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Funds That Can Win in a Resurgent France

Richard Widows

Investors watching the Tour de France cyclists gliding down the Champs-Elysees to the finish line at the Arc de Triomphe on July 29 might want to ask themselves if that country might be worth a look for an investment allocation, too.

After all, in May, France elected its first pro-business president in recent memory, followed a month later by a victory in parliamentary elections for Nicolas Sarkozy's center-right UMP Party.

President Sarkozy has been talking about economic concepts unheard of in modern France: lowering the tax burden on businesses; ending the 35-hour workweek; and reducing the size of government. Et après!

Room for Growth

One possible reason for considering channeling some investments in France's direction is that there is enormous room for improvement in the nation's economy. One could argue that it is so bad that even mild success by the new administration might produce impressive investment results. The bar for success is quite low. For example, while unemployment in the European Union dropped to 7.0% in May, France's jobless rate stood at 8.7%, the highest rate of the group.

In export-minded Europe, France's ability to sell more goods abroad than it imports has been badly lagging. The nation suffered a trade deficit amounting to 1.7% of gross domestic product in 2006. And while government spending as a percentage of GDP declined for the euro zone as a whole to 46.2% in 2006 from 48.2% in 2002, France's swelled over the same period to 53.8% from 52.6%.

Even the attitudes of most French citizens seem out of synch with free markets. A 2005 poll of people in 20 countries by GlobeScan found that only 36% of the French believe that "the free market economy is the best system on which to base the future of the world." That compared with 74% of Chinese respondents who agreed with the phrase.

While returns on French stocks have been generally positive in recent years, they have frequently trailed the gains generated by stocks of other major euro zone nations. For example, the iShares MSCI France (EWQ Quote) exchange traded fund advanced 12.18% during the first half of 2007, but still trailed the 23.26% rise by the iShares MSCI Germany (EWG Quote) ETF.

Similarly, the French ETF's impressive 29.95% total return for the 12-months ended June 30 was trounced by the German ETF's surge of 47.15% for the period. For the past three years, the score was for a 28.53% annual return for the German ETF vs. 23.52% for its French counterpart.

Of course, for U.S. investors, the returns on both French and German investments have been boosted by the steady rise of the euro relative to the dollar.

The iShares MSCI France ETF is the only pure play on the French market among U.S. ETFs and open-end and closed-end mutual funds. The table below lists some other ETFs, open-end funds and a single closed-end fund that allocate at least 20% of their assets to French securities.