Top stock picks from top pros

Katrina Dudley

The strategy

Katrina Dudley, who co-manages this fund with Philippe Brugere-Trelat, doesn't just look for beaten-down stocks -- which there are plenty of in Europe these days.

"We look for companies that have a catalyst on the horizon that will cause their shares to reach full potential," she says. The managers also like to get paid dividend income while they wait. There's more opportunity for that in Europe, where the average stock yields 3.8%, vs. 2.2% for the U.S.

This balanced approach doesn't always lead to sizzling numbers. Over the past year, Mutual European out-paced the MSCI EAFE index of foreign stocks but fell just shy of cracking the top 50% of European equity funds. Still, the strategy did help the fund, owned by Franklin Templeton, limit losses in 2008 to 33%, while its peers plunged 50%.

The opportunities

Dudley says Europe is a better hunting ground for bargains than North America. One way to tell is looking at price-to-book value ratios, which measure stock prices against the value of the assets on a company's balance sheet. The average P/B ratio in Europe stands at 1.5, vs. 2.2 for the U.S., highlighting a larger than average gap.

To find the best bargains, Dudley often focuses on stocks unfairly weighed down by scandals or the fact they just happen to be headquartered in an economically troubled country.

Her picks

UBS (UBS): Dudley says the CEO of this Swiss bank is following through on promises to get out of the riskiest parts of investment banking, while building up the more stable and profitable private wealth management business. Yet UBS's share price does not fully reflect this fact, she says.

BP (BP): The British oil giant -- whose shares trade at around a 40% discount to industry peers -- appears to be working its way out of many of its problems, Dudley says. BP has already spent around two-thirds of its estimated $40 billion to $50 billion liability for the 2010 oil spill in the Gulf of Mexico.

REXAM (REXMD): This U.K. firm flies under the radar because of its banal niche: It makes cans for beer and other beverages. Rexam dominates Europe, but also large parts of Latin America. Dudley is also fond of Rexam's penchant for selling low-performing units and returning most of the proceeds to shareholders.

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