The Daily Screen: The Best European Stock Funds

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Europe stock funds have held up better than some other foreign funds this year, but that's not saying much.

Thanks to slowing economies and slipping corporate profits, every foreign stock fund category is underwater this year. Europe stock funds, in particular, are off, 11.3% so far this year.

They've been held back, at least in part, by a sagging euro -- the currency of unified European nations that has consistently tested its lows this year. The weak euro hurts U.S. fund investors because no matter whether the stocks in Europe funds go up or down, when Europe funds convert their shares to dollars, they're worth less than when they started.

Europe funds have also been hurt by a selloff in the technology and telecommunications sectors. For instance, wireless shops Nokia(NOK), Vodafone Airtouch(VOD) and Ericcson(ERICY) -- three popular holdings among Europe funds -- are down 8.3%, 26.8% and 32.1%, respectively, this year.

That said, there's good reason to pay attention to European markets. The category only had two down years in the 1990s and beat the S&P 500 in 1993, 1994, 1996 and 1999.

Not Big in Europe It's been tough going in Europe this year.
	Avg. Europe Fund	S&P 500
YTD Return	-11.3%	-7.8%
1-Year Return	-0.2	-4.2
5-Year Return	14.2	19.4
10-Year Return	11.7	18.3
Source: Morningstar. Annualized performance figures through Nov. 28.

If you like the idea of investing in Europe with 5% or 10% of your long-term portfolio, we've done some homework for you.

We screened the 68-fund category for those funds that beat their average peer over the last one- and three-year periods, according to Morningstar. Seven funds made the cut; here they are, ranked by their one-year returns.

Leading Europe Funds These funds have bested their peers during recent years.
Fund	1-Year Return	3-Year Annualized
(MEUEX)Deutsche European Equity Instl	112.4%	50%
(TEMIX)Mutual European A	26.4	19.9
(GEURX)GAM Europe A	13.3	10.4
(FNORX)Fidelity Nordic	5.7	21.1
(MAEFX)Merrill Lynch EuroFund A	3.8	12.7
(SBEAX)Smith Barney European A	0.2	13.3
(EUGAX)MSDW European Growth A	0.1	13.6
Avg. Europe fund	-0.2	9.8
S&P 500	-4.2	13.8
Source: Morningstar. Annualized performance figures through Nov. 28.

We've also screened these leading funds' holdings to get an idea of which stocks they're betting on, but first let's check out the funds.

How did chart-topper (MEUVX)Deutsche European Equity post that 112.4% gain? In the first quarter the fund dabbled in the then-hot IPO market, leading to a 105% gain. Since those heady days it has mainly focused on blue-chip stocks.

As you might imagine, the funds that made our list aren't the riskiest out there since higher-octane funds have taken it on the chin this year. The only fund on our list with above-average volatility compared to its peers is the broker-sold (GEURX)GAM Europe fund, according to Morningstar.

If you're hunting for a fund with a less aggressive, value-oriented approach, check out the broker-sold (TEMIX)Mutual European fund, which is part of value shop Franklin Templeton's family of funds. The other funds on our list are also good candidates.

But if you're in the market for a more aggressive Europe fund you might look at the no-load (FEURX)Invesco European fund or the broker-sold (GTGEX)AIM Euroland Growth fund. Both funds share co-manager Steven Chamberlain. For details on his investment style, read this 10 Questions interview.

Those in the market for an index fund should look at the no-load (VEURX)Vanguard European Stock Index fund, which tracks the MSCI Europe Index. Despite a sub-par 5.4% loss over the last 12 months, the fund beats its average peer over the last three-, five- and ten-year periods. Its 0.29% annual expense ratio is also well, well below the category's 1.78% average.

If there was any doubt about the telecom sector's role in Europe funds, a glance at our leading funds' cumulative top holdings confirms that suspicion. More than half of the top 10 are stocks of telecom shops.

Under the Hood The stocks with the heaviest weighting in the combined portfolios of the seven above funds.
Stock	Weighting in Top-Seven Funds	Number of Top-Seven Funds Owning the Stock
Nokia(NOK)	4.5%	5
Vodafone Airtouch(VOD)	2.6	5
LM Ericsson Tele B(ERICY)	2.5	4
Aventis CI A(AVE)	1.6	4
Alcatel(ALA)	1.6	4
Telefonica(TEF)	1.2	5
British Telecom(BTY)	1.2	4
ING Group(ING)	1.1	4
Total Fina CI B(TOT)	1.1	4
Royal Dutch Petroleum(RD)	0.9	3
Source: Morningstar. Holdings as of funds' most recent portfolio reports.

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