(PUB) Investing 2015

August 2015

Morningstar FundInvestor

11

Don’t Worry, Your Funds Probably Don’t Own Any Greek Securities Red Flags | Gregg Wolper

stakes in Greece in their latest portfolios. However, no equity funds in the Morningstar 500 had more than 1% of assets in Greece, save for Third Avenue International Value TAVIX and Berwyn BERWX , both of which were under 3% . And a statement on the Third Avenue Funds website dated June 30 , 2015 , says that no Third Avenue funds have any direct exposure to Greece, implying that Third Avenue International Value sold its position between April 30 (the latest published portfolio) and June 30 . Greek holdings are similarly scarce on the fixed- income side. A search of the latest portfolios shows that Greece does not show up as a meaningful exposure for taxable-bond funds sold in the United States. No Morningstar 500 bond funds have mean- ingful exposure to Greece. The tiny or nonexistent Greece stakes among Morningstar 500 funds—and in nearly all funds, for that matter—does not, of course, mean that the Greek debt crisis couldn’t have an impact on the port- folios of FundInvestor readers. If recent trends that appear to be containing the problem to Greece alone go into reverse, it’s possible that crises would develop in other European stock and bond markets. If that happened, it would have a negative impact on a wide variety of funds. After all, nearly all broad- based foreign-stock funds have more than half of their assets in Europe. Even so, it would be tough to argue that investors should take action to prevent damage. With foreign- stock funds so exposed to Europe—and with many U.S.-focused stock funds owning both European stocks and U.S. companies with extensive business in Europe—one would have to sell a wide variety of funds to truly move out of the way. Such drastic action is almost always inadvisable. Not only is it very difficult to predict when such moves would truly work to one’s advantage, but it’s also even harder to know when to get back into the markets. One could easily end up on the sidelines for years, and that’s no way to build wealth for one’s future. K Contact Gregg Wolper at gregg.wolper@morningstar.com

Investors can hardly be blamed for worrying about Greece. Seemingly every day for years, news reports appear that describe the latest twist in the Greek debt crisis, including how it’s affecting other Euro- pean countries and their financial markets. The positive developments have been far outnumbered by the alarming headlines. The good news for U.S.-equity fund investors is that they almost certainly have little or no direct exposure to Greek securities. A survey of fund portfolio hold- ings shows extremely small or nonexistent positions in Greek stocks or bonds. That’s not surprising. First, even before the global financial crisis in 2007 – 09 started the downward spiral in Greece, that nation’s small stock market contained few companies that attracted the attention of global investors. Some funds owned one or two of the bigger Greek banks, and more than a few managers liked a legal, publicly traded sports-betting firm based in Greece. But Greece never boasted the type of large, multinational publicly traded companies that would attract widespread ownership from U.S.- based funds. In addition, the crisis has been going on for so long now that even those managers who did have some money in Greece have had plenty of time to sell. Thus, the averages for the foreign categories in the Morningstar Style Box (foreign large-blend, foreign small/mid-value, and so on) all show averages of less than 1% of assets invested in Greece. Even the Europe-stock category average, with a limited mandate, is well below 1% . Of course, averages could obscure larger stakes held by individual funds. And a few small funds, typically focusing on small-cap stocks, did have 4% or 5%

What is Red Flags? Red Flags is designed to alert you to funds’ hidden risks. Such risks can take many forms, including asset bloat, the departure of a solid manager, or a focus on an overhyped asset class. Not every fund featured in Red Flags is a sell, and in fact, some are good long-term holdings. But investors should be prepared for a potentially bumpier ride in the near future.