As the World Turns, so Do Fund Managers, Back to Europe

A recent tech boom adds luster to improving economic conditions, they say.
Author:
Publish date:

The awakening of a European tech boom is luring international mutual fund investment back to the region from Japan, mutual fund managers say. That's a reversal of the

trend earlier this year.

And while no one is comparing the tech-stock action in Europe to what is happening in the

Nasdaq

in the U.S., it's promising enough to induce some money managers to lower their allocations to Japan -- despite the average 97.7% run-up in Japanese-sector mutual funds this year.

"As a growth investor for the last three years, I've been sitting back watching growth investors in the U.S. buying Internet and tech stocks, making a fortune, and I've got nothing to buy," says Vincent Willyard, manager of the

(DHIIX)

Duncan Hurst International Growth fund, which has posted a 45% return since its July 1 launch. "Suddenly, I've got wireless communications plays, tech plays and Internet plays all over the place."

Those plays include Germany's

Mannesmann

(MNNSY)

, currently the subject of a hostile takeover bid from the U.K.'s

Vodafone AirTouch

(VOD) - Get Report

, France's

Bouygues Telecom

and German online auctioneer

ricardo.de

.

Since the fund's launch, Willyard has decreased his exposure in Japan from 37% to 30% while increasing his exposure in Europe from 26% to 42%.

"The simple answer is, I'm rotating into Europe because I'm seeing accelerating growth there as opposed to decelerating growth in Asia," Willyard says.

A big portion of the gains this year in Europe -- like those on the Nasdaq in the U.S. -- have come very recently, fueled by tech and telecom stocks. The

Lipper European Fund Index

is up a relatively unremarkable 20.3% year to date. But it has risen 17.8% in the past 13 weeks.

"Over the past couple of weeks, we've seen this tremendous run in European technology companies, specifically Scandinavian companies" notes Andrew Reitenbach, a co-manager of the

(RIEAX)

Reserve International Equity fund, which boasts a 46.8% year-to-date return. "People are starting to value them like they are in the U.S."

Since mid-November, Reitenbach has cut his exposure in Japan to 25% from 38% and increased his European exposure to 61% from 50%.

Among his favorites are likely suspects

Nokia

(NOK) - Get Report

and

Ericsson

(ERICY)

, the Scandinavian mobile-phone makers who are up 165% and 150%, respectively, this year. But he also points to companies that are riding those firms' coattails. Case in point:

Jot Automation

, which designs assembly-line applications for Nokia. The stock has nearly doubled since early October. He also likes French computer-game designer

Infogrames Entertainment

.

That said, the rosy outlook for Europe isn't entirely based on a "tech took off in the U.S. and Europe will follow"

outlook. Fund managers say positive economic indicators, as well as restructuring that has taken place in Europe over the past three years, put the region on solid footing for growth.

"For the first time in a long time, the whole of Europe is beginning to accelerate together," says Howard Moss, manager of the

(HAIGX) - Get Report

Harbor International Growth fund. "I'm strictly a bottom-up guy, but at this moment, we have very little money in the Far East, and we're predominantly in Europe."

One of his largest holdings is Spain's

Telefonica

, he says.

The unemployment rate in Europe fell below 10% in October for the first time since 1992. Germany's production numbers for October came out higher than expected, a sign the country's languishing economy -- the continent's largest -- may be getting back on track. And a recent bump-up in European interest rates has been viewed as further evidence of real growth in the region.

Factors like these make managers believe a recovery in Europe is in its nascent stage, while Japan's recovery -- still viewed by many with skepticism, despite this year's performance -- is quickly becoming yesterday's news.

"The story in Japan is at least one year old, while in Europe, it's two years delayed," says Oscar Castro, manager of the

(MIIGX)

Montgomery International Growth fund. Three of his favorite stocks are Dutch semiconductor equipment maker

ASM Lithography

(ASML) - Get Report

, Dutch publisher

VNU

and French utility

Vivendi

.

These recent developments are an interesting plot twist from two years ago. Then, worries over Europe's largest economies, combined with political clashes over the Euro, weighed on the market, fueling capital flight. Earlier this year, that capital headed for Japan. But while flow of money back to Europe doesn't yet add up to significant numbers, fund managers say it's happening.

That isn't to say that international investors have turned tail on Japan now to head into the hills of Europe for good. They're just recognizing the run that the region has had.

"We're still positive on Japan going forward," Reserve's Reitenbach says. "These stocks were starting to turn over, and we just decided it was time to take some money off the table."

But the rise in Europe in recent weeks coincides eerily with the mad-dash run-up of the Nasdaq in the U.S., pushed by little other than

momentum investing. Has daytrading spread across the Atlantic with technology as well?

"No doubt, momentum is in this market as well," Montgomery's Castro says. He cautions that if the traditional early-year shift into cyclicals comes about in the European market next year, growth investors could end up giving some of their gains back.

It's a scenario that Frank Semack, manager of the

(IGFAX) - Get Report

Federated International Growth fund, can see playing out.

"The valuations between growth stocks and cyclical stocks, same as in the U.S., are very, very expensive," Semack says. "I think we'll see a normal rotation out of growth and into cyclicals, but I think after that, we'll get another rotation into growth stocks."

Let the volatility, Euro-style, begin.