Over There: European Funds Shine

Grab your backpack and beret, we're heading across the pond!

European funds have been having an impressive run, with the average fund returning 37.58% in 2003, compared to the average U.S. diversified equity fund return of 32.44%, according to Lipper.

But conquering the Continent isn't as easy as moving plastic troops across the Risk board. Investors who don't have the time or inclination to research European funds might consider owning globally diversified foreign funds. Most foreign funds contain approximately 60% in European stocks, an exposure more than sufficient for the majority of investors, according to Morningstar.

"Europe-focused funds don't give you a lot of diversification for your buck," says Morningstar analyst Emily Hall. "And regional funds tend to be expensive." Morningstar's average expense ratio for European funds is a heady 1.86% compared to the domestic equity fund average of 1.51%.

Aside from the higher prices, stock overlap is a major concern for Hall. And it's not just a problem in which investors find a Finnish-based company like Nokia(NOK Quote) in both their foreign stock fund and their tech fund. Occasionally, European names sneak their way into so-called domestic stock funds, and a good number of them also trade as ADRs.

"If a U.S.-based fund has the freedom to venture overseas they may own a lot of well-known European names like GlaxoSmithKline(GSK Quote) or British Petroleum (BP Quote)," says Hall. "So adding a Europe-focused fund will not add to your diversification, but will add to your fund expenses."

Hall's two fund picks in the European category are (VEURX Quote)Vanguard's European Stock Index and (TEMIX Quote)Mutual European fund.

Mutual European fund's portfolio manager, David Winters, mines for value stocks across all market capitalizations. Winters is also unafraid to hold cash -- currently 18.7% according to Morningstar -- or a U.S. stock or two, like White Mountains Insurance (WTM Quote) and Berkshire Hathaway(BRKB Quote).