The prospect of Greece defaulting on its debt has long been viewed as the recipe for a global stock market disaster. Yet some fund managers are prospering by ignoring the risks of another financial crisis and moving more money into European stocks.
Brian Burrell, co-portfolio manager of the $11.5 billion Thornburg International Value fund, increased the percentage of European stocks such as French materials maker Compagnie de Saint-Gobain and French construction company Vinci in his portfolio by 10 percentage points since the end of 2014, making European stocks 65 percent of his total assets.
Now, he's reaping the rewards: with broad European stock markets up by 15 percent or more for the year to date, his fund is up 17.1 percent over the same time, a performance that ranks among the best international funds and leaves the 2.5 percent gain in U.S. stocks far behind.
At a time when the average international fund tracked by Lipper has dropped its holdings of European stocks by 1 percentage point, to an average of 43 percent, fund managers like Burrell that went the other way are outperforming.
Now, with Greece and the so-called "Troika" of primary creditors - the European Commission, the European Central Bank and the International Monetary Fund - once again at an impasse, several of these fund managers say that they are ready to double down on European stocks should the market start to sell-off if Greece does indeed default.
"People are starting to react to headlines, and that's when we start buying," said Michael Testorf, a co-portfolio manager of the $53.8 million RSQ International Equity fund.
Reasons for bullishness
Chief among their reasons for bullishness: the conviction that Greece's debt standoff, now drawn out for four years, has given Europe's financial system enough time to prepare, preventing the sort of panic that sent stocks tumbling in 2008 when Lehman Brothers fell.
At the same time, the European Central Bank has expanded its quantitative easing program to lower interest rates, helping spur economic growth and leading to an 11 percent drop in the euro against the dollar in the first quarter.
Combined with lower oil prices, the ECB now expects eurozone GDP to grow by 1.5 percentage points in 2015 and 1.9 percentage points in 2016. The eurozone economy rose by an annual rate of 1 percent in the most recent quarter.
To be sure, the significant decline in the value of the euro has eaten into the returns for some dollar-based investors. Burrell, the Thornburg fund manager, said that his portfolio had partial currency hedges in place during the early part of the first quarter, but that the fund no longer has currency hedges in place after the euro's decline.
Testorf, whose fund has been trimming its holdings of Japanese stocks to have cash available to buy European stocks on declines, is planning on increasing his holdings of Italian banks such as Intesa Sanpaolo and Banca Popolare di Milano in the event of a selloff. Both companies should benefit from increased consolidation in the Italian banking sector over the next 12 months, he said, which will give the companies more pricing power.
"We've been long-term believers in the repair of Europe, and you're starting to see it in the economic numbers. We are confident that you're going to see GDP growth of over 2 percent in the eurozone by 2016," he said.
A Greek default would also likely lead to an immediate recession in the country, muting the appeal of anti-austerity movements in Spain and Italy, he added.
Not all fund managers that have benefited from Europe's stock rally are as optimistic, however.
Michael Allison, a co-portfolio manager of the $423 million Eaton Vance Global Dividend fund, increased his stake in European stocks by 64 percent between the end of 2014 and April.
Yet much of that move was timed to capture annual dividend payments, and not indicative of his long-term outlook for Europe, he said, adding that the fund has since sold some of its European holdings.
"With Greece, who knows what could happen. You could have a very unpleasant outcome for investors, and we don't try to position ourselves with macro outcomes in mind," he said.
Burrell, the Thornburg fund manager, said that he is not overly concerned that a Greek default would affect his holdings in companies such as wealth manager UBS or Telecom Italia.
Instead, he's looking for signs that the European economy is truly improving before he decides to significantly increase his positions from here.
"We're in the phase where need to see fundamental growth kick in. If that happens, then these stocks are still quite compelling valuation-wise," he said.