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Which Funds are Most Exposed to European Banks?

For American investors who own foreign-stock funds, new worries about troubled European banks may be a cause for concern: While many mutual funds have been cutting their exposure to these banks, several offerings are still heavily invested in the financial sector there.

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Many European banks still own lots of exotic mortgage products and other risky assets  — hundreds of billions of euros worth —  according to a report in today’s Wall Street Journal. Unfortunately for investors in foreign-stock funds, having some exposure to these troubled banks is hard to avoid. The MSCI EAFE index, a widely used benchmark for so-called developed international stock funds, is roughly 20% financial stocks. The S&P 500-stock index, on the other hand, has less than 15% dedicated to the sector.

Other funds are making even bigger bets on European financials, according to data provided by Standard & Poor’s, which screened international stock funds for high financial exposure and looked for funds with big European banks in their holdings. “We still see funds that are betting on European financials believing that the fundamentals will improve,” says Todd Rosenbluth, a mutual fund analyst for Standard & Poor’s Capital IQ. For instance, the Oakmark International fund (OAKIX) had about 25% if its assets invested in financial stocks at the end of September. Top 10 holdings included Credit Suisse, BNP Paribas and Allianz. And the Templeton Foreign fund (TEMFX) has about 22% of its assets in financial stocks, with Credit Suisse and ING among its top 10 holdings.

Of course, many of these funds have heavy exposure to other areas less impacted by Europe’s debt crisis, which should mitigate some of the potential losses, says Rosenbluth.

Other funds that previously had large stakes in the region have been cutting exposure in recent months. However, it’s not clear if managers reduced their holdings or if the reduction was due to a drop in price for European financial stocks, says Rosenbluth. The Fidelity International Value fund (FIVLX), for example, had 27% allocated to financial stocks at the end of September, down from 34% in June, and European banks like Banco Santander, Societe Generale and BNP Paribas, which were top holdings in June are no longer on the list. The JPMorgan International Value fund (JFEAX) had 21% in financials as of August, slightly less than the 24% weighting it had in July; ING is no longer one of its top 10 holdings.


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