By Eleanor Laise
In times of crisis, go shopping.
At least that's what many mutual-fund managers focused on Europe say they are doing. The euro-zone debt crisis that this week sparked violent protests on the streets of Athens and precipitous market declines across the continent is creating opportunities for long-term value-minded investors, they say.
Europe-focused managers who seek beaten-down investments haven't had to look far for such opportunities. The widespread selling has brought the Stoxx Europe 600 Index down 13% from its 2010 high hit in mid-April, and the euro on Thursday sank to its lowest level against the dollar in more than a year.
"In this environment we're going to find some of the best investments we'll see for the next few years," says David Marcus , manager of the Evermore European Value Fund.
The current volatility means the continuation of a long-running roller-coaster ride for Europe stock-fund shareholders. The average Europe stock fund sank 50% in 2008, gained 47% in 2009 and is down almost 10% this year through Thursday, according to investment-research firm Morningstar /zigman2/quotes/209325896/composite MORN -1.98% Inc. Even so, investors added more than $200 million in net new money to the funds during the first three months of the year, bringing total assets to about $22 billion.
Of course, fund managers are always eager to talk up their holdings, and they acknowledge that there could be plenty of short-term pain in European investments. Some are taking steps to guard against wild portfolio swings even as they hunt for fresh bargains. A headline about a political decision could wreak havoc even on the most carefully researched investments, managers warn. "Everybody's going to get knocked by this, including ourselves," says Alec Walsh , co-manager of the Harding Loevner International Equity Fund. He's staying away from some of the most distressed markets, like Greece, Spain, Portugal and Italy.
But other managers say this is no time to ignore these troubled markets. Italy offers some opportunities, managers say, partly because its relatively strong savings rate means it's not overly reliant on foreigners to fund its deficit. The T. Rowe Price European Stock Fund, for example, has bought stakes in some Italian banks over the past month or so, says manager Dean Tenerelli . And the Oppenheimer International Bond Fund has about 10% of assets in Italy. "All risky assets are getting hit, and Italy is getting thrown in" with other, more-troubled countries, says co-manager Robert Robis . "It's unjustified."
Spain is another country on shaky financial ground that also holds opportunities, managers say. To reduce volatility, T. Rowe's Mr. Tenerelli says he has lately trimmed Spanish holdings to 5%, from 8% previously, but remains bullish on telecommunications giant Telefonica /zigman2/quotes/202434549/delayed TEFOF +4.17% SA. "Yes, it's in Spain, but the cash flow is secure and the dividend is secure," he says. The shares are cheap "because people are scared of Spain."
Most managers remain extremely skeptical of Greece, asking whether the country can stick to new austerity measures and how those steps might impact the economy. The austerity measures, which the government promised in recent days in exchange for a bailout, include tax increases, lower pension payments and other steps.
But the sharp sell-off is enough to spark the interest of some deep-value investors. Evermore's Mr. Marcus says he hasn't had any Greek holdings in more than 20 years of investing in Europe, "but now I think maybe we should start looking." The place to start, he says, is with banks. The reason: As the country starts to get its financial act together, ensuring that banks are functional will be a top priority.
Looking broadly at sectors across Europe, many managers say the crisis has bolstered the case for investing in exporters. Companies based in Europe that export their goods outside the region can benefit from a weak euro, as their products become more competitive in foreign markets and as they translate overseas earnings into their home currency. The Harding Loevner fund, for example, holds Swiss food giant Nestlé /zigman2/quotes/208115528/delayed CH:NESN +1.31% SA and French luxury-goods maker LVMH Moet Hennessy Louis Vuitton /zigman2/quotes/201350549/delayed FR:MC -1.08% SA, which get much of their revenues from outside Europe.
Food, beverage and tobacco companies, which tend to see fairly steady demand in both good and bad economic times, also offer nice ballast for portfolios in stormy markets, managers say. The Mutual European Fund holds stocks like British American Tobacco /zigman2/quotes/210207837/composite BTI +0.92% PLC and beverage maker Pernod Ricard /zigman2/quotes/204974112/delayed FR:RI +1.54% SA, says manager Philippe Brugere-Trelat .
Many managers are generally wary of financial stocks across Europe. T. Rowe's Mr. Tenerelli recently moved to underweight the financial sector, though it still accounts for about 20% of his fund. The banks are major holders of government debt in Europe, which is looking riskier lately.
Indeed, some bond managers are looking for ways to back away from government debt without taking a lot of risk in corporate bonds. Oppenheimer's Mr. Robis says he's not finding a lot of opportunity in government debt. But he has stashed about 5% of his fund's assets in euro-denominated bank-issued covered bonds, which are secured by mortgages and other loans. Prices for these bonds, he says, have lately been stable to rising.
Managers are using a number of strategies to tone down volatility, including currency hedging and holding big cash stakes. In the Mutual European Fund, most of the currency exposure is hedged back to the U.S. dollar, says Mr. Brugere-Trelat. While the euro "is not going out the window," there will be concern about the currency's stability as long as there's no clear resolution for the ballooning government debt in some European countries. What's more, he's not in any hurry to spend down his sizable cash stake, because "the knives are falling indiscriminately, and it's painful to try to catch them," he says.
Evermore's Mr. Marcus, meanwhile, has more than a quarter of his fund in cash, although "every day we're nibbling on things," he says. "We don't know where the bottom is."
Write to Eleanor Laise at email@example.com