European Fund Managers Call Value Comeback the 'Real Thing'

Even growth managers are buying unglamorous industrial companies.
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For Jean-Marie Eveillard, the misery is over.

The recent run-up in cyclical and small- and mid-cap stocks in Europe has generated what must be a welcome recovery in

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SoGen Overseas, the deep value fund managed by Eveillard since 1979.

"This is the real thing," says the Frenchman, commenting on the recent shift by investors away from European growth stocks into companies that have long been left by the wayside.

In Europe, the move away from expensive-looking growth names, which recently has been mirrored in the U.S., has not come a moment too soon for this high priest of value investing, who has paid dearly for his dogged insistence that a company must be indubitably "cheap" for him to buy it.

Overseas has returned 6% year to date through April 15, according to

Lipper

. That ranks the fund a respectable 189th among 602 international funds, and puts it significantly ahead of the 0.67% return on the Europe index calculated by

Morgan Stanley Capital International

. However, over three years, Overseas has returned a pallid 5.8% annually, ranking 267th among 334.

It's tempting to side with mavericks like Eveillard who have scoffed at the Alice-in-Wonderland valuations attached to many big-cap names in Europe. But will his fund's shareholders actually start making some serious money now?

Quite possibly. Overseas holds a lot of cyclical stocks in commodity-linked industries. If the global economy (outside of the U.S.) recovers, then commodity prices will too, pushing up profits at the commodity producers and firms that do especially well during economic upturns. And hopes for a revival in growth in Europe are stronger after the

European Central Bank

slashed interest rates earlier this month.

One of Eveillard's biggest holdings is

Buderus

, the German heating equipment maker, the sort of grunge company that has been left behind by investors chasing sexier names. According to Eveillard, Buderus promises dependable earnings growth in the low teens, trades at around 12 times 1999 earnings and recently announced plans to buy back 10% of its shares. Currently trading at 308 euros, he says it's worth "twice that."

Other value managers are sitting on what are turning out to be real Cinderella stocks in Europe. Francois Sicart, manager of

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Tocqueville International Value, up 10% so far this year, holds medium-cap French paper company

Emin-Leydier

, which has soared nearly 30% this month.

One piece of evidence that the shift to cyclicals may last is that even some growth managers are participating in it.

Neil Worsley, a manager of

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Bartlett Europe, which has hitherto topped performance tables by betting on growth names, is now considering buying into companies that will benefit from a faster-than-expected recovery in the U.K. economy.

Worsely thinks banks will do well in a buoyant environment, and is particularly eyeing

Royal Bank of Scotland

. Perhaps the clearest sign the times are a-changin' in Europe is when managers like Worsely are tempted by decidedly dirty industries like construction. And one such U.K. firm he's looking seriously at is

Aggregate Industries

, a construction materials manufacturer that has ramped up 13.5% this month.

Bartlett Europe is the No. 2 Europe fund over the past year. Year to date, its growth emphasis has been a drag, causing the fund to fall to 49th, with a 0.5% return.

Now, growth managers are keen to show they were never totally beholden to growth sectors like telecoms and pharmaceuticals in the first place.

George Evans, manager of

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Oppenheimer International Growth, enthuses about what is the antithesis of a shiny clean growth stock:

Boskalis

, a Dutch dredging company that trades at around eight times 1999 earnings. "This is a good basic business with solid earnings growth," says Evans, who says he's held the stock for around three years.

And such stocks seem to have served Evans well this year: His fund is ahead 6.4% year to date.