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By Christine Benz | 10-10-2011 12:17 PM

Keeping a Lid on Europe Exposure

Stevens Wealth Management CEO Sue Stevens says the firm changed its holdings last year to decrease Europe exposure.

Benz: Sue, I want to shift gears and talk about equity positioning. Obviously Europe has been on the front burner recently. I'm wondering whether you have been making any changes to your client portfolios in the wake of what we've seen unfolding in Europe and here at home?

Stevens: I was actually over in Europe last year in May, in Athens and some of the other areas over there, and around that time I really figured out that this was a much bigger problem than maybe we had realized before. So, what I did last summer was take a look at all the international funds that we hold and look at the proportion that was held in Europe, which I think is a good thing for people to do. Morningstar.com is a wonderful resource. I use it constantly to look at those types of things.

And so that gives you an idea of, does the stock fund hold 60% in Europe? A lot of the big index type of international funds have huge amounts in Europe as you would expect, because it's one of the big developed areas. But I wanted to look at comparisons across different types of international funds and think about, "Gee, maybe there is one that only has 25% in Europe that I feel is a good choice with low cost." And so, we changed our holdings last year to just not get out of Europe, but just decrease the exposure there. So, I think that's one thing you can do.

I mentioned the money market issue before. I think you can look at what types of money markets you have. You should know that because, in 2008, one of the scariest moments for me was when the money markets were breaking the buck, and I just want to make sure my cash is super-safe.

And one more thought for you ... that's an impact from what's happening in Europe is, if you have foreign bond funds, and we do that and we think foreign bonds play an important role in the portfolio, you want to think about periodically whether you want those bond funds to be hedged or unhedged.

So I would say in a normal kind of environment, you would want unhedged, because you want the different correlations and you want to make sure that your portfolio has exposure to different types of things, including currency risk. If we look at, for example, a foreign bond fund that you can either buy in a hedged or unhedged type of fund, year-to-date the unhedged fund is doing better, but if you look at the more recent performance as the dollar has strengthened in kind of relationship to what's happening in Europe and with the euro, the hedged funds are actually starting to look a little better, which again you would expect as you see the dollar strengthen.

So it's a nuance if you are thinking about portfolio management, but it's kind of interesting for those of us that think about those things.

Benz: So, Sue, last question for you. In terms of U.S. equity exposure, we have seen a huge sell-off in the small- and mid-cap names; I am wondering how you have been positioning client portfolios in regard to that small-, mid- and large-cap split?

Stevens: Well, I think it's important to have some exposure to all those areas, and one of the things I like about something like a Vanguard Total Stock Market Index is it does have exposure to those areas--maybe 25%-30% to small and mid-cap. So I think it's important to keep that exposure whether you do it through a broad index fund that has exposure to those areas or whether you choose small- and mid-cap funds that complement your large-cap stocks or funds. I think my preference is to try to keep that as we go through these cycles.

Again, you can dial it up or down, and I think sometimes that does help people deal with the extreme risks that we see in the markets now. So, for instance, if you were choosing a portfolio that had 45% in stocks and shifting to 35%, it would naturally pull down the allocation to small- and mid-cap, so I think you can make shifts like that while still preserving the integrity of your strategic allocation.

Benz: So, rebalancing perhaps can tackle some of these adjustments for you?

Stevens: Right.

Benz: Well, Sue thank you so much for sharing your insights. We always appreciate talking to you.

Stevens: It's a great pleasure. Thank you.

Benz: Thanks for watching. I'm Christine Benz for Morningstar.com.

 

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