A recent screen of Value Line’s fund database seeking out the top performing European Equity funds surfaced T. Rowe Price European Stock Fund (PRESX), among others. (Read the entire list of the top-10 European Equity funds.) Although not for the risk averse, the fund could be an interesting way to gain exposure to a collection of markets that, combined, create one of the largest in the world.
The fund’s objective, as stated in its prospectus is to seek “long-term growth of capital through investments primarily in the common stocks of companies located (or with primary operations) in Europe.” That is clearly in keeping with the fund’s name. In practice, however, management divides Europe, which is large and diverse, into two areas; those countries that are a “primary” focus and those that are not.
Austria, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, and the United Kingdom all fall into the “primary” focus category. As of May 31st, nine of the top 10 country allocations were in these nations. Belgium, at just 1.5% of assets, was the only country in the top 10 that wasn’t on the “primary” list. The top five countries accounted for over 75% of the portfolio, with the United Kingdom alone accounting for almost a third of the portfolio. Under normal market conditions, the fund will have positions in at least five countries at all times.
Country allocations, however, are not the result of top-down decision making and are largely a function of individual stock selection. That said, management is clearly aware of and concerned with macro-economic issues that affect Europe as a whole and countries individually.
The fund has no restriction regarding market capitalization, and, thus, can own companies from small to large. Nor is there a bias for either growth or value investing. Management simply seeks out companies with quality management teams and strong cash flows, that, in its view, have the “most favorable combination of company fundamentals, earnings potential, and relative valuation.” In its decision making process, management examines such factors as market position, business niche, franchise or industry position, management, earnings and/or cash flow, and balance sheet strength. A security may be sold to lock in price gains, if a more promising investment opportunity arises, or to curtail losses in a position that did not work out as planned.
Dean Tenerelli has managed this no-load fund since late 2005, putting the trailing one, three, and five-year periods through June firmly under his tenure. The fund was in the top 15%, or better, of all European Equity funds Value Line reviews in each of those periods. Moreover, the fund was near the top of the heap in three of the five years between 2006 and 2010. Add to this the fact that the fund’s expense ratio is materially below that of the average European Equity fund under review and this fund should clearly interest investors seeking exposure to Europe.
That said, the fund is concentrated in a particularly troubled region of the world, which could increase risk. The current financial issues plaguing some of the weaker nations on the Continent highlight this fact. Additionally, the fund’s standard deviation is almost 30 over the trailing three-year period, providing a historical exclamation to the issue of risk. Note that the fund receives one of Value Line’s two worst Risk Ranks (4, out of a range of 1-best to 5-worst).
However, more aggressive investors with a broadly diversified portfolio who are seeking a focused way to gain exposure to European equities with an active manager would be well served by a closer look at T. Rowe Price European Stock Fund.
At the time of this article's writing, the author did not have positions in any of the companies mentioned.