By Jonnelle Marte
As some of the world’s biggest banks release more information on their exposure to troubled euro-zone countries, fund investors are bracing for possible losses.
J.P. Morgan Chase and Goldman Sachs were among banks who this month published details on their exposures to Portugal, Ireland, Italy, Greece and Spain in regulatory filings, according to a report today in the Wall Street Journal. And for the first time, Morgan Stanley outlined its European lending and trading positions in those countries in its third-quarter earnings report, the paper reported. While these firms hold far less euro-zone debt than their European counterparts, the news has renewed fears for American investors in these financials.
Why all the worry? A sizeable bond default in Europe could impact banks’ balance sheets, says Jeff Tjornehoj, senior analyst for Lipper. “The more exposure you have to some of these investment banks the harder you’ll feel that fall.” And for investors in large-cap U.S. stock funds, it’s difficult to completely avoid exposure to the financial sector. The S&P 500 Stock index is about 14% allocated to financials, which are down 17% year-to-date, making them the worst performing sector so far this year. The S&P 500 index is up .5%, or flat, for the year.
Some stock funds have bigger bets on the sector, according to data provided by Standard & Poor’s Capital IQ, which screened equity funds for high financial exposure. The $7.1 billion Lord Abbett Affiliated fund (LAFFX), for example, was about 20% invested in financials at the end of September, with banks like Wells Fargo, J.P. Morgan Chase and Goldman Sachs among its top 10 holdings, . The fund is down 7.5% this year, compared to an average 2.1% drop for other large cap value funds. The $13 billion Eaton Vance Large-Cap Value fund (EHSTX) had 24% invested in financials in September and top 10 holdings included Wells Fargo and J.P. Morgan Chase. The fund is down 4.6% this year.
To minimize any possible losses, investors should be aware of how much they are exposed to financials, says Russel Kinnel, director of fund research for Morningstar. “Some of the financials, based on their Europe exposure and their mortgage exposure and their leverage, are pretty high risk stocks at the moment,” says