Betting on a European Recovery

THE BLOCKBUSTER MERGER OF FRENCH utilities Suez and Gaz de France not only provided a nice profit for Philippe Brugère-Trelat, it offered a measure of vindication for the French fund manager.

"For us, it's not just about owning undervalued securities, but ensuring a catalyst exists to unlock the true value of the investment, which often is the key," says Brugère-Trelat, who runs Franklin Templeton Investments' strong-performing Mutual European Fund. "Sometimes, when necessary, our managers will assume an activist role to serve as the catalyst," he says.

In the case of Suez, France's largest water utility, Brugère-Trelat believed the shares were cheap when he purchased them for 23 to 24 euros in October of 2005.

The stock did nothing at first, but jumped in early 2006 when an Italian utility was reported to be readying a bid for the company. The news prompted the protectionist-minded French government to accelerate on-again, off-again merger talks between its largest gas utility, Gaz, and Suez. But Brugère-Trelat thought the initial French deal undervalued Suez. After Mutual European (TEMIX) and other investors protested, terms of the stock swap were sweetened. The shares subsequently hit a high of €44 in 2008, when the deal finally closed.

"We did well with the stock," says the 59-year-old Brugère-Trelat, who holds a master's degree in law and political science. "We are not an activist fund, but sometimes it pays to be a little 'forthright' in managing a portfolio."

Since Brugère-Trelat rejoined Templeton's Mutual Series group (including Mutual European) in 2004 -- he had previously followed European investments for the Mutual Series between 1984 and 1994 -- the Mutual European fund has outperformed its index (MSCI Europe) over one-, three-, five-, and 10-year periods, with returns of 5.50%, 1.65%, 10.02% and 11.29%, respectively, versus the benchmark's returns of 1.95%, -5.26%, 4.85% and 1.25%. It has returned 12.73% per year on average since it was formed in July 1996. It's also beaten its peer group over those time periods, according to Morningstar. The fund has an initial sales charge of 5.75% and an expense ratio of 1.4%.

"Mutual European is one of our favorites," says Morningstar analyst Karin Anderson. "Investors who want extra exposure to European firms should do very well here. An experienced management team and its valuation-sensitive approach have made it a top contender," she adds. The firm's investment universe consists of more than 8,000 companies operating in 25 countries in Western Europe and Scandinavia. It holds 92 stocks.