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Europe's silver lining: world-class companies

Business practices and access to emerging markets matter more than geography, fund managers say

Europe looks like a frightening place to invest money these days.

The economy is flirting with recession, the debt crisis has threatened to move beyond Greece and banks are looking increasingly fragile - and that's on top of the some of the longer term afflictions such as an aging population.

Even though major indexes have already fallen to bear-market lows this year, you don't hear many money managers portraying Europe as a bargain-hunter's paradise poised for a rebound.

So why give the region a second thought?

Europe is home to a number of world-class companies whose head offices just happen to be located in the region but whose operations span the globe - particularly higher-growing areas within the emerging markets.

"Some of the best-run businesses in the world just happen to be in Europe," said Paul Musson, who manages the Mackenzie Ivy European fund with colleague Matt Moody. "We're looking for great businesses; we don't really care where they're domiciled."

This approach, along with a defensive posture in recent years, has helped the $400-million Mackenzie Ivy European fund deliver surprisingly upbeat results.

According to Lipper, the fund has returned 5.5 per cent over the past 12 months, to the end of August. And over the past three years, with the Euro Stoxx 50 index down more than 30 per cent, the fund has stayed in positive territory, returning 2.1 per cent.

Part of what makes the fund stand out is its relatively narrow number of holdings, which total about 20 right now. That compares to a peer average of 53 holdings, according to Lipper - although the fund's volatility tends to be low.

But the fund also steered clear of some of the recent market turbulence when it began to cut back on economically sensitive stocks prior to the 2008 financial crisis, fearing that debt-fuelled economic growth was not sustainable and would probably end badly.

The fund jettisoned CRH PLC, the Irish-based building materials company that had big exposure to the residential housing markets in the United States, the U.K., Ireland and Spain. It also slowly exited HSBC when the banking giant ramped up its exposure to subprime lending in the U.S.

"We are even more concerned about the economy today than we were five years ago," Mr. Musson said. "You have countries with so much debt at a time when they have aging populations, with health care costs and retirement costs increasing. It's not a pretty picture."

The fund's high cash levels, currently at 17 per cent, reflect this cautious outlook. But it also tends to favour strong multinational corporations, particularly within the consumer staples sector, which tends to perform well even when the economy is weak.

One of the fund's top holdings, Unilever NV, generates about 50 per cent of its soap and shampoo sales in faster-growing regions outside Europe. French-based yogurt-maker Groupe Danone, another top holding, is expanding into Russia, Brazil and China.

"We want businesses that are much better able to control their own destinies - businesses that are not reliant upon decisions by the European Central Bank to print money or bail companies out," Mr. Musson said.

"We don't want companies that are dependent upon somebody else making a decision."

Domestic-oriented companies within the fund - and there are only a few - tend to be even more defensive.

U.K.-based William Morrison Supermarkets sells low-priced groceries and Admiral Group PLC, also based in the U.K., offers low-cost car insurance.

Mr. Musson also likes a number of industrials and even financials, which are obviously more economically cyclical. However, he believes valuations are too high right now.

"We're not averse to holding banks, but it has to be a bank that we can understand and feel comfortable with the corporate culture," he said.

© 2007 The Globe and Mail. All rights reserved.

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