Bank failures are certainly frightening. But when the rioters start to show up, as they did in Greece this year, it can strike the kind of fear that inspires investors to make like Columbus-hoist anchor, set sail and look for another continent.

After the events of 2008, investors certainly can't be blamed for being jittery. Indeed, the European credit crisis has brought a lot of bad memories back to the surface. Talk of sovereign defaults, economy-stifling austerity measures, insurmountable private and public debt and the possible breakup of the euro zone has stirred fears of a double-dip recession in parts or all of Europe. That has some investors worried about a global ripple effect.

For investors here in the U.S., a significant drop in the value of the euro versus the dollar has already taken a toll on international allocations. Making matters worse for the panicky investor is the fact that fleeing from Europe ain't so easy.
International allocations remain an important part of any diversification plan. Yet the average international large-cap fund has between 50% and 65% of its assets invested in Europe and that's not expected to change much, notes Todd Rosenbluth, an equity analyst with Standard & Poor's.

So how does an advisor make sense of the European chaos?

Seasoned international money managers say the real problem is the premise of the question. Don't even try to make sense of it all, they say. You can't.

What's going on in Europe right now is one of those financial tornadoes that will have to run its course, they say. Maybe the euro zone will break up, maybe it won't. The more likely scenario is that debts will be restructured and life will go on. As for currencies, don't even dare make a prediction. In the meantime, the storm is going to churn up a lot of garbage-as well as a few gems. The key is to sit tight and remain fixed on the long term, they say.

Put another way, there's a reason international funds are heavily invested in Europe and expected to remain that way: Managers see the crisis as both creating and destroying value. It depends on where you look.

Some managers add that after the strong rebound in internationals last year, when the MSCI EAFE index rose 32.5% after suffering a 43% loss in 2008, some type of correction was bound to take place. As of June 10, the index was down 15.8% year to date.
"There are a lot of investors talking as if the euro is doomed. There is fear, but I think that also leads to strong opportunities," says Audrey Kaplan, senior vice president and co-head of international equity at Federated Investors Inc. "In Europe, there are probably the best opportunities we have seen in several years."

Investors need to be aware of another fact: While most of the world was shocked to see tear gas and burning tires on the streets of Athens, astute international managers were not as surprised as everyone else. They had been spending the previous two years highly concerned about Europe's private and public debt. While virtually all international benchmarks are in the red so far this year, observers note that some of the best international performers were those that devoted 2008 and 2009 to weeding out overleveraged European companies-particularly those that rely on domestic sales-and hedging against the euro.

"This most recent period reflects the ongoing dilemma faced by the developed world, including Japan and the United States," says Abhay Deshpande, portfolio manager on the global value team of First Eagle Funds. "How to face the consequences of a multi-decade, debt-financed consumption binge. The birds are coming home to roost."

That, international investors say, is a question for politicians. From an investing standpoint, they say the focus remains, as it always should, on looking for value. In Europe these days, managers say that such a search is often leading them to companies with substantial earnings through exports-a business model that can be expected to benefit from a diminished value in the euro.

It also means looking past the problems of the so-called PIGS-Portugal, Italy, Greece and Spain-and recognizing that good investments do exist throughout Europe, even in these hot spots. One example: Coca-Cola Hellenic Bottling Company S.A., whose share price rose as the streets of Athens erupted into chaos, notes Thomas Shrager, manager of the Tweedy, Browne Global Value Fund. The company is expected to be one of the beneficiaries of a devalued euro, as it serves a market that extends to more than 500 million people in 28 countries.

Given the nightmare scenarios people have conjured for Greece, any investment in that country may be viewed as daring. But Shrager says the Hellenic holding is an example of sticking to investment principles and not being distracted by situations whose outcomes are unknowable.

"It's not that international investors are not conscious of the macro environments," he says. "We simply cannot predict things. In fact, we're humbled that we cannot predict things."

U.S. investors would serve themselves well if they stepped back and examined what they are really doing when they put assets into an international investment, Shrager says. "You're really making two decisions," he says. "You're asking yourself which stocks you are buying and you're asking yourself whether you think currency is going to strengthen or weaken."

Some international money managers say the currency situation has gotten so hairy it's not worth pursuing the second question, at least for the time being. Tweedy Browne, for example, has managed to stay ahead of its benchmark with maneuvers such as trading forward currency contracts. The aim, Shrager says, is to cancel out the currency equation altogether. "We try to eliminate the second part," he says. "We're simply saying, we don't know."

Federated Investors started to use similar strategies to hedge currency risk earlier this year, when Kaplan and her team noticed that currency values were acting erratically. "Historically, over two decades, when a country tends to have a strong economy, its currency appreciates," she says. Since the global financial collapse in 2008, however, that hasn't always been the case. Poland, for example, has been one of the fastest-growing economies in Europe in recent years. Yet its currency depreciated in 2008 and 2009, Kaplan says. Conversely, Japan, which has been suffering through years of economic contractions, saw its yen appreciate during the crisis.

"Currency stopped moving along the lines of countries or economies," Kaplan says.

As for equity holdings, Federated is overweight in Norway and Denmark and has a positive outlook on Germany, where it expects companies will grow earnings per share by nearly 40% over the next year-up from an average of 24%. "There is extreme European pessimism and that means you can pick up some bargain blue chip names," she says. "We believe that once the dust settles, market fundamentals will reassert themselves."

Among the companies Kaplan likes is the German engineering conglomerate Siemens, which she feels is an attractive way for investors to get exposure to the global economic recovery, particularly because it is an early cyclical business. Her team's global holdings also include Novo Nordisk, the Danish pharmaceutical company, and Piaggio, an Italian manufacturer of scooters and motorcycles, including the Vespa line of scooters.

European financial companies remain underrepresented in many international fund portfolios, reflecting the belief that many institutions remain overleveraged.

At the Thornburg International Value Fund, for example, manager Lei Wang sold his fund's holdings of AXA, the largest insurance company in France, and redeployed the assets into China Life, China's largest insurance company. "We believe China Life's balance sheet should be in relatively better shape than AXA's, which might become vulnerable to the uncertainty of European credit repricing," Wang says.

Financials will remain a dubious sector until public officials offer a clearer vision of how to solve the debt crisis, managers say.
"The amount of debt that is outstanding in much of the developed world is too much for the income available to service it," says Deshpande at First Eagle Funds. "As long as the authorities fail to encourage a recognition of the overindebtedness of society, then there remains a great deal of risk in various credit institutions."

Among the companies he feels will benefit from the current crisis are Daimler AG, the German manufacturer of Mercedes-Benz automobiles. Two-thirds of the company's business is outside Europe and Deshpande feels the weaker euro will give it a competitive advantage against Asian auto exporters.

He also likes HeidelbergCement, a German cement and building material manufacturer that depends on exports for 75% of its business. The lower value of the euro should enable the company to win a large share of the U.S. infrastructure program-part of the stimulus package approved by Congress in 2009-that is just now starting to enter the contract-procurement phase.

Some managers note that even European companies with global markets continue to face risks. If the U.S. dollar were to fall in value for some reason, for example, these companies could face the double whammy of a recession at home and an expensive euro abroad. Joe Portera, manager of the Hartford Strategic Income Fund, notes that even Germany, viewed as one country that can keep the euro zone whole, has a lot riding on countries like Greece, Spain and Portugal because 40% of its exports are to other EU members. "A large chunk of the German export market may be in distress the next couple of years," Portera says.

At the same time, he feels a double-dip global recession, similar to the one started by the U.S. debt implosion in 2008, remains a long shot. "The difference between now and when Lehman [Brothers] blew up is that there was a lot more leverage in the system back then," he says. "You're not hearing the anecdotal whispers about funds getting margin calls or wholesale selling of assets."

Kaplan agrees, saying that she considers the breakup of the euro zone to be an outsized fear. Too many countries in Europe have too much riding on the success of the euro, she says.

"I see Greece departing the euro zone the same way I see California departing the U.S.," she says.