Morningstar Magazine - August/September 2018 - 26

Dispatches

"redenomination" risk-that is, the risk of
Italy's unilateral exit from the single currency.
While the spread between 10-year Italian
government bonds, or BTPs, and German Bunds
widened as far as 300 basis points, the
most striking movements appeared at shorter
maturities, as demonstrated by the
distribution of daily returns of the JPM Italy
Government Bond 1-3 Years TR EUR Index
over the 15 years through May 31. As shown in
the exhibit, the move on May 29 was truly
unprecedented, eclipsing even the most severe
daily losses at the peak of the eurozone
sovereign debt crisis in 2011. Although bond
prices recovered to an extent in the following
days, the magnitude and velocity of the
fall sent a warning to investors worldwide.
For fund investors, the market turbulence resulting
from Italy's political developments was felt
especially by fixed-income investors. With
a total public debt pile of more than EUR 2.3 trillion,
Italy represents almost 25% of the main euro
government bond benchmarks.
Shares of Italian banks were also hit badly. The
FTSE Italia AllShare Banks TR EUR Index,
up over 15% for the year through May 15, went into
freefall and lost around 20% in the following
two weeks, touching a low on May 29. However,
Italian stocks represent a small fraction of
the regional indexes-just 5.8% of the MSCI

Distribution of Daily Returns of Short-Term Italian Government Bonds
One- to 3-year bond returns normally range between +/- 20 basis points on any
given day. Steep losses on May 29 dwarfed those of the 2011 eurozone debt crisis.
Days

JPM Italy Govt 1-3 Years TR EUR

50%

25
05/29/2018

-2.5% -2.0
Daily Return

11/09/2011

-1.5

-1.0

0
-0.5

0.0

0.5

1.0

1.5

2.0

2.5

Source: Morningstar. Data from 10/03/2006 through 05/31/2018.

EMU Index and 3% of the MSCI Europe Index
as of May 31.

Amid investors' panic, the intervention of the
Italian Ministry of Economy and Finance was
noteworthy, as it announced a buyback transaction
of EUR 500 million in the secondary market
of four notes of one- and two-year maturities.

Italian bonds. Fewer than 20 U.S.-domiciled funds
and ETFs had an average exposure to Italian
BTPs greater than 5% for the trailing 12 months
through April. Vanguard Total International
Bond Index VTIFX, which had around a 7% stake,
was among the most highly exposed portfolios.
Franceso Paganelli is an analyst with Morningstar
Manager Research, EMEA.

It is also noteworthy that most of the exposure
to Italian assets is concentrated among
European funds and exchange-traded funds. In the
United States, portfolio managers typically
have little appetite for the meager yield offered
by eurozone government bonds, including

Yes, You Can Divest From Oil-or Anything Else-Without Much Consequence
Absolute Returns (Nominal Terms) of S&P 500 Excluding One Sector, 1989-2017
Annualized
■

■

■

■

■

■

■

■

■

■

■

Logarithmic
9.44

Ex Industrials
S&P 500
Ex Energy

9.66
9.74

+1.5

Ex Con. Discretionary
Ex Utilities

9.75

+1.0

Ex Materials
Ex Telecom

9.84

Ex Financials

9.94

9.54

+2.5

9.56

+2.0

9.71

9.77

+0.5

9.90

0%
Source: S&P, GMO. Data as of 09/30/2017.

26

+3.0%

Ex Healthcare
Ex Consumer Staples
Ex IT

Morningstar February/March 2018

0.0
-0.5
12

1989

1996

2003

2010

What should investors do? Grantham said
three things: Invest in green solutions,
encourage corporate sustainability in
the companies they own, and divest from
fossil fuels. The latter action comes
with negligible performance costs. "You can
divest from oil-or about anything else-
without much consequence for performance."
Only 50 basis points separate the S&P 500
ex healthcare and the S&P 500 ex financials.
Table of Contents for the Digital Edition of Morningstar Magazine - August/September 2018
