Is stock picking skill enough to navigate the financial fallout from a euro-zone breakup?
That is the multibillion-dollar question for U.S. fund managers and financial advisers, many of whom are reluctant to withdraw entirely from the 17-nation bloc that makes up the world's largest economy.
Europe's debt woes, subject of another round of central-bank meetings this week, have become so intractable that some commentators now see the collapse of the euro as a realistic outcome. A full split is now "a non-negligible possibility," says Marco Priani, co-portfolio manager of the $47.5 million Advisory Research International Small Cap Value Fund.
A euro collapse would likely be a Lehman Brothers-grade worst-case scenario for most investors, of course, with stocks falling globally. But for companies that operate in Europe, the sting would be especially sharp: The Continent's economic weakness would continue to drag down their revenues; and many of the national currencies that could replace the euro would be weaker in relation to the dollar, making earnings from operations in Europe less valuable to U.S. investors.
"The mechanics of it would be messy," said Savita Subramanian, head of U.S. equity and quantitative strategy at Bank of America Merrill Lynch Global Research.
Due to such uncertainty, some financial advisers who might previously have invested in European mutual funds say they are now relying on old-fashioned, company-by-company stock picking. They cite some common criteria for stocks they will buy: no liquidity concerns, no exposure to sovereign debt, and above all, significant revenue from outside the euro zone.
Ernie Cecilia, chief investment officer of Bryn Mawr Trust in Bryn Mawr, Pa., likes Unilever (ULVR.LN) PLC.
Matt Ballew, chairman of Security Ballew Wealth Management in Jackson, Miss., says he plans to scoop up Daimler (DAI.XE) AG
Kevin Kautzmann, a financial adviser in New York, has sharply reduced his clients' exposure to international mutual funds in response to the euro crisis, since he sees funds -- with their broader range of holdings -- as more vulnerable to systemic shocks than individual stocks. "There's nowhere to hide with mutual funds," Mr. Kautzmann says.
In addition, some fund managers who specialize in Europe have been hedging against declines in the euro by buying derivatives that make up for any losses related to the euro-dollar spread. As Mr. Priani, points out, however, that strategy has a potential flaw: If the euro falls out of use, or if individual countries leave the euro zone, figuring out how hedging contracts would apply to new currencies could involve drawn-out legal wrangling.