Since news of Europe’s banking and sovereign debt crisis broke in the latter part of 2009, sales of European equity funds have been in continuous decline, while the volatility of the MSCI Europe index has increased.
Given the impact of Europe’s woes on both the economy and corporate profits, investors may want to avoid the continent altogether. But a zero-allocation would leave investors with no exposure to the eventual recovery.
So, how do investors maintain exposure without getting burned? One of the options is to get into an actively managed global equity fund that has flexibility to deviate from the MSCI World Index. While top-down funds and closet-index mutual funds may track the lagging index, active global fund managers can implement their views to mix things up and flex their stock-picking muscle to beat the benchmark.
For David Fingold, lead portfolio manager of the Dynamic Global Discovery Fund, navigating through the European crisis means keeping exposure to a minimum. He has scaled back his European holdings, believing the investment risk has increased as the debt crisis remains unresolved. The current credit spread, which remains wider than it was in depths of 2008, is a testimony of the heightened risk. Also, given the current global economic slowdown, there are better growth prospects in the U.S., he says.
“Just because MSCI Europe is whatever percentage it is to MSCI World, doesn’t mean that you have to put the money into it,” he says. “I’ve spoken at conferences this year about investing in Europe and the recommendation I’ve given is: Don’t do it; put your money in the U.S.
“That’s my number one recommendation for anyone looking at Europe.”
As a global equity fund manager Fingold has to maintain some European holdings, but with an active mandate, he’s able to act on his current views that U.S. is in a better financial position than Europe. For him, America is a safer bet because its market is inherently defensive and U.S. companies tend to have healthier balance sheets than their global peers. Also, most U.S. companies will use the bond markets as a primary source of financing, whereas most major European companies will turn to the banks. Not only will U.S. companies likely out-perform European rivals, but they’re also safer.
“Obviously, I have very high convictions in the (European) companies that I own, but they’re not going to out-perform American peers until such a time as the credit risk in Europe abates,” he says. “So this is part of the reason we were so aggressive in taking down our Europe weight, because you only need to be in the markets for a few years to understand that if the French banks are being destroyed, then Danone (the French food products multinational) is going to under-perform its American comparable.”
In the last year General Mills advanced approximately 7%, while Danone increased by 5%, in U.S. dollars term. The French company’s relative underperformance is largely the result of being on the European index, says Fingold. That means that every time someone shorts the euro stock future it puts pressure on the stock.
“The problem is that if you’re a good European company, you’re the best house on a bad block And that’s not a good investment, to be the best house on a bad block. You’re still in a bad neighborhood.”
Focus on company, not economy
Chris Ryder, vice-president and investment specialist for Capital Group Institutional Investment Services, is less bearish on Europe. Ryder believes the silver lining amid the increased market volatility in Europe is that there are opportunities through the volatility to buy stocks at a discount.
While the daily headlines continue to feed investors’ fears of investing in Europe, one approach advisors can take to help maintain perspective is to tell the stock story as opposed to talking about the economy, says Ryder.