No Spain, no gain? – Make sure any passive fund you buy delivers your desired exposure


Jamie Lowry

Jamie Lowry

Fund Manager, Equity Value

To the surprise of many (and the consternation of some well-established fund managers), so-called ‘peripheral’ European markets such as Spain have been to the fore in the recent upturn in the continent’s economic fortunes. One way of hedging out the risk of this trend continuing being discussed by some investors is to ‘buy Spain’ – but how do you go about doing that in practical terms?

One possibility would be to buy a future – a contract obliging you to buy an asset or financial instrument at a set price and date in the future – while another would be to buy an exchange-traded fund (ETF). These are passive investments designed to mirror the performance of a particular stockmarket – the only snag being that Spain’s stockmarket does not really reflect Spain’s economy.

The following chart, courtesy of Horizon Kinetics, graphically illustrates that point. It shows that half of the 10 largest companies in the benchmark MSCI Spain index – and therefore in any ETF that tracks it – generate at least 70% of their revenues outside Spain. Indeed, with the exception of Banco Popular Espanol, all of the 10 generate at least 49% of their revenues abroad.

Top 10 Holdings in iShares MSCI Spain Index Fund (EWP)

% Rev not in Spain

Banco Santander SA 85%
Telefonica SA 76%
Banco Bilbao Vizcaya Argentaria 70%
Inditex 78%
Iberdrola SA 52%
Repsol YPF SA 49%
Amadeus IT Holding SA 94%
Abertis Infraestructuras SA 55%
Banco Popular Espanol 8%
Ferrovial SA


Source: Company reports, Bloomberg for Fund Year 2012. Sourced as of October 2013.

The five largest companies in Spain account for more than half of the entire MSCI Spain index and the top 10 for almost three-quarters of the benchmark. As such, even if investors were comfortable with the lack of diversification inherent in any fund tracking that index, could they really feel confident they were taking a representative bet on Spain?

The broader point here concerns the way investors can attribute undue significance to potentially meaningless risk metrics. It is all very well trying to assess the different weightings fund managers have in their portfolios but what does ‘owning Spain’ actually mean if most of the revenues being generated are coming from outside the country?

Similarly, what does being overweight in the UK really mean if part of that is down to owning shares in global businesses such as BP? The fact is, you can only truly understand risk if you look at individual companies – at what they do and where they earn their profits – and that is a difficult and time-consuming job. Anything else is just shorthand and, as the Spain example shows, ETF investors do need to be sure of what they are buying.


Jamie Lowry

Jamie Lowry

Fund Manager, Equity Value

I joined Schroders in 2004 as an equity analyst in the European Equity Team initially specializing in the Industrial sectors before moving on to Consumer-based companies and finally Insurance. In 2007, I became a co-manager on a fund investing in undervalued European companies and took on sole responsibility for the fund in May 2010. Prior to joining Schroders, I worked at Hedley & Co Stockbrokers and Deutsche Asset Management as a trainee analyst.

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