Managing European portfolios not auguring euro exits

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As markets contemplate the possibility of a Grexit, Giles Worthington, manager of the European Growth Trust at Smith & Williamson, explains his current asset allocation;

“While Greece isn’t economically important, and Europe has done its best to shield itself from the ructions in the shadow of the Acropolis, the political ramifications of a member state leaving the currency union – something that hasn’t been done before and hasn’t been planned for – could be huge. This is uncharted territory – we simply do not know.

“Caution dictates that we hold a reasonable margin in cash, and the fund is currently running 9%. The investment style and scalability of the fund mean that we can deploy this cash quickly should attractive investment opportunities arise, but in the current market this weighting seems sensible. However, cash-plus-market in a rising market equals underperformance, and that is not what we’re paid to deliver. So in order to offset this, we have added beta to the portfolio, particularly in the area of financials, where the fund is overweight.

“Financials are typically higher beta, and are geared to any recovery. If Q€ is to work, then banks have a key role to play in this, through increased lending to companies and individuals. They must therefore be beneficiaries of this rising tide. So we are looking closely at this area, particularly peripheral banks, and have Bank of Ireland as one of the fund’s top 10 holdings.

“Our preferred exposure in the fund at the moment, however, is through real estate, such as Unigail in France and Beni Stabili in Italy. Banks since the global financial crisis have been very difficult to analyse on a fundamental basis. Real estate, on the other hand, is highly correlated to banks and more transparent. Further, as it did in the US, Q€ should have a positive impact on real asset prices, such as property.

“In this way, we have been able to more than keep pace with the market, while retaining a margin of safety. Where we do target greater market exposure, it is in highly liquid stocks where, should the market turn sour, we can exit quickly. This is one exit that I can have some control over and, as a stock picker, feel it is best to concentrate my energies, rather than playing augur on the likelihood of a Grexit. Here it’s likely that not even Greek finance minister Yanis Varoufakis knows the answer.”

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