Europe Value Funds Gaining Ground on Growth Rivals

But is it a short-term blip?
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European growth stocks have taken big hits in performance lately, raising doubts about a sector that has fueled the returns of many top-performing foreign funds.

Meanwhile, certain European value funds, after lagging badly for months, have recently been catapulted to the top of the standings by a strong rally in long-shunned European cyclical stocks.

For instance,



European fund, managed by growth-stock enthusiast Steven Chamberlain, is down 2% for the year through April 8, according to


. This return ranks the fund 100 among 153 Europe-region funds tracked by Lipper. The

Europe Index

calculated by

Morgan Stanley Capital International

was flat over the same period.

Chamberlain has often said that as long as a company shows strong earnings prospects, he will buy it, even if valuation measures look expensive.

Until recently, this take-no-prisoners strategy had served Chamberlain well. In 1998, for instance, Invesco European returned 32.9%, ranking it ninth among 96 funds.

Then the European growth stock sector experienced a nasty crunch in February and March. Investors had plenty to get spooked about: Europe's poor economic growth prospects, instability at the heart of important

European Union

institutions, the weak euro and the confrontation in the Balkans.

They sold off whatever looked pricey and piled into defensive sectors like chemicals and utilities. As a result, value funds like

Franklin Templeton's

(MEURX) - Get Report

Mutual European have surged. Year to date, this fund is ahead 5.3%, ranking 11 of 153.

End of story? Not if growth stocks recover. Chamberlain wasn't available for comment, but co-manager Anand Sunderji insists the recent selloff is over. "It was a short-term blip."

This is also the line from Jason Holzer, a manager of

Aim International's

(aedax) - Get Report

Euro Development, a growth-oriented fund that has posted a negative 2.0% return so far this year. "We see no reason to jump into the cyclicals."

Both managers think the recent larger-than-expected half-percentage-point

interest rate cut by the

European Central Bank

will help reignite their favorite stocks.

Indeed, some much-favored growth names have made impressive recoveries. U.K. cell phone operator


(VOD) - Get Report

, which the Invesco and Aim funds both hold, has surged 18% from its March low.

But this stock, like many others, is looking increasingly pricey, thus making it ever-more vulnerable to another selloff. Vodafone, which accounts for 4% of the Invesco fund, trades at a dizzying 56 times 1999 forecasted earnings from

First Call

. Finnish cellular handset maker


(NOK) - Get Report

, another darling of the growth stock bulls, trades at 43 times forecasted 1999 earnings.

Lofty price/earnings ratios are not a worry to Sunderji. "If we believe in a company, we will stick with it regardless of valuation," he says.

But there's a risk to this. When a much-loved stock disappoints, investors show no mercy. German discount telephone operator


, one of Invesco European's biggest bets at the start of the year, has fallen more than 50% from its 1999 high. Another large holding, Spanish fast-food provider


, is about 25% off its yearly peak.

It's too early, perhaps, to suggest that a tectonic shift in favor of value funds is taking place in European equity markets. After all, over longer time periods they still lag well behind growth competitors. Mutual European shows a negative 5.6% return over one year, ranking 71st of 99 funds, whereas Aim's fund is up 5.7%, ranking 11th.

But it would be foolish to ditch defensive stocks with Kosovo becoming a quagmire and no real evidence that the big three continental European economies -- Germany, France and Italy -- are about to emerge from their low-growth doldrums.

The value funds are experiencing the sweet taste of vindication -- but it still is only a taste.