Europe backtracks on last year's promises

If you wonder what happened to all those promised gains in your European-linked mutual funds, you're not alone.

European stocks, red-hot in 1998, hit the skids this year, dragged down by a tepid economic outlook, a slumping euro currency, and slower growth in company profits.

"European markets had a tremendous year last year," but now face a tough" environment, says Jeremy Pink, editor in chief of Worldlyinvestor.com, a Web site that tracks European and Asian investments.

With the exception of telecommunications, Mr. Pink says, Europe lacks the go-go Internet/high-tech sectors that propelled US stock markets to new highs this year.

Recent interest-rate cuts should help, but they take time to show up in higher returns for fund investors, says Hap Bryant, who tracks European funds for information firm Morningstar Inc. in Chicago.

One reason for the lackluster fund returns has been the slumping value of the euro against the dollar, he says. The upshot: Gains for US investors are often diluted through currency translations.

Still, the same factors that made Europe so promising last year remain in place, Mr. Bryant notes. They include extensive restructuring for industry, merger activity (especially in banking and finance), increasing computerization of data and communications, and stock-market gains in the United Kingdom, France, and Italy.

Moreover, stock valuations look relatively inexpensive compared to those of many US companies.

In buying into a European fund, keep in mind that many European funds are, in fact telecommunications funds, Mr. Pink says.

If you want broader exposure, make sure you look through the fund prospectus for companies from a variety of market sectors.

One such fund, Bartlett Europe Fund (800-800-3609), is up 1.5 percent year-to-date, compared with a loss for many Europe-linked funds.

Bartlett Europe buys into companies throughout Europe, and, unlike some Europe funds, taps companies from beyond the heartland - that is, beyond Germany, France, and Switzerland, says Neil Worsley, co-manager of the fund.

The fund's sectors are also diversified, including financials, service companies, health care, retail, and technology.

Mr. Worsley, based in London, remains upbeat about Europe over the long run, and he sees a trend towards lower interest rates.

Worsley sees little impact from the current crisis in Kosovo, although, he says, "that could change" if the situation worsens.

Other European funds posting gains this quarter include Merrill Lynch Europe (up 1.6 percent) , Fidelity Nordic Fund (up 6 percent), and Mutual European (up 4.7 percent), part of the Franklin-Templeton Group (see chart, above).

While most European funds are dormant now, the economic factors are in place for an eventual renaissance, says Bryant. Europe, he says, is far too wealthy, resourceful, and productive to stay in the doldrums.

European region funds

Down 83 percent in 1998, the Lexington Troika Dialog Russia mutual fund has bounced back big time. The fund that focuses on Russian stocks sits atop Morningstar's top performing European funds list for the first quarter of 1999. European funds as a whole paled in comparison during that period, down more than 2 percent. Analysts blame weak corporate earnings, a troubled euro, and an uninspiring high-tech sector for the drop.

TOTAL RETURN FUND NAME YTD 1-YR. Lexington Troika Dialog Russia 25.8 -74.9 800-526-0056 Fidelity Nordic 6.0 8.8 800-544-8888 Mutual European A 4.7 -7.0 800-342-5236 Goldman Sachs European Equity A 3.6 N/A 800-621-2550 Templeton Greater European A 3.2 -9.0 800-342-5236 ICAP Euro Select Equity 3.0 5.2 888-221-4227 Merrill Lynch EuroFund A 1.9 4.5 800-637-3863 MSDW European Growth D 1.7 1.7 800-869-6397

WHITNEY DODDS WOODRUFF