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Fund Spy

Great Funds With Eurozone Exposure

These funds will be impacted by the euro's gyrations, for better or for worse.

Europe has dominated the economic headlines lately, overshadowing evidence of a solid recovery in the United States. As Greece tottered on the edge of insolvency, Europe's stock and bond markets fell due to fears that Greece's problems would spread, potentially decimating the euro and putting the brakes on the continent's fragile economic rebound. But Europe's markets bounced back strongly on May 10, after the European Union and the International Monetary Fund announced a massive bailout plan to support the euro and prevent an economic meltdown.

It's natural for mutual fund investors to wonder how all this market zigzagging will affect them. The European bailout plan has eased the most immediate fears, but there's still plenty of uncertainty, as Morningstar's Jeremy Glaser pointed out in this video report. It might be tempting for contrarians to go bargain-hunting in Europe amid all this uncertainty, but taking advantage of the turmoil is far from easy for fund investors, as Gregg Wolper recent explained.

Back in February, when the Greek debt crisis was coming to a boil, we looked at bond funds with the most exposure to Greece and other financially shaky nations that use the euro. Now we've examined the question from a slightly different angle, ranking stock funds by their combined exposure to the 12 biggest eurozone countries: Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Netherlands, Portugal, Slovakia, and Spain. (Note that the United Kingdom and Switzerland, home to some of the biggest companies in Europe, are not part of the eurozone and thus not included here.) Not surprisingly, the top funds on that list are mostly in the European stock category, led by ING Dow Jones Euro STOXX 50 Index (IDJIX), which is specifically limited to stocks from eurozone nations.

We focused on diversified, actively managed foreign-stock funds, and found a number of very good ones with more than 30% of their stock exposure in the countries listed above. The following funds all fit those criteria. In addition, they never or rarely hedge their currency exposure (with one exception noted below), so they provide significant exposure to the euro, for better or worse. These fund are all fine long-term holdings, but several of them have been hurt recently by the euro's slide, and the strength or weakness of the euro could have a significant effect on their returns going forward.

 Causeway International Value (CIVVX)
This is a fairly cautious fund, with a portfolio consisting mainly of stable large-cap stocks from developed countries. As of March 31, 2010, seven of its top 10 holdings were from eurozone countries, including French energy-services firm  Technip (TEC), German industrial conglomerate  Siemens (SI), and Dutch publisher  Reed Elsevier (RUK). It has mostly been a fine long-term performer, except from 2005 to 2007, when emerging markets (which this fund avoids) were especially hot. So far in 2010 it has stayed well ahead of the foreign large-value category and the MSCI EAFE Index, though it badly trailed the category in the week before the May 10 bailout, when the euro was getting hammered.

 Artisan International (ARTIX)
This one is a bit less cautious than the Causeway fund, but its portfolio is still dominated by European large caps. All of its top nine holdings (as of March 31) are from Western Europe, led by Dutch semiconductor firm  ASML Holding (ASML), though three of the nine are from Switzerland and the U.K., and thus not part of the eurozone. Under Mark Yockey, a former Morningstar International Stock Manager of the Year, the fund has been a strong performer over time, beating the foreign large-growth category in nine of the past 10 calendar years. However, it has struggled so far in 2010, ranking near the bottom of the category, and losses during the week before the bailout didn't help.

 American Funds EuroPacific Growth (AEPGX)
This fund has excelled both in down markets, such as 2008, and in up markets such as 2009, when its management team was named Morningstar Foreign Stock Manager of the Year. As the fund's name implies, its portfolio is drawn mostly from Europe and the Pacific rim, though it can hold stocks from other regions, such as Mexico's  America Movil (AMX). Nine of its 10 largest holdings are from Europe, though only five of these, led by top holding Bayer AG (BAY), are from the eurozone. Unlike the Causeway and Artisan funds, this offering doesn't seem to have been significantly hurt by its euro exposure, and has beaten the foreign large-blend category so far in 2010.

 Tweedy Browne Global Value (TBGVX) and Global Value II (TBCUX)
Tweedy Browe Global Value is another fund run by former Morningstar Foreign Stock Managers of the Year, though one of the skippers who won that award back in 2000, Chris Browne, died in December 2009. The team focuses on cheap stocks trading for less than their private-market value, ranging from high-quality names such as  Nestle (NESN) to riskier fare. As of March 31, 2010, its 12 largest holdings are all from Europe, led by German publisher Axel Springer (SPR), though only nine of them are from eurozone countries.

Global Value differs from the three other funds we have looked at in that its currency exposure is hedged back to the U.S. dollar. However, in October 2009 Tweedy Browne introduced Global Value II, an unhedged version of essentially the same portfolio, providing an interesting experiment in currency effects. Both funds have easily beaten the foreign large-value category so far in 2010, but the unhedged Global Value II has significantly underperformed its older sibling (by about 4 percentage points as of May 12), reflecting the weakness of the euro in recent months. Such effects can be a double-edged sword, though; if the bailout plan succeeds in strengthening the euro over the longer term, it would hurt Tweedy Browne Global Value, but help Global Value II and the other unhedged eurocentric funds.

David Kathman does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.