Analysis: U.S. funds get gun-shy on Europe's periphery

Fri Feb 8, 2013 2:41pm EST
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By Gertrude Chavez-Dreyfuss

NEW YORK (Reuters) - After going gung-ho on the euro zone's weakest economies in the second half of last year, U.S. fund managers are paring back their bond holdings in the region, sensing they've seen the best for now.

Total returns on government debt in so-called "peripheral" countries in Europe -- Greece, Spain, Portugal, Italy and Ireland -- have descended back to earth in the new year after hitting the stratosphere in 2012, and that's making some U.S. investors nervous.

For instance, Standish Asset Management in Boston, has already cut its positions in the group. Others, such as Oppenheimer Funds, are holding on, but are ready to act quickly if one of the countries fails to meet targets under its austerity program.

"It is becoming more difficult to find hidden gems in the periphery," said Raman Srivastava, deputy chief investment officer and head of global fixed income at Standish. "There won't be a Portugal where returns totaled nearly 60 percent last year. Those were picked over."

U.S. investors became major buyers of the group's sovereign debt in the second half of 2012, encouraged by the promise of support from the European Central Bank. The ECB has committed to buying bonds with maturities of one and three years from euro zone countries seeking financial assistance.

Standish, which manages fixed-income assets of about $170 billion, was one of the early U.S. bulls on the European periphery, buying up its bonds early last year in auctions and the secondary market.

U.S. investors accounted for 3 percent of Spanish bonds bought in last month's auctions, 6 percent of Italian bonds, 9 percent of Irish bonds, and 33 percent of Portuguese bonds, JP Morgan data show.

But these investments are fraught with risk.   Continued...