Get a Piece of the Action in Europe

06/25/2013 10:15 am EST

Focus: FUNDS

Benjamin Shepherd

Analyst, Breakthrough Tech Profits, Global Income Edge and Personal Finance

Some corners of the Continental market may be close to the bottom, and here's one easy way to dip your small toe into European stocks, says Benjamin Shepherd of Personal Finance.

We're adding Oakmark International (OAKIX), whose co-managers David Herro and Robert Taylor focus on absolute value and boldly wade into markets other managers avoid.

Herro and Taylor will buy companies irrespective of their geographies, as long as they trade at significant discounts to their intrinsic value, are cheap compared to their peers and their own growth prospects, and are shareholder-friendly in terms of share repurchases and dividends.

As a result, the fund is heavily concentrated in Europe (64.5% of assets), where weak sentiment has created a plethora of bargains in European blue chips, especially financials.

While no single holding in the fund's portfolio exceeds 4% of assets, Herro and Taylor have been steadily building positions in major European banks such as Switzerland-based Credit Suisse (CS), Italy's Intesa Sanpaolo (ISNPY), the UK's Lloyds Banking (LYG), and French BNP Paribas (BNPQY).

These banks' countries of origin may be different, but all have rock-solid balance sheets. Moreover, despite the weak market environment on the Continent, they have remained operationally sound, with high capital-adequacy ratios thanks to capital raises a few years back.

Now that the worst of the European crisis appears to be over, these banks should continue to thrive, particularly since their cost of capital has been so low.

At the same time, blue-chip multinationals in the region are now generating healthy earnings growth and worries about a Eurozone breakup have faded. Moreover, the focus in the region is shifting away from austerity, as central bankers increasingly lean toward stimulus in the face of popular pressure.

Most analysts now forecast a resurgence in European economic growth in the back half of the year, a turning of the tide that makes this fund increasingly appealing.

Management has also been heavily attracted to Japan, devoting 19.2% of the fund's assets to the country. Its top holdings there include Canon, Toyota Motor (TM), and Honda (HMC).

Some investors may be leery of Herro and Taylor's adventurous spirit, but the fund's stellar performance speaks for itself. While it took a heavy hit with a 41.1% decline in 2008 and another 14.1% loss in 2011, the fund consistently comes in among the top-performing foreign mutual funds.

Over the trailing one-year and five-year periods, it ranks in the top 1% of foreign-blend funds, finishing in the top 2% over the trailing three-year period, and top 4% over the last decade.

Given their focus on absolute value, Herro and Taylor also tend to retain their stocks as long as their thesis doesn't change materially. That results in a low 38% annual turnover rate, minimizing the fund's distribution of capital gains and making it appropriate for non-tax advantaged accounts, although it does distribute its dividend income annually.

That low turnover also helps to keep the fund's costs in check...and it doesn't carry a 12b-1 charge, making the fund relatively inexpensive compared to other foreign funds, with a 1.06% annual expense ratio.

To round out our international exposure to include Europe and a large allocation to Japan, buy Oakmark International.

Subscribe to Personal Finance here...

Related Articles:

Toyota Remains in the Driver's Seat

Make Abenomics Work for You

Thirst for Data Drives This Stock

Related Articles on FUNDS

Keyword Image
Is a Bottom Forming for MLPs?
11/27/2017 5:00 am EST

I think we’re finally seeing the bottom forming in MLPs, which is good news for JPMorgan Aleri...

Keyword Image
Takeover at Oppenheimer?
11/15/2017 3:58 am EST

On November 1, we featured Doug Hughes' recommendation for investment banking firm Oppenheimer Holdi...