The Tortoise and the Herr? Top-Performing Deutsche European Has Idled for Months

The fund's returns hover in triple-digit territory, but investors getting in now may have missed the party.
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For a fund that has been the highest performing of any in the fund universe this year, the

(MEUVX)

Deutsche European Equity fund sure has been taking it easy lately.

The fund is up 95.3% so far this year, crushing all other funds -- especially its Europe-focused brethren -- and attracting quite a bit of attention from investors. However, it made almost all of its gains during February, thanks in part to big bets on

initial public offerings. During the past four months or so it has gained less than 5%. The upshot is that investors thinking of jumping in now are probably too late for the party.

"If you weren't in there from Jan. 31 to Feb. 29, you weren't going to get that performance," says Diane Finnerty, an investment adviser with

Ventur Asset Management

in Locust Valley, N.Y.

Finnerty bought the fund's institutional

(MEUEX)

share class, which has earned an even frothier 105% return, early in the year.

Portfolio manager Michael Levy won't have to do much more for the rest of the year to end up with a stellar 2000 record. However, "Anybody buying this fund based on its recent performance is going to be disappointed," says Kunal Kapoor, a

Morningstar

analyst who covers the fund.

What is amazing about the fund is that its category, as a whole, hasn't done much this year. The typical mutual fund investing in Europe is up just 3.6% in the year to date, after the shellacking European stocks took this spring amid the U.S. stock selloff.

A look at the institutional version's performance in the first two months of the year tells the tale. In January, the fund went up just 1.2%. By the end of February, the fund was up 96.5% year to date as a result of several days of double-digit returns. On Feb. 1 alone, the fund rose a whopping 35%. Since the end of February, however, it's tacked on just 4.3% in additional gains. The investor fund has followed a similar trajectory. (The institutional fund, which has a $250,000 minimum investment, has parlayed its lower fees into a higher return.)

Many of the gains in European Equity came about through its participation in what portfolio managers call "a buoyant initial public offering market." In fact, the fund was able to take advantage of IPOs listed on the tech-heavy German

Neuer Markt

because parent

Deutsche Bank

has pull in institutional circles which affords it access to hot offerings. And thanks to the fund's small size -- currently just $59 million and open to new investments -- those positions had a significant impact on the fund.

For example, the fund took a stake in

Advanced Vision Technology

, which doubled within the first few days of trading. At one time, shares of

Carrier1 International

(CONE) - Get Report

, a successful IPO, accounted for 3% of the fund's assets.

"The performance is probably not going to continue as it has," says Lou Stanasolovich, a planner with Pittsburgh's

Legend Financial

. "It was an aberration."

Levy, who was traveling and could not be reached for this article, writes in his semiannual report that he's sold of many of the names that generated the wild gains. Since then, the fund veered toward tame

large-cap names, applying a growth-at-a-reasonable-price strategy.

Aside from the IPOs, European Equity made other big bets in Germany, feeling that the country is poised for further gains because of changes in the corporate capital-gains tax laws. That should free up vast amounts of money for investment in infrastructure and mergers and acquisitions. As of March 31, about 19% of the fund's holdings are in Germany, the largest single country allocation. The largest position is in

Siemens

, the giant consumer goods producer. Previously, the fund had owned

Mannesmann

, the German conglomerate, which was bought out by Britain's

Vodafone Airtouch

(VOD) - Get Report

at a premium earlier this year.

The fund also likes French media and telecom companies. Its largest French holding, as of March 31, was

Vivendi

, which recently announced it was buying entertainment giant

Seagram

(VO) - Get Report

. At the same time, European Equity is also underweighting the United Kingdom, believing that the strong pound has been putting British companies at a competitive disadvantage.

European Equity's smartest move was prescient selling during the first quarter that avoided the spillover from the bloodletting in the U.S. technology market. The lucrative stocks -- including the IPOs -- were sold in late February and early March.

The fund also goes beyond the eponymous European focus, buying stocks from countries as far away as Israel. European Equities also has investments in the Mediterranean and Turkey.

Furthermore, by selling off some its winners and locking in gains, the fund has certainly heaped on some capital gains. Shareholders getting in now won't get much benefit from past performance and will likely be handed a tax bite, Stanasolovich reasons.

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