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TheStreet Open House

Use Mutual Funds to Profit From Europe's Revival

NEW YORK ( TheStreet ) -- After languishing for years, European stocks are at last rebounding.

During the past three months, European mutual funds returned 12.9%, compared to 7.4% for the S&P 500, according to Morningstar.

Better economic news has helped spark the rally. In the second quarter, the European Union reported that its GDP grew 1.2%, the first gains after a prolonged contraction.

Despite the recent rally, there is still room for European stocks to continue climbing, say some fund portfolio managers.

Many European stocks are cheaper than their U.S. counterparts. The average stock held by European funds sells for 1.8 times its book value, compared to a figure of 2.4 for the S&P 500. As the eurozone continues its long slog back to full recovery, sales should revive, and stock prices will climb.

"We are in the fourth inning of a long game," says Paul Ehrlichman, portfolio manager of ClearBridge International All Cap Opportunity (SBIEX).

To participate in the revival, consider international funds. Although they can invest anywhere overseas, some top choices have outsized stakes in Europe.

Solid performers include Causeway International Value (CIVVX), ClearBridge International All Cap Opportunity, and Northern International Equity (NOIGX).

At the height of the eurozone crisis, Causeway International snapped up depressed shares. Those rebounded and delivered strong returns. During the past five years, the fund returned 7.7% annually, outdoing 91% of foreign large-blend funds. Causeway currently has 78% of assets in Europe.

A die-hard value fund, Causeway looks for companies with earnings setbacks that seem poised to recover. Many holdings are restructuring, selling off troubled divisions or focusing on new lines.

One holding is Akzo Nobel (AKZOY), a Dutch maker of paints and coatings. The company recently sold a troubled U.S. paint operation.

"It is a good sign, when management sells a business that has been a drain on resources," says Causeway portfolio manager Sarah Ketterer.

Another holding is Tesco (TSCDY), the largest grocery retailer in the U.K. The company has struggled in recent years, but it is increasing capital expenditures, revamping stores.

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