have more than that amount 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 A, ESMAX).

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 to other geographical areas in terms of size, its historical and ongoing significance is outsized 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 there 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 April 30, 2012, the group had an annualized return of 5.6%, while the MSCI WORLD Index gained at an annualized return of 3.9%. For the five- and three-year periods through April, the group had a loss of 5.0% and a gain of 13.6%, respectively, while the Index reported an annualized decline of 3.2% and a gain of 13.1%, respectively. During the past year, the European Equity group reported a loss of 13.5% compared with a loss of 6.8% for the MSCI WORLD Index. Year to date through April 30, 2012, however, the European Equity objective group has outperformed the MSCI WORLD Index, reporting a gain of 11.3% versus a gain of 9.4%, respectively. Indeed, while almost all funds in the group have posted one month losses, including the top performers, their three-month, six-month, and year-to-date returns have been in the black. The group has a Risk Rank of 4, indicating that funds in this group might not appeal to risk-averse investors. That said, there are benefits to increasing diversification through international exposure. 

One fund with a better return than both the benchmark and the group overall for the four months ended April 30, 2012 is Henderson European Focus Fund A (HFEAX).  This fund’s investment objective is to achieve long-term capital appreciation primarily through investment in equities of European companies.

Under normal circumstances, the fund invests at least 80% of its net assets in equity securities of European companies. These include common stocks and related securities, such as preferred stock, convertible securities, and depositary receipts. European companies are broadly defined to include any company that meets one or more of the following tests: 

•     Its country of organization, its primary business office, and/or the principal trading market of its stock are located in Europe
•     50% or more of its assets are located in Europe
•     50% or more of its revenues are derived from Europe  

The manager (Henderson Global Investors North America Inc.) selects stocks based on an opportunistic approach that seeks to exploit stock specific criteria described below and particular investment factors in Europe that are expected to drive stock prices. The manager will invest in both “growth” stocks that it believes to be reasonably priced and “value” stocks that are, in the manager’s opinion, under-valued.  
Companies are evaluated using a broad range of criteria, including:

•     financial strength
•     competitive position in its industry
•     projected future earnings and cash flows  

The fund has no limits on the geographic asset distribution of its investments within Europe. If political and economic conditions warrant, the fund invests in issuers located in Central and Eastern European countries, such as Russia, Bulgaria, the Czech Republic, Turkey, and Poland.  

Country and sector allocation decisions are driven primarily by the stock selection process. However, in evaluating investment opportunities in various countries and sectors, the manager will consider:  

•     the condition and growth potential of the various economies, industry sectors and securities markets
•     expected levels of inflation
•     government policies influencing business conditions
•     currency and taxation factors  

The fund generally sells a stock when, in the manager’s opinion, there is a deterioration in the company’s fundamentals, the company fails to meet performance expectations, the stock achieves its target price, its earnings are disappointing, or its revenue growth has slowed. Some of the fund’s investments may produce income, although income from dividends and interest is not an important consideration in choosing investments.  

Another fund with better-than-average returns on a year-to-date return basis, is Invesco European Small Company Fund (ESMAX). The fund’s investment objective is long-term growth of capital. 

The fund invests at least 80% of its net assets (plus any borrowings for investment purposes) in securities of small European issuers. Only 35% of its total assets are permitted to be invested in developing countries. The fund invests primarily in equity securities.  

The fund is non-diversified, which means it can invest a greater percentage of its assets in any one issuer than can a diversified fund.  

The fund considers various factors when determining whether an issuer is in Europe, including whether it is organized under the laws of a country in Europe; it has a principal office in a country in Europe; it derives 50% or more of its total revenues from business in a country in Europe; or its equity securities are traded principally on a stock exchange, or in an over-the-counter market, in a country in Europe. The fund considers an issuer to be a small issuer if it has a market capitalization, at the time of purchase, no larger than the largest capitalized issuer included in the Russell 2000 Index during the most recent 11-month period (based on month-end data) plus the most recent data during the current month ($16 million to $3.7 billion). As of December 30, 2011, the principal countries in which the fund was invested were the United Kingdom, Ireland, Germany, Norway and France.  

The fund can invest in derivatives, including forward foreign currency contracts to mitigate the risk of foreign currency exposure. A forward foreign currency contract is an agreement between parties to exchange a specified amount of currency at a specified future time at a specified rate. Forward foreign currency contracts are used to protect against uncertainty in the level of future foreign currency exchange rates. The fund will use these contracts to hedge against adverse movements in the foreign currencies in which portfolio securities are denominated.  

The portfolio managers employ a disciplined investment strategy that emphasizes fundamental research, supported by quantitative analysis, portfolio construction and risk management techniques. The strategy primarily focuses on identifying quality issuers that have experienced, or exhibit the potential for, accelerating or above-average earnings growth but whose prices do not fully reflect these attributes. Investments for the portfolio are selected bottom-up on a security-by-security basis. The focus is on the strengths of individual issuers, rather than sector or country trends.  

The fund’s portfolio managers may consider selling a security for several reasons, including when its fundamentals deteriorate or it posts disappointing earnings, its security price appears to be overvalued, or a more attractive investment opportunity is identified.


A third fund with a 2012 year-to-date return above the index average, through April 30th, is Fidelity Nordic Fund (FNORX). This fund’s primary objective is long-term growth of capital. 

Under normal circumstances, the fund invests at least 80% of assets in securities of Danish, Finnish, Norwegian, and Swedish issuers and other investments that are tied economically to the Nordic region. It normally invests primarily in common stocks. The fund allocates investments across different Nordic countries, investing up to 35% of total assets in any industry that accounts for more than 20% of the Nordic market.

In the table below, we have listed 10 top-performing funds through April 30, 2012 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

Henderson European Focus A

HFEAX

17.69

-4.66

5.49

9.36

0.91

 

Invesco European Small Company A

ESMAX

17.36

0.46

8.52

8.01

-3.70

Fidelity Nordic Fund

FNORX

16.85

-0.16

10.46

8.04

-3.80

US Global East European Fund

EUROX

15.66

-1.31

2.50

3.56

-7.47

 

Ivy European Opportunites A

IEOAX

13.81

0.79

7.60

8.63

-6.57

DFA Continental Small Company

DFCSX

13.89

-2.36

4.04

2.19

-6.45

Blackrock Eurofund A

MDEFX

13.57

-1.09

6.50

7.74

-5.59

JPMorgan Intrepid European Fund A

VEUAX

13.36

-1.08

7.11

6.48

-5.95

T. Rowe Price European Stock

PRESX

12.91

-1.12

6.93

8.02

-2.43

Virtus Grtr European Opport. Fund A

VGEAX

12.70

1.05

10.66

10.65

 

European Equity Objective Group

 

11.28

-1.16

5.45

5.70

-4.97

 

 

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