Levy: Absolutely. This is a transformation and even a revolution of the European landscape. The countries involved are surrendering the sovereignty of their currencies--something that won't be easily undone. It will be a catalyst in achieving economic union and, one step further, a quasi-political union. It will shake up a lot of the rigidities that have been in place in Europe. Corporations are making changes in anticipation of a new environment, where the barriers to competition are fading. There will be losers in this game, but there will be winners, too. And those that win will win big.
Times: What about Britain, which has the largest European stock market?
Reiner: The U.K. looks a lot like the U.S. Both countries have enjoyed a very long economic-expansion phase but now are dealing with inflationary and interest rate pressures. France has been the best-performing core European market for the year to date, while Britain has been the worst.
Times: You mentioned several French stocks. Any companies in other nations that you really like at the moment?
Reiner: Adidas-Salomon in Germany. It's being added to the [leading German stock market] DAX-30 index, so it's a timely pick. It's a situation where a dynamic individual--Chairman Robert Louis-Dreyfus--came in and transformed a beleaguered shoe company that had been a big player in the 1970s before ceding the market to Nike, Reebok and other competitors. Essentially, he came in and reinvented the company. He streamlined operations, redesigned the shoe offerings and put money into marketing to foster a positive image and relaunch a quality brand name. Then he expanded the lineup by buying Solomon, a French ski company, and by moving into apparel.
Levy: Our largest position is in Credito Italiano. Early on, we identified this as a company that's forward-thinking in terms of understanding the banking challenges that lie ahead in an environment of monetary union. It has become necessary to consolidate the Italian banking sector, and Credito is paving the way.
Management has tremendous experience and understands the importance of creating value for shareholders and being sensitive to the wishes of minority shareholders. They've broken with past traditions of being beholden to core shareholders or minority shareholders who exerted influence--a practice that went on in Europe and Japan fairly routinely. So it's a very innovative company that just engineered a merger with another bank. With the combination, management is beginning to show an ability to generate a 20%-plus return on equity.
Reiner: Credito Italiano also will benefit from the equity excitement that's happening in Europe. Historically, Europeans, except for people in Britain and Holland, haven't owned much in the way of stocks. They've preferred bonds, which paid nice double-digit returns, especially in places like Italy and Spain.
That's not going to happen now because interest rates are converging down to German levels. Also, as governments stop contributing to pension plans in an effort to force individuals to fund their own pensions, people will have to move more toward equities. We're seeing the first signs of that now, much as the U.S. developed an equity culture over the last several years. It's just starting in Europe, which implies greater liquidity and demand for European stocks, and a more supportive environment for stocks to do well.
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Russ Wiles is based in Phoenix. He can be reached by e-mail at russ.wiles@pni.com.
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BT Investment International Equity Fund
Strategy: Seeks capital appreciation by investing in foreign companies, primarily those based in developed nations.
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VITAL STATISTICS
For periods through May 31
12-month return: +30.84%
12 month return, avg. foreign fund: +13.96
3-year annualized return: +23.50
3-year annualized return, avg. foreign fund: +12.86
5-year annualized return: +20.36
5-year annualized return, avg. foreign fund: +11.89
Five biggest holdings as of May 31:
1. Credito Italiano (Italy) 2. Societe General d'Enterprises (France) 3. Telecel-Comunicacoes (Portugal) 4. Renault (France) 5. Newcourt Credit Group (Canada)
Sales charge: None: Assets: $1.1 billion
Min. investment: $2,500 ($1,000 for IRA) Phone: (800) 730-1313
Morningstar risk-adjusted performance rating, 1-5: *****
Source: Morningstar Inc.
