Why Europe Still Deserves a Place in Your Portfolio
Rachel Koning Beals
Reasons long-term investors should look past the European region's short-term struggles
But some asset allocation advisers and fund managers believe there is a place for European exposure in a diverse portfolio that can tolerate at least some level of risk, particularly if investors look past the current situation and focus on company fundamentals and valuation.
Select European multinational companies, like their U.S. brethren, stand to benefit from emerging market demand for their goods and services. Emerging markets are expected to lead this global recovery, outshining the established economies that remain bogged down by debt as well as consumer and business spending hesitation.
Analysts aren't ignoring
"Financial markets fear a domino effect, in which there's a 10-domino lineup, with the first domino
Focus remains on limiting the spread of certain
There has been some disagreement over the level of help that should be given to countries that have run up steep debt tabs; Greek's austerity measures have fallen short of the expectations among some of its regional peers.
It's that export story that leaves Bergman optimistic. He advises putting 40 percent of an international equity portfolio in
Put 70 percent of your European investments in a large-cap European index fund or ETF, he says. That will bring exposure to multinational powerhouses like
Investors should consider adding a slim percentage of small-cap companies, but focus on those with strong exports outside of the European continent. With small caps, active management adds enough value to make it worth the management fee, Bergman says.
He recommends mutual funds such as DFA International Small Cap Value, Oakmark International Small Cap, and T. Rowe Price International Discovery.
Banking sector volatility prompted Oakmark's fund managers to address the issue in an August website posting to their customers. "Like everyone else, we are unsure when the market volatility will end. We believe, however, that our holding of select European financials with strong profitable franchises, formidable balance sheets and very attractive valuations will not only be survivors, but will improve their competitive positioning and build shareholder value,"
"We remain disciplined and are closely monitoring the ever-changing global equity market situation. We are ready to exploit the short-term dislocation in the share prices of quality businesses, no matter the sector they operate in," he said.
Oakmark is focusing on banks with less capital-intensive businesses, such as asset management or advisory. Its holdings also include banks with strong deposit franchises and liquidity, which would have a funding-cost advantage over wholesale-funded banks and be better-positioned during times of crisis. It also favors banks with significant scale and diversification that would allow for a more efficient cost structure.
Other fund managers remain hesitant to tread in the financial sector. "We really haven't owned any banks for quite a while, also because we've always been slightly uncomfortable about really knowing what we are buying when we're buying a bank,"
"And then, secondly, when looking at companies that are exposed to specific drivers and have strong niches, when we go into German companies such as
A company-by-company approach and careful placement of European investments among other international choices is advised.
"Don't give up on
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