"Events on the European periphery have taken another turn for the worse," said Jones, who manages the Rathbone Ethical Bond fund.
"Markets are less inclined to accept reassurances from the bureaucrats and are taking their cues from leaks on debt-restructuring. This is a good juncture to start de-risking a portfolio in light of what could be a very nasty mess."
In the latest Trustnet poll, 47 per cent of investors said they were more inclined to move into European-focused funds in light of Europe’s stronger-than-expected GDP figures published this month, but Jones thinks the most damaging effects of the sovereign debt crisis have yet to come into fruition.
Source: Trustnet.com
In a recent interview with Trustnet, Invesco Perpetual’s Adrian Bignell said investors could protect their portfolio against the crisis by avoiding direct exposure to peripheral Europe.
However, Jones says the contagion is likely to spread to core economies such as Germany and France.
"It is the indirect exposure that the core economies have to the peripherals, through loans and the banking system, which is really going to hurt," he continued.
"Whilst the European banking system, from a capital perspective, might withstand a restructuring of the PIGS [Portugal, Italy, Greece and Spain], we are worried that it won’t be able to circumvent the indirect impact of any large-scale restructuring event."
Jones points to research suggesting that 80 per cent of Germany’s Tier 1 capital – the capital that theoretically provides protection against unexpected losses – is exposed to peripheral banks.
"With the situation potentially one big debt-bomb waiting to explode, we are avoiding banking names with significant exposure to peripheral Europe and are also reducing our Tier 1 holdings," he explained.
According to Financial Express data, the Rathbone Ethical Bond fund has outperformed its IMA Sterling Corporate Bond sector by 1.21 per cent in the last five years, albeit with substantially more volatility.
Performance of fund vs sector over 5-yrs
Source: Financial Express Analytics
The fund is the best-performing in its entire sector over a one-year period, with returns of 10.5 per cent.