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European Fund Favorites
10/01/2013 10:00 am EST
Europe's equity markets have benefited lately from signs of economic stabilization, suggests fund expert Mark Salzinger; in his No-Load Fund Investor, he highlights three well-positioned funds.
The purest way to bet on a continued rebound in European equity markets would be to invest in top-rated international equity funds focused on Europe. In our stock rankings, three such funds that are open currently make the grade.
One is Vanguard European Stock Index (US:VESIX), which strongly emphasizes the countries with the largest economies in Europe. It devotes more than three quarters of its assets to stocks from four major countries: the UK (33.6% of assets), France (14.8%), Switzerland (14.0%), and Germany (13.4%).
In terms of sectors: financial services, consumer staples, and healthcare account for at least 12% each of the fund, while utilities and technology account for less than 5% each. The fund includes more than 500 holdings, with an average market cap of about $41 billion.
As a passively managed index fund, Vanguard European Stock Index benefits from a low expense ratio: only 0.26% on the Investor class shares ($3,000 minimum initial investment), and only 0.12% on the Admiral class (VESIX; $10,000 minimum).
Portfolio turnover is also minuscule: usually less than 10% a year, which speaks well for the fund's tax efficiency and minimal transaction expense.
We also recommend several actively managed Europe funds, including T. Rowe Price European Stock (US:PRESX).
Compared to the Vanguard fund, Price European Stock has considerably more in Spain (15.2% of assets as of July 31) and Italy (7.7%) and only about half as much (18.3%) in the UK. It also invests a higher percentage of assets in mid-cap stock.
Based on these comparisons, the Price fund would seem to be riskier than the Vanguard offering. Statistically speaking, however, that hasn't been the case. In fact, the funds have been equally volatile over the past several years.
Meanwhile, Price European Stock has produced a three-year annualized return of 15.9% through Aug. 30, 2013, beating Vanguard European Stock by 5.4 percentage points a year, despite having a higher expense ratio (1.00%).
Dean Tenerelli joined Price in 2000 and began managing the fund in 2005. Tenerelli has been favoring the consumer discretionary sector (21.1% of assets), especially media stocks, including broadcasters.
Though Fidelity Europe (US:FIEUX) is also actively managed, it has quite a bit in common with Vanguard European Index. Its portfolio is dominated by stocks domiciled in the UK, France, Germany, and Switzerland, and it devotes little to the continent's riskiest nations.
Consumer discretionary stocks represent the only very significant overweight (15.4% of assets, versus 8.9%), while energy and telecom services get less than, in the index fund.
Though Fidelity Europe includes only 124 holdings, many of them are the same multinational household names that factor so importantly into the index fund.
Despite the similar positioning of Fidelity Europe to Vanguard European Index, the former fund's return has beaten that of the index fund by 2.4 percentage points over the 12-month period ended Aug. 30.
Fidelity Europe's manager, Risteard Hogan, began his tenure in April 2012. He favors companies with moderate, stable growth trajectories, combined with propensities to repurchase stock and pay dividends.
While the portfolio's valuation ratios approximate that of the index fund, he sometimes invests with a contrarian mindset.
He especially favors attractively valued companies that compete well in global markets, as opposed to companies that focus on their home markets in Europe. The fund's expense ratio is 0.83% (very reasonable for an actively managed foreign stock fund), and the minimum initial investment is $2,500.
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