The European Union's attempts to help its debt-laden countries--such as Greece, Portugal, Italy, Ireland, and Spain--remain fiscally sound spooked investors, as evidenced by the MSCI Europe Index's 18% slide from January through early June 2010. Since then, the region's markets have been on the upswing, though in a choppy fashion. Various government-funded rescue packages provided some near-term bandages that sent the markets surging ahead. But negative sentiment surrounding the individual governments' abilities to service their debt over the long haul continues to cause short-term jolts to the region's stock markets.
Karin Anderson is an associate director covering fixed-income strategies on Morningstar’s manager research team.
All told, the MSCI Europe Index and the typical Europe-stock fund (excluding the category's gaggle of small cap- and Russia-focused offerings) bounced back by roughly 30% and 32%, respectively, from June 2010 through March 21. Small-cap stocks continued to lead the way, giving funds with smaller average market capitalizations, such as T. Rowe Price European Stock
, a leg up. (It gained a whopping 40% during the time frame.) Mutual European
's 15% gain ranked it at the bottom of this custom group over the June-to-March period. The fund hedges around 80% of its foreign-currency exposure back into the dollar, a tack that created a headwind as the euro and pound appreciated relative to the greenback.
So far in 2011, European stock funds have bounced around pretty wildly. The typical diversified fund gained around 4% for the year to date ended March 21; during the previous week, it was in the red for the year. Regardless of what's ahead for European stock markets, fans of the region have a great no-muss, no-fuss choice in Vanguard European Stock Index
. The category's other Analyst Pick, Mutual European, provides a more eclectic portfolio that's less likely to overlap with core holdings.Favorite:Mutual European
Morningstar Rating: 4 Stars
One-Year Return: 12.97%
Expense Ratio: 1.40%
Like all funds run by Mutual Series, this one applies a three-pronged strategy. Manager Philippe Brugere-Trelat's main tack is to home in on companies he deems undervalued relative to their cash flows or break-up value. Distressed-debt deals are within the fund's purview, and when compelling opportunities arise, so are merger-arbitrage plays Mutual Series typically hedges around 80% of its portfolios' foreign-currency exposure as a means of limiting volatility, but Brugere-Trelat adjusts that hedge based on his view of currency values. The process results in a unique portfolio that has provided a smooth, successful ride. Click here for the full Analyst Report
.Favorite: Vanguard European Stock Index
Morningstar Rating: 3 Stars
One-Year Return: 24.89 %
Expense Ratio: 0.26%
Created by Vanguard's indexing experts, this fund tracks the MSCI Europe Index, a market-cap-weighted benchmark comprising the region's largest developed-markets stocks. As a result, the fund typically has ample exposure to the United Kingdom and to financial firms (20% of the benchmark), and its hundreds of holdings are mostly large-cap stocks. Though returns have been muted compared with more intrepid rivals', the fund's performance has been on par with the benchmark's. Passive management means investors need not worry about manager turnover or strategy shifts, while low expenses provide a perennial edge. Click here for the full Analyst Report