Scout International Fund (UMBWX) is finding value in good companies in Europe, even as the continent struggles to move out of its economic recession, says manager Jim Moffett.

Japan has promise, but before it can move out of its multi-decade recession, it must deal with structural changes that will take time to implement, he adds.

Moffett spoke to Financial Advisor magazine on his investing outlook on the sidelines of the Morningstar Investment Conference.

Scout International Fund has a four-star rating from Morningstar and a silver medal. It has $9.5 billion in assets. It has a yield of 1.52 percent and an expense ratio of 0.99 percent.

The fund has about a 50 percent exposure to Europe, which is slightly less than its benchmark MSCI EAFE stock market index, which is about 60 percent European, he says.

German, Swiss and French companies dominate their holdings, with a few other European countries thrown in, as of April 30. Among some of the biggest holdings are Finnish financials company Sampo, at 2.35 percent, German athletic shoe company Adidas, at 1.64 percent and French information technology company Dassault Systemes, at 1.63 percent.

Moffet says in Europe their work focuses on “looking for good companies in troubled countries.”

Two examples he gave were Spain’s Inditex, and Italy’s Luxottica Group, both in the consumer discretionary sector. “Those are two rotten local economies, but (the firms) are worldwide businesses. That’s the common denominator,” he says.

The fund has a 25 percent weighing in financials, which is the largest sector weighting in the fund. Most of those are insurance companies, he says, such as Axa and Allianz. They are slowly adding some banks, including French bank BNP Paribas.

Moffett says they see Europe’s economic situation as several years behind the U.S. The U.S. is working its way out of the financial crisis, he adds. “It just takes time. The last time we had this was with the S&L (savings and loan) crisis,” he says.

He sees some positives in Europe, such as unit labor costs coming down in Spain, but says that improvements in Europe will take some time as structural changes, such as reforming labor laws, are needed.

Japan is on his watch list, particularly to see if Prime Minister Shinzo Abe can proceed with his reforms. Structural changes are needed there, Moffett says, and not just fiscal and monetary policy changes. Changes in importation laws, changes in labor laws to allow more women in the workforce and other changes in the business environment are needed to fix the country’s economic problems, Moffett says.

Until there are changes, the fund will remain underweight Japan, he says. They do own a few names, such as Japan Tobacco, Honda Motor Co and Toyota Motor Co., along with some industrial firms. They haven’t added any Japanese banks and don’t plan on it. “We still see them as the same old rotten Japanese banks,” he says.

The Scout International Fund has about 16 percent in emerging markets. One well-known name in emerging markets, Brazil, is not the darling it once was. “We’ve cut back on Brazil. The politics have changed there. They’re also a resource-based economy. We question whether or not China will buy every barrel, ton and bushel of commodities,” he says, noting current Brazilian President Dilma Rousseff is handling policies differently than previous President Lula da Silva.

As a result, they’ve sold holding in AmBev, “one of our old favorites,” he says, but are holding on to regional jet maker Embraer.

Moffett says they’re taking the money that was invested in Brazil and redeploying it in Colombia and Mexico, instead. Colombia is particularly interesting as its past struggles with the armed guerrilla group FARC are behind them, he says. “Colombia has lots of known oil on land instead of sinking hundreds of billions dollars in holes in the Atlantic. When people question me about Colombia, I ask them when was the last time you’ve heard of the FARC?” he asks. Their two Colombian holdings are energy firm Ecopetrol and bank Bancolombia.

Moffett describes the fund’s investing philosophy as both top down and bottom up. They look at which countries and sectors they want to be in and then which ones they want to avoid. From there analysts come up with ideas, such as investing more in Colombia.

The Scout International Fund is will celebrate its 20^th anniversary in September and Moffett has been there since its inception. The fund has grown up over the years from investing in Japanese major exporting companies and some Latin American funds to having a much broader global reach.

Back when they first started, Moffett said it was extremely difficult to get investors interested in international securities. “When we started off, it was hard to get (investors) to put even 10 percent in international funds,” he said.

It’s a little easier now, but many investors’ portfolios are underweight in international stocks, he says. People in general are just starting to come back to stocks after leaving following the 2008 financial crisis, Moffett says. “They’re making a slow transition, starting to think again about long-term goals,” he says.