By Charles Stein and Christopher Condon – May 26, 2010
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Managers of non-U.S. equity mutual funds that have outperformed their peers since the Greek debt crisis sank financial markets favor European stocks with limited exposure to Europe.
Companies such as Vevey, Switzerland-based Nestle SA derive much of their sales from faster-growing parts of the world and will be helped by a weaker euro, said Charles De Vaulx, manager of the $1 billion IVA International Fund.
“We’re asked, ‘Why do anything in Europe when the outlook is bleak?’ ” De Vaulx said in a telephone interview from New York. “A lot of European companies have little to do with Europe.”
International stock funds fell an average of 13 percent between April 1 and May 25, according to data from Chicago-based Morningstar Inc., amid speculation that European governments will have difficulty reducing budget deficits without derailing the economic recovery. The selloff continued after European leaders unveiled an almost $1 trillion rescue package for debt- laden governments earlier this month.
De Vaulx’s fund dropped 6.9 percent in the period. The $18.6 billion First Eagle Overseas Fund lost 7 percent. The $17.2 billion Mutual Global Discovery Fund declined 8.2 percent.
The managers of the three funds said they benefited from holding at least 10 percent of their assets in cash, having fewer financial stocks than most rivals and by owning European companies with a global focus.
Nestle fell 5.9 percent in the period, compared with the 15 percent decline for the Euro Stoxx 50 index.
U.S. investors poured $25.7 billion into international stock funds in the first four months of the year, almost four times as much as they put into domestic funds, Morningstar data show.
More recently, clients have steered clear of stock funds. In the two-week period ended May 19, domestic equity funds had $13.6 billion in net withdrawals while foreign funds had $5.6 billion pulled out, the Investment Company Institute, a Washington-based trade group, said today.
“Market corrections like this one will further limit people’s willingness to make long-term investments,” said Geoff Bobroff, an independent fund-industry consultant in East Greenwich, Rhode Island.
De Vaulx said Nestle is a multinational that happens to be based in Switzerland. The world’s largest food company, the fund’s second-biggest holding as of April 30 after Bureau Veritas SA, gets about 78 percent of its revenue outside Europe, according to data compiled by Bloomberg.
North American Income
Sodexo SA, based in Guyancourt, France, the world’s second- largest catering firm after Compass Group Plc, generates 50 percent of its operating income in North America, according to Bloomberg data. Sodexo and Nestle are in businesses that are relatively unaffected by the global economy, De Vaulx said.
Philippe Brugere-Trelat, manager of Mutual Global Discovery, said he has added to his holdings of European exporters since the start of the year. Siemens AG, a Munich- based producer of industrial products, and Stuttgart, Germany’s Daimler AG, the maker of Mercedes-Benz cars, will get a lift by selling into countries that will grow faster than Europe, he said.
Mercedes sales in the U.S. rose 22 percent in April from a year earlier. Exports from Germany, Europe’s largest economy, climbed the most in 18 years in March as the global economic recovery gathered pace.
The euro zone economy will expand 1.1 percent this year, according to the average estimate of economists surveyed by Bloomberg. The economies in the U.S. and China are expected to grow 3.2 percent and 10.1 percent, the data show.
A weaker euro will also help the exporters by making their products cheaper in the rest of the world, Brugere-Trelat said.
“That’s the cherry on the cake,” Brugere-Trelat said in a telephone interview from Short Hills, New Jersey.
The euro has retreated about 14 percent against the dollar this year, Bloomberg data show.
That raises the price of imported goods in Europe, giving an edge to European companies in their home markets, said Howard Archer, chief European economist for IHS Global Insight, a Lexington, Massachusetts-based consulting firm.
Matthew McLennan, co-manager at First Eagle Overseas Fund, said that since mid-April the fund has invested in a German- listed cement and aggregate maker and a Belgian-listed investment holding company that have significant operations outside the euro-zone. He declined to name them.
“Many stocks have traded off, throwing the baby out with the bathwater,” McLennan said in a telephone interview from New York.
He said he came into the Greek crisis with more than 20 percent of his fund in cash, which helped minimize losses as stocks tumbled. De Vaulx said about 15 percent of his fund was in cash, Brugere-Trelat about 10 percent.
Mutual Global Discovery had 23 percent of assets in financial stocks at the end of 2009, Morningstar data show. First Eagle had 18 percent as of March 31; IVA International had 3 percent as of Dec. 31.
Financials, which represent 24 percent of the international-stock benchmark MSCI EAFE Index, slid 21 percent between April 1 and May 25, making them the third-worst performing group in the index, Bloomberg data show.
“We are in no rush to add to them,” Brugere-Trelat said.