Managing a europe fund can’t be easy. The continent has long lagged in economic growth, dogged by rigid labour markets, political instability and a monetary policy that focuses on price stability rather than growth.

But hopping the pond in search of investment opportunities has proven fruitful for Dana Love, vice president of Toronto-based AIM Funds Management Inc. and lead manager of the $360-million Trimark Europlus Fund. For the three years ended Dec. 31, 2005, the fund has reaped an average annual compound return of 19.1%, walloping the category’s median return of 10.5%. Since its inception in November 1997, the fund has posted an average annual compound return of 7.6%.

Love credits the fund’s performance to a patient investment style that looks for companies that will be well positioned in the next three to five years, as opposed to the next three to five months. It’s a discipline that is easier said than done, given all the “noise” that goes along with investing in Europe. An aging population, high unemployment and subpar GDP growth are a few of the drawbacks.

The soaring Canadian dollar isn’t making things easier, either. Europlus Fund suffered a 15.5% dip as a result of the C$’s strength, but Love is confident the effect on the portfolio will be minimal over a five- to 10-year time frame. Forecasting the currency is increasingly difficult, he says, and as a result he is sticking to the fundamentals — researching companies and industries, not looking at currency charts.

“It’s very hard to ignore all of that, in terms of the macroeconomic forecasts and investment strategies of overweighting sectors relative to benchmarks and so on,” says Love, who has co-managed the fund since 1999 and became lead manager in 2003. “But we try as much as possible to think independently. By definition, if an investor does the same thing as everyone else, the returns are going to be the same as those of everyone else. The only way to get an advantage is to do things differently.”

He’s not talking about being a contrarian for the sake of being a contrarian. By “different,” he means seeking out companies that have been either overlooked or under-researched by other managers. One such name is Topdanmark AS, a Danish insurance company that accounts for almost 6% of the fund (the heaviest weighting). Topdanmark underwrites property and casualty insurance more efficiently than its competitors, so it can underprice the competition and still maintain a profit, Love says.

Small-cap names

Nokian Renkaat Oyj is another company that has slipped off the radar of most fund managers. The Finnish tire company is a classic example of a holding that isn’t sexy but is a solid business that is easy to understand.

“A couple of years ago, we found it at a very attractive price and it had all the ingredients we were looking for,” explains Love. “It was a great business with a niche focus, probably the most profitable tire company in the world and run by a very talented management team.”

Europlus Fund doesn’t hold to any market-cap restrictions, although Love has been finding the most attractive names among small- and mid-cap companies, which account for around two-thirds of the 30 to 35 names in the portfolio. The fund is fairly well concentrated in consumer discretionary companies but, Love says, those broad categories don’t necessarily tell the whole story. In fact, many of the fund’s holdings have built-in diversification.

Britain-based publishing company Reed Elsevier Inc., for instance, is a good example of a consumer discretionary that doesn’t quite fit the definition of its category. The company publishes academic research and reference material for the medical and science community, as well as text books for schools and universities — not exactly consumer discretionary in its truest form, Love says.

“How discretionary are those products it’s providing?” he asks. “The academics aren’t going to stop reading industry-leading research. Schools can’t stop using textbooks. These really aren’t consumer discretionary products. But that is how they are categorized.”

The publisher is geographically diverse as well. Although Reed is based in Britain, only about 15% of its business comes from Britain; two-thirds comes from the U.S.

Love aims to hold investments for five years, keeping the fund’s annual turnover rate to a relatively low 20%-25%. He has held high-end fashion apparel company Escada AG (common) for five years, for example, despite it going through a period of mismanagement and having a bloated cost structure. Love had recognized the firm’s leading brand name and its efforts to improve efficiencies, so he continued to hold it. Today, Escada has recovered and will probably grow its sales at a rate of 4%-5% a year.

@page_break@Ignoring the negative hype has been helpful in Love staying on track, particularly considering the media criticism to which Europe has been subjected in recent years. “I think Europe gets a bad rap in the media,” Love says. “The press generalizes a lot, and the problem with doing that is, yes, Europe is becoming increasingly integrated, but there are still enough regional differences that you can’t make broad statements.”

Look deeper

Look a little deeper, he says, and you’ll find hidden pockets of opportunity. Finland, for instance, is one of the most productive economies in the world. Scandinavia’s GDP is showing impressive growth, and the country has reported budget surpluses. And Ireland has some of the best demographics in the world.

“There are lots of opportunities, and it’s too easy for people to generalize that Europe is not attractive based on what they read in the press,” he says. “What they read in the press is really representative of three of the largest economies — Germany, France and Italy — and not the entire region.”

Becoming a fund manager is a somewhat improbable fate for Love, who earned an undergraduate degree in sociology and legal studies at Ontario’s University of Waterloo in the early 1990s. He had planned to become a lawyer, but the legal classes disillusioned him. Love became a financial planner in 1992 with the now-defunct Fortune Financial Group in Toronto. After leaving Fortune in 1994, he joined Guardian Group of Funds Ltd. as a planner before moving on to Altamira Investment Services Inc. the next year. Although he earned his CFP in 1994, financial planning wasn’t where he wanted to be.

“Every step I took in my career was aimed at trying to get a position as a fund manager,” he says. “I found that my interest was in researching companies, looking at annual reports and finding out what makes a company tick.”

With that goal in mind, he left Altamira in 1997 to take a master’s degree in finance at the London Business School in England, at which he specialized in international investing and capital markets. When he completed the program in 1999, he came back to Canada and joined AIM, at which he was immediately appointed to the Europlus fund.

Now his ongoing challenge is getting the message out. “I’ve spent a lot of my time over the past few years telling people that, with Europe, it is not so much the risk as the opportunities,” Love says. “The risk is essentially no greater than anywhere else — you just have to dig a little deeper.” IE