Strategies for Investing in Europe of the ‘90s

The 1990s may well be the decade of Europe. The dropping of internal trade barriers in 1992 should enhance economic growth, free European companies from onerous rules and allow for more takeovers and consolidations. And the opening of the Eastern Bloc creates vast investment opportunities for Western European, American and Japanese companies.

Should you try to profit from these powerful trends?

Most definitely. Many experts believe that some European stock markets will outperform the U.S. and Japanese markets in the next decade, just as some did for parts of the past decade. Also, international investments should be a part of any prudent, diversified portfolio. When American stocks are falling, European and Asian stocks may be rising.

But don’t put all your investment eggs in the Euro-basket--and don’t expect quick profits either. Many European stocks have already been bid up by American and Japanese investors, so the easy, short-run profits may have already been made.

“The chances that all of the developments in Europe will produce increased prosperity for Europe and elsewhere is very high. But there isn’t any rush. It’s a major opportunity and it’s going to last for years. So you should invest in Europe but do it in a sensible way,” says John P. Dessauer, publisher of Dessauer’s Journal, an Orleans, Mass., newsletter specializing in international investments.

Fortunately, there are several different ways you can invest in Europe, each for a different level of time, money and risk. The three most common are:

*International stock mutual funds. This is the best choice if you have limited time, money and tolerance of risk. You can invest as little as $1,000 and get a diversified portfolio--while leaving the decisions of which stocks to pick to full-time professionals.

There are two basic approaches. You can pick a mutual fund that specializes just in Europe. More and more Europe-only funds are being offered, but they are relatively new, with no long-term track records.

Alternatively, you can buy shares in any of the dozens of funds that invest in stocks worldwide, including Europe as well as Asia and North America. Some of these funds have been around for years and have excellent track records. Nine of the 10 top-performing equity funds over the past five years are international funds, including second-ranked Fidelity Overseas, up 353% in the period, and fifth-place Trustees Commingled International, up 292%, according to Lipper Analytical Services.

Such diversified international funds “don’t put the portfolio manager in a straitjacket and force him to buy in a certain country even if there are not good values,” says Kurt Brouwer, president of Brouwer & Janachowski, a San Francisco money management firm. Consider the more specialized Europe-only funds if you already have a diversified international portfolio, he suggests.

-Single-country “closed-end” funds. These are for you if you are more adventurous and willing to take greater risks. They are like mutual funds in that they invest in portfolios of stocks. But they are far more specialized. There’s a Germany Fund, Spain Fund, Italy Fund, United Kingdom Fund and Portugal Fund, among others, each owning stocks only from those respective countries. By 1992, there might even be funds for Czechoslovakia and Hungary, newsletter editor Dessauer says.

Single-country funds also are more volatile than conventional mutual funds; their shares are traded on stock markets and are thus subject to wild price swings. They trade at premiums or discounts to the actual net asset value of stocks in their portfolio. Barron’s newspaper lists those premiums or discounts every week.

Unfortunately, in part because of heavy buying by Japanese investors, many closed-end funds are trading at sky-high premiums over their net asset values. One, the Spain Fund, is trading at more than twice its value. The Germany Fund is trading at about an 85% premium.

It’s best for conservative investors to avoid many of these for now until their premiums drop. Such declines are likely to occur as fund companies respond to high demand by rolling out more and more new funds.

-Individual stocks. This is for the most adventurous, and best financed, investor. You will need at least $20,000 to $30,000 just to start building a diversified portfolio, and the issues can be volatile. Just as in buying American stocks, look for companies with good fundamentals that are not overpriced, newsletter editor Dessauer says. The best country for bargain stocks right now is Holland, he suggests.

However, investing directly in European markets is too costly and inconvenient for all but the most sophisticated and wealthiest investors.

One alternative for the small investor is to buy American Depositary Receipts. An ADR is a piece of a block of a foreign stock held in trust at a bank; it is traded on a U.S. exchange or over the counter. ADRs are available for dozens of firms, including such blue chips as British Airways, Siemens and Deutsche Bank. Many more are on the way.

Another alternative is to pick stocks of American firms that stand to benefit from the growth of Europe. U.S. auto firms (Ford and General Motors), computer companies (International Business Machines and Apple Computer) and telecommunications concerns (Pacific Telesis and US West), among others, stand to benefit from growing operations in Europe.

Bill Sing welcomes readers’ comments and suggestions for columns but regrets that he cannot respond individually to letters. Write to Bill Sing, Personal Finance, Los Angeles Times, Times Mirror Square, Los Angeles, Calif. 90053.