Europe: What Market-Beating Managers Are Buying
If you’ve been consumed the past few months by the implications of potential Federal Reserve tapering on the U.S. markets, you may have missed a compelling investing opportunity worth some financial research: Europe is getting some serious love as an area ripe for value investors.
While European unemployment remains painfully high, economists, market strategists and money managers are eyeing key data out of Europe and coming to the conclusion that the proverbial corner has been turned. Moody’s Analytics senior economist Glenn Levine pointed to the improving balance sheets of Europe’s corporations, improving euro purchasing managers’ index readings and the beginning of rising output from key economies as positive continental green shoots. “In the past week, a spate of industrial production figures confirmed a steady acceleration in European factories … businesses typically lead the business cycle, and Europe appears to be in the initial stage of a recovery” Levine wrote in an August 9th note.
A key metric being watched is the IFO Eurozone Economic Climate Index, which recently climbed back above 100:
Indeed, on Monday Bloomberg reported that when German GDP is released on Wednesday it is expected to register a second quarter gain of 0.75%. That’s better than the 0.60% consensus estimate and could be enough to pull the overall euro zone officially out of recession. Corporate Germany is indeed signaling it is gaining more traction:
William Riegel, head of equity investments at TIAA-CREF says Europe is an “attractive region for equity investing. Relative valuations are compelling, particularly if earnings move toward more normal levels.” (One word of caution from TIAA-CREF is to keep an eye on France’s government bonds where yields have recently risen. If that continues it could portend some more destabilizing volatility ahead for the euro zone.)
In a end-of-quarter note, Dean Tenerelli, manager of the T. Rowe Price European Stock fund, struck the same “normalized” theme. He said that even though the MSCI Europe Index had gained nearly 20% year-to-date through the end of June, “there’s room for stocks to move up … valuations don’t yet reflect normalized growth.” Jonathan Matthews, manager of T. Rowe Price International Growth & Income, who has a broader geographic berth, said he’s nonetheless “been buying Europe ahead of some other markets.” At the end of the second quarter both T. Rowe Price funds owned Royal Dutch Shell (RDS.B) and Glaxo-SmithKline (GSK) in their top 5.
Granted, Royal Dutch Shell announced a clunker of a quarter last week, even more so than competitors Exxon Mobil (XOM) and Chevron (CVX), as the big boys are struggling with low demand and rising costs.
But at this juncture new money in Shell picks up a 5.2% dividend yield -- double the yield on the resurgent 10-year Treasury -- from a company still pumping out ample free cash flow that keeps its dividend payout ratio well below 40%.
One of the best possible endorsements for Europe, as compelling investing turf, comes from the Oakmark family of funds. David Herro, lead manager of $21.1 billion Oakmark International has trumped the passive crowd for eons. The fund’s 10.7% annualized gain for the past 15 years is more than double the 4.1% annualized return for the MSCI EAFE index. In the near term, Oakmark International’s 13.5% three year annualized gain is more than three points ahead of its benchmark index. Even after Europe’s strong year-to-date run, Herro has nearly three-quarters of his stock portfolio invested in greater Europe: 57% on the continent and another 14% in U.K. firms. That’s telling for one of the most resolute of value investors.
In the second quarter Herro was still adding to long-time holdings in Top 5 positions Credit Suisse (CS), Daimler (DDAIY), Intesa Sanpaolo (ISNPY) and BNP Paribas (BNPQY). The fund also more than doubled its holding in Tesco (TSCDY), which now accounts for nearly 2% of fund assets. New names added in the second quarter include Bayerische Moteren Werke (BAMXY), tire-maker Continental (CTTAY), luxury goods retailer LVMH Moet Hennessy Louis Vuitton (LVMUY) and SKF (SKFRY).
It was about a year ago that Herro was having to explain why he was sticking with beaten-up Credit Suisse, which now accounts for about 5% of fund assets.
The patient value investor turned out to be more than a little right as Credit Suisse is up 65% since the end of 2012’s second quarter.
Herro also co-manages the concentrated Oakmark Global Select fund along with Bill Nygren (of Oakmark Select). At the end of the second quarter the fund had 42% of its stocks invested in Europe (38% continent, 4% U.K.) a much heavier weight than the 28% for its MSCI global benchmark.
The fund’s largest position is a 7% stake in Daimler, which it added to in the second quarter. In the fund’s other top five holdings, European stakes in Fiat Industrial (FIATY), Kuhne & Nagel International (KHNGY) and Adecco (AHEXY) were also added to in the second quarter.
Carla Fried, a senior contributing editor at ycharts.com, has covered investing for more than 25 years. Her work appears in The New York Times, Bloomberg.com and Money Magazine. She can be reached at firstname.lastname@example.org. You can also request a demonstration of YCharts Platinum.