Lured by economic recovery and structural changes that are making Europe more competitive in the American mold, U.S. mutual fund managers and investors are increasingly eyeing European stocks.
From Madrid, Spain, to Helsinki, Finland, European bourses are blossoming, producing gains so far this year that in many cases are already double the U.S. market's returns. Ecstatic portfolio managers say that individual fund investors -- stung by Asia but wanting exposure to overseas markets -- are finally catching on to Europe's grand awakening.
"People have been so mesmerized by the United States," said Carol L. Franklin, manager of the Scudder Greater Europe Growth fund, which gained 28.18 percent this year through April. "But they are waking up to the Europe story."
Sales of U.S. mutual funds devoted exclusively to European stocks have picked up. So have sales of international stock funds, which invest the world over but are putting larger amounts of their cash in Europe.
The resurgent interest comes as plans to establish European economic unity gain ground. In the making for decades, the project is intended to turn the 15-member European Union into an economic superpower to rival the United States. One of its first steps has been the creation of a unified currency, the euro.
Epic changes are also taking place in Europe's corporate culture, especially among companies in the 11 countries -- Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal, and Spain -- that will scrap their currencies for the euro in 2002.
Fearing a loss of sovereignty, Britain, Denmark, and Sweden chose not to join the new currency. Greece failed to meet the strict criteria. But staying out of the euro has not stopped those markets from soaring. Since January, the United Kingdom's main index, the FTSE-100, is up more than 15 percent while Athens' bourse has climbed 69.6 percent.
Overseas markets are tiny compared to their U.S. cousins. But they are likely to get bigger as consolidation, mergers, deregulation and privatization turn European companies into leaner, more competitive outfits. The restructuring, which has intensified in the past three years in preparation for monetary union, has created opportunities for fund managers.
"Many European companies are now talking the same language of capitalism that the United States has been speaking for a long time," said Nigel P. Hart, a vice president and portfolio manager at Putnam Investments.
Although neophyte investors may not know it, European and broader international mutual funds have outperformed the average U.S. diversified equity fund over the past three and five years. More recently, the 95 European-stock funds tracked by New York-based Lipper Analytical Services Inc. soared 23.51 percent on average through April 23, outpacing the 13.41 percent gain of the Standard & Poor's 500 index.
"Europe's been strong for longer than the general buying public recognizes," said Brian E. Hersey, research director at Watson Wyatt Investment Consulting in Chicago.
With disparate economies and conflicting feelings about the deficit-cutting austerity measures needed for the euro, European markets are still a volatile place.
"These are really emerging markets," Franklin said.
Now, after years of preaching the virtues of buying European, U.S. fund managers said investors were finally coming around. In the first quarter, European-stock funds gained $1.27 billion in net new cash, compared to $978 million in the year-ago period, according to Morningstar Inc., the Chicago fund-tracking firm.
European stocks, generally cheaper than their U.S. cousins, are still a tiny fraction of U.S.-run mutual fund assets. Out of more than $5 trillion in U.S. funds of all kinds, European-stock funds VTC accounted for only $17.6 billion at the end of March, an increase of $8 billion since the end of 1996, Morningstar said. Assets devoted to Europe via international funds were another $125.8 billion -- double the level since the end of 1996.
In fact, the typical international stock fund is essentially a European fund, with two-thirds of its assets in the region. A case in point is also one of the brightest performers: Putnam's International Voyager -- it is 88 percent invested in European stocks -- is the top-performing international fund this year, gaining 23.06 percent through April.
Europe takes off
EU countries .. .. 1997 .. .. 1998
.. .. .. ... .. GDP ... .. return*
Austria ... .. ... 2.1 ... .. 21.20%
Belgium ... .. ... 2.7 .. ... 26.50
Denmark ... .. ... 2.9 .. ... 10.09
Finland ... .. ... 5.9 .. ... 49.27
France . .. .. ... 2.4 .. ... 30.26
Germany ... .. ... 2.2 .. ... 24.77
Greece . .. .. ... 3.5 .. ... 65.69
Ireland ... .. .. 10.5 .. ... 31.19
Italy .. .. .. ... 1.5 .. ... 39.05
Luxembourg ... ... 3.7 .. .. ... NA
Netherlands .. ... 3.3 .. ... 27.40
Portugal .. .. ... 3.5 .. ... 50.84
Spain .. .. .. ... 3.4 .. ... 34.55
Sweden . .. .. ... 2.2 .. ... 26.76
U.K. ... .. .. ... 3.3 .. ... 16.25
United States . .. 3.8 .. ... 14.50
Return for main stock exchange or index Jan. 1 through May 8. U.S. figure is for Dow Jones industrial average
-- not available
SOURCE: Organization for Economic Cooperation and Development; International Monetary Fund; Bloomberg News
Pub Date: 5/18/98