Paths to Profit in a New Europe
Smorgasbord of opportunities on the comeback Continent
Across Europe there are many ways to say "profit," and as many ways for equity investors to make one.
In stocks, of course, profits are never guaranteed, but stock markets on the Continent have been on a roll, and American investors have many ways to play the game. Here are some European investment tires you may want to kick:
Traditional mutual funds. This is the simplest approach, and it has paid off handsomely in recent years. Several major mutual-fund families have offerings that target Europe. The chart above shows the Europe-focused funds that have gained the most so far this year.
Most of these funds are heavily weighted in the bigger markets: London, Paris, and Frankfurt. Others aim at subregions: Scudder Spain & Portugal Fund has taken advantage of the steady fall in interest rates in those nations. Fidelity Nordic Fund, this year's leader, has ridden the same interest-rate trends and the comparatively cheap valuation of the area's equities, analysts say.
Closed-end funds. These are complex, but many investment advisers say they're worth a look. Closed-end funds have a set number of shares, unlike traditional, open-end funds that create as many new shares as investors want to buy. (Sometimes an open-end fund closes to new investors, but that's not the same as a closed-end fund.)
Where a regular fund's share price is based on the value of the investments it owns, closed-end funds trade like equities on US stock markets. Their share prices rise or fall with investor demand, and they often trade at a discount to the value of the investments they own. That adds an extra bit of uncertainty.
But the stable share base frees fund managers from having to either invest wildly when a fund is popular or sell stocks pell-mell when markets fall and people flee the fund.
Michael Porter, close-end mutual fund analyst at Salomon Smith Barney recommends the Scudder New Europe Fund (selling at a 17 percent discount). Along with the major markets, it targets smaller countries such as Portugal and Poland that stand to gain from Europe's monetary union.
Closed-end funds are bought from brokers, not from fund companies.
Single-country funds. These concentrate on the equities of a single country. Investors should be aware of the greater political and currency risks from tying one's assets to just one country. But these funds, which are often closed-end, can offer big opportunities too.
Morningstar rates a number of European closed-end funds in its mutual-fund guide. So does the Value Line Investment Survey. Both are available in many libraries.
Stock analysts find most promise in countries on Europe's periphery that plan to join the monetary union. These countries, benefiting from interest-rate declines, include Italy, Spain, Portugal, Ireland, and Finland. Salomon Smith Barney ranks Ireland No. 1 among developed markets because of its low risk, strong momentum, and rapid economic growth.
Individual Stocks. Many of Europe's large companies sell American Depositary Receipts, similar to stock shares, on US exchanges.
With some careful picking, investors can take advantage of the flurry of deregulation and mergers in industries such as finance, telecommunications, utilities, and airline industries. Lorretta Morris, manager of Nicholas Applegate International Core Fund in San Diego, favors Telecom Italia and two discount airlines, Ryanair and Virgin Express.
Financial advisers see two reasons to put some of your money into foreign-stock mutual funds: (1) a possible performance boost and (2) spreading your risks.
Historically, a stock mix of 30 percent foreign, 70 percent domestic has often beat an all-US portfolio with a higher return and less volatility (share-price swings).
Some foreign funds cast a broad net. The manager picks stocks from all over the world. To control where your money goes, you can buy a regional fund, such as one focused on Europe.
Skeptics argue that foreign markets can fall especially hard (witness Asia last fall) and that foreign companies are less open and accountable to investors.