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World cup winners for your portfolio

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Written by:
08/07/2014
The World Cup has created a stand-off between Europe and South America as Argentina faces Germany in the final this weekend, says Tom Stevenson of Fidelity.

Stevenson assesses the economic and investment equivalents of the national stereotypes of Latin Flair, Total Football and Dour Defence. South America may have the edge when it comes to the beautiful game but off the field Europe looks the safer bet.

Macroeconomics

The Brazil/Germany semi-final pitted the economic heavy-weights against each other. Argentina and Holland are relative lightweights in terms of economic output. In per capita terms, however, the Netherlands is way ahead of Brazil still and on a par with Germany. Life expectancy is perhaps unsurprisingly higher in Europe than Latin America.

Stock market

When it comes to stock market performance, the last five years have favoured European investors when the markets are measured on a level playing field. When looking at the four countries’ stock markets in dollar terms, Argentina illustrates the volatility of many emerging markets, while Brazil has borne the brunt of a sell-off in commodity-dependent markets as China has slowed. Both the European markets have ridden the Draghi-wave following the ECB chairman’s promise two years ago to do “whatever it takes” to protect the euro.

Taking a longer-term view, each of the four has form when it comes to financial calamities:

Holland – home of the first and silliest investment bubble – Tulip-mania. At its peak in 1637, tulip bulbs sold for around 10 times the average wage of a skilled craftsman.

Germany – between 1921 and 1923, as a result of borrowing to fund the cost of the Great War and the terms of the Treaty of Versailles, the value of the Germany currency collapsed as hyperinflation spiralled out of control. In 1924, 1 trillion old marks were converted into 1 new Reichsmark.

Argentina – defaults are a way of life in Argentina. The most serious occurred on Boxing Day 2001 when the Government reneged on $93bn of bonds. The peso fell from parity with the dollar to a 4 to 1 exchange rate and inflation soared to 40%. The repercussions of the default are still working their way through the courts as a number of bond holders refused to agree to a debt restructuring in 2005.

Brazil – rebranded a decade ago by Goldman Sachs as one of four fast-growing BRIC economies, the country has also battled with rampant inflation, corruption and crime, although since the introduction of the Plano Real in 1994 the Brazilian economy has been significantly more stable.

Funds

Here are four funds on Fidelity’s Select List for anyone looking to back the Europe/LatAm head to head through their investment portfolio.

Fidelity Funds – Latin America Fund
Co-managed by Alex Duffy and Angel Ortiz, this fund is run by stock-pickers who have divided up the region by sector.

Threadneedle Latin America Fund
Daniel Isidori’s fund tends to contain around 50 high-conviction companies. While Isidori operates within sector and country limits, he is fairly unconcerned about his benchmark.  

Jupiter European Special Situations Fund
Cedric de Fonclare seeks out companies with a solid product offering, robust management and a strong competitive position.

BlackRock Continental European Fund
Vincent Devlin is a dedicated stock-picker who nevertheless retains a strong awareness of big-picture economic themes. Most of the holdings in this fund are large-cap companies.

Portfolio construction = It’s a draw

Investors can marry the best of Latin America and Europe by employing an investment approach known as core and satellite investing. Maike Currie, associate director at Fidelity explains:

“Under core-satellite investing, the core of the portfolio consists of passive investments that track major market indices and smaller satellite investments in carefully selected actively-managed funds.

Typically your core holdings offer exposure to the larger, more efficient markets, such as Europe and the US, where it is harder for an active manager to outperform the market. The core holdings should provide stability to the portfolio and should match your risk tolerance and investment horizon. 

The aim of the satellite holdings is to provide outperformance and will include investments in property, commodities, high yield bonds and emerging markets, where skilled active managers tend to outperform the benchmark. The satellite holdings make up the smaller, more risky part of the portfolio.
 
This method of portfolio construction can be used to minimise cost – as the bulk of the portfolio is held in passive funds, costs are kept in check. It can also help to create a well-diversified portfolio by combining a wide range of markets.”  

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