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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, 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 October 31, 2012, the group had an annualized return of 8.1%, while the MSCI WORLD Index gained at an annualized rate of 6.0%. For the five- and three-year periods through October, the group had a loss of 5.9% and a gain of 4.2%, respectively, while the Index reported an annualized decline of 5.0% and a gain of 5.6%, respectively. During the past year, the European Equity group reported a gain of 8.8% compared with a gain of 6.9% for the MSCI WORLD Index. Year to date through October 31, 2012, though, the European Equity objective group has almost outpaced the MSCI WORLD Index, reporting a gain of 14.6% versus a gain of 10.1%, respectively. Indeed, almost all funds in the group have rebounded from earlier lows, with all but a few reporting year-to-date returns that are 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 is a benefit to geographically diversifying investments.  

One fund with a relatively better return than both the MSCI WORLD year-to-date return and the group overall for the ten months ended October 31, 2012 is Invesco European Small Company Fund A (AEDAX). This fund’s primary objective is long-term growth of capital. The fund invests at least 80% of net assets (plus borrowings for investment purposes) in securities of small European issuers. Management may allocate up to 35% of its total assets in European issuers located in developing countries. 

Management considers various factors when determining whether an issuer is in Europe, including whether (1) it is organized under the laws of a country in Europe; (2) it has a principal office in a country in Europe; (3) it derives 50% or more of its total revenues from business in a country in Europe; or (4) 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. 

Another fund with better-than-average returns on a year-to-date return basis is Virtus Greater European Opportunities Fund (VGEAX).  This fund’s investment objective is long-term capital appreciation. This fund seeks to offer investors exposure to European market economies through well-established companies. The securities selected for inclusion in the fund are believed by the sub adviser (Vontobel Asset Management, Inc.) to be well-managed businesses with consistent operating histories and financial performance that have favorable long-term economic prospects and, in most cases, generate strong free cash flow. 

Under normal circumstances, at least 80% of the fund’s assets are invested in equity securities or equity-linked instruments of issuers located in Europe, including issuers in emerging markets countries. Equity-linked securities are hybrid debt securities whose return is connected to an underlying equity, usually a stock. The fund intends to diversify its investments among countries and normally to have represented in the portfolio business activities of a number of different countries. In determining the “location” of an issuer, the sub adviser primarily relies on the country where the issuer is incorporated. However, the country of risk is ultimately determined based on analysis of the following criteria: actual building address (domicile), primary exchange on which the security is traded and country in which the greatest percentage of company revenue is generated. This evaluation is conducted so as to determine that the issuer’s assets are exposed to the economic fortunes and risks of the designated country.

A third fund with a 2012 year-to-date return above the index average through October 31st is Blackrock Eurofund A (MDEFX). The investment objective of this fund is to seek capital appreciation primarily through investment in equities of corporations domiciled in European countries. Under normal circumstances, the fund will invest at least 80% of its net assets in equity securities, including common stock and convertible securities, of companies located in Europe. For these purposes, “net assets” include any borrowings for investment purposes. The fund currently expects that a majority of its assets will be invested in equity securities of companies in Western European countries, but may also invest in emerging markets in Eastern European countries. Within particular countries the fund considers the condition and growth potential of industry sectors and selects what management believes are companies with attractive valuations or good prospects for earnings growth within those sectors. The fund may invest in companies of any size.

Under normal circumstances, management anticipates it will allocate a substantial amount (approximately 40% or more — unless market conditions are not deemed favorable by BlackRock, in which case the fund would invest at least 30%) — of its total assets in foreign securities, which may include securities (i) of foreign government issuers, (ii) of issuers organized or located outside the U.S., (iii) of issuers which primarily trade in a market located outside the U.S., or (iv) of issuers doing a substantial amount of business outside the U.S., which the fund considers to be companies that derive at least 50% of their revenue or profits from business outside the U.S. or have at least 50% of their sales or assets outside the U.S. The fund will allocate its assets among various regions and countries (but in no less than three different countries). For temporary defensive purposes the fund may deviate substantially from the allocation described above.


In the table below, we have listed 10 top-performing funds through October 31, 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

DFA United Kingdom Small Company A

DFUKX

30.83

2.17

13.23

7.07

-1.01

  

Invesco European Small Company A

ESMAX

23.04

1.14

12.88

4.84

-4.09

Virtus Greater European Opportunity Fund A

VGEAX

20.64

1.69

8.33

7.04

  

BlackRock Eurofund A

MDEFX

18.29

2.08

12.34

4.15

-6.38

Fidelity Europe Fund

FIEUX

18.38

1.72

9.36

5.72

-5.31

Fidelity Europe Capital Appreciation Fund

FECAX

18.37

2.46

10.37

5.35

-6.22

Fidelity Adv. Europe Capital Appreciation Fund A

FAEAX

18.01

2.47

10.27

5.26

-6.97

Putnam Europe Equity Fund A

PEUGX

18.00

1.98

10.96

5.28

-4.89

Rydex Europe 1.25X Strategy Fund A

RYAEX

17.26

2.26

11.95

6.33

-13.99

ICON Europe Fund A

IERAX

16.58

0..71

7.74

4.32

-9.33

European Equity Objective Group

  

14.57

1.29

8.70

2.96

-5.88

  

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