NEW YORK Europe's three-year macroeconomic crisis opened a window for savvy fund managers to snap up well-established European companies at cut-rate prices, a winning strategy that brought them honors in the Lipper Fund Awards for international equity funds.
Economic weakness in Europe caused by Greece, Ireland, Spain and France's inflated budget deficits, along with widespread investor jitters, helped five fund managers reap top returns for their international equity funds during a three-year period in which low-priced stocks slowly recovered from the 2008-2009 global economic crisis.
The 2013 U.S. Lipper Fund Award winners of international-flavored equities were Wasatch Advisors, Thornburg Investment Management, Artisan Partners, Aberdeen Asset Management and Virtus Investment Partners.
These funds were honored for the strongest risk-adjusted returns within their respective classifications during the past three years ended November 30, 2012, according to Lipper.
The reasons for these portfolios' success lies in carefully choosing the shares of discounted European companies, as well as the shares of emerging market-based companies, in a variety of sectors. At the same time, the top-ranked funds avoided troubled areas of peripheral Europe, but kept a pinch of contrariness amid jittery markets.
"You want a certain amount of fear in markets to operate, and there (was) enough fear to suppress valuations," said Roger Edgley, manager of the International Growth Fund and the Emerging Markets Small Cap Fund for Wasatch.
Wasatch's International Growth Fund, with $738 million in assets, won top award in the International Small/Mid-Cap Growth Fund category, returning 18.56 percent in the three-year period, compared with 9.08 percent by the MSCI All Country World ex-U.S. Small Cap Index.
In 2009, global private and public debt levels in Europe rose as investors worried about higher-than-average real estate prices, high public sector wages and overwhelming public pension commitments.
The Lipper fund award winners took advantage of a sell-off in global stock markets triggered by the European wave of sovereign debt downgrades to snap up shares at reduced prices.
European-based companies that helped drive the award-winning returns included Nestle SA, Unilever Plc, British American Tobacco Plc, Wirecard AG, Novartis AG and UBS AG, the fund managers said.
Nestle, for one, was selling for an average of 45 Swiss francs per share in 2009, while it now sells for 68.75 francs per share, a rise of nearly 53 percent.
Rajiv Jain, manager of the Virtus Foreign Opportunities Fund, agreed that European weakness presented a good chance to help drive future returns.
"We tend to do better in ... markets where not everything is going to do well," Jain said. "When everything is rosy, we don't do well because how do you differentiate?"
The fund, with $38 billion in assets, received the 2013 Lipper Fund Award for the three-year International Large-Cap Growth Fund after returning 10.6 percent in 2012, compared with 3.56 percent by the MSCI EAFE Index.
Other winners included Daniel O'Keefe, co-manager of Artisan's International Value Fund that took the top trophy in the International Multi-Cap Core Funds returning 10.69 percent in the three-year period, compared with 3.56 percent by the MSCI EAFE Index.
Andrew McMenigall, who manages the $1 billion International Equity Fund for Aberdeen Asset Management, won in the International Large-Cap Core Funds category for the three-year time period returning 7.61 percent, compared with 4.33 percent by the MSCI All Country World ex-US index.
Wasatch's Emerging Markets Small Cap Fund, with assets at $1.7 billion, won the Lipper Fund Award for the best performer in the Emerging Markets Small Cap Fund category, returning 17.67 percent compared with 6.79 percent by the MSCI Emerging Markets Small Cap Index.
Tim Cunningham, co-manager of Thornburg's International Growth Fund, with $687 million, returned 14.6 percent in the three-year period compared with 4.63 percent by the MSCI All Country World ex-US Growth index.
All of the winning funds in the international category follow the bottom-up investing approach, focusing on specific company balance sheets, rather than making bets on the industry or the economy in which the companies operate.
Looking forward, the fund managers say they continue to bet on medium to large European companies and favor the bottom-up investing approach.
For example, Cunningham holds shares of German cable network operator Kabel Deutschland Holding AG, a Japanese internet firm MonotaRO Co Ltd and Swiss drugmaker Novartis AG, saying these companies have strong sales but depressed share prices amid continued economic uncertainty.
Cunningham buys companies that tend to be less recognizable such as Christian Hansen Holdings, a bioscience company that develops cultures and enzymes, and Wirecard, an internet payment and processing services firm.
(Reporting By Manuela Badawy; Editing by Chelsea Emery and Andre Grenon)