Harries: Why I’m still preparing for a breakup in the eurozone
The FE Alpha Manager says the first that many investors will know of an outright default will be when they wake up one morning and find their holdings are denominated in a different currency.
By Joshua Ausden, News Editor, FE Trustnet
Friday September 21, 2012
Investors cannot afford to run a portfolio without factoring in a breakup of the euro, according to star manager James Harries
, who heads up the £2.9bn Newton Global Higher Income
There are some commentators who believe the worst of the eurozone crisis is over, with Skandia’s Rupert Watson saying last week that the ECB's bond-buying announcement was “a significant turning point
However, FE Alpha Manager Harries (pictured)
thinks investors should remain cautious of the existing headwinds and tailwinds in the region.
"You’ve got to invest on the basis that Europe is going into recession," he explained. "In addition, you can’t afford to invest on the assumption that the eurozone won’t break up."
"Yes, you can find good businesses, but you don’t want to be invested in a company whose currency could be debased by 60 per cent overnight. For this reason, the region where you’re invested is more important now than it was before."
Harries says any country’s default will be most definitely kept under wraps by the ECB, meaning investors will have little to no warning to alter their holdings.
"I’d expect there to be an announcement one weekend that the said country is to exit the eurozone," he explained. "Measures would be put in place to prevent investors taking out their money, and the companies would then be denominated into the new currency."
"On Monday morning, investors would have the same holdings, but some would no longer be denominated in the euro."
"This is of course a guess, because this situation is unprecedented, but there definitely won’t be a warning."
Surprisingly, one of the manager’s biggest overweights in his Newton Global Higher fund is Europe; according to FE data, he has 29.93 per cent in the region – more than twice as much as the UK and Asia Pacific.
However, Harries says he has made sure these stocks are protected from an all-out default of a country such as Greece or Spain.
"Most of this exposure is in Norway, Switzerland and Germany, which have strong sovereign balance sheets," he said. "We are more wary of a country like Spain, where there is no confidence in the balance sheet."
"We feel northern Europe in general is robust."
Swiss global healthcare company Roche and German chemical and pharma firm Bayer are both top-10 holdings.
Performance of fund
vs sector and index
Source: FE Analytics
The Newton Global Higher Income fund has returned 78.54 per cent since its launch in November 2005, compared with 42.67 per cent from its FTSE World benchmark, and 40.52 per cent from its IMA Global Equity Income sector average.
It has been less volatile than the index over this period, but slightly more so than its peer group.
The five crown-rated fund is a top-quartile performer over one, three and five years, as well as over six months. Its one-year historic yield is above average at 4.25 per cent.
Harries is fully invested and his biggest overweights are in traditionally defensive sectors such as telecoms, pharmaceuticals and utilities.
Newton Global Higher Income has a minimum investment of £1,000 and a total expense ratio (TER) of 1.62 per cent. It is available on all major platforms.