Despite an apparent “currency war”, advisers appear largely unconcerned over the effects of exchange movements and prefer to back managers to produce good returns whatever the rates.
Exchange rates stayed high on the political agenda last week as Guido Mantega, Brazil’s finance minister, claimed that governments were engaged in an “international currency war”. Mantega’s warning followed last month’s intervention by Japan to weaken the yen and reflected widespread concern that some countries – notably China – are manipulating currencies lower to boost their economic performance.
Currency movements are difficult to predict at the best of times but the prospect of government intervention adds an extra layer of uncertainty.
For investors with overseas assets, changes in exchange rates can have a significant impact on total returns. In 2008, for example, yen-based investors tracking Japan’s Nikkei 225 index suffered falls of 40% as global markets declined sharply in the fourth quarter.
But the risk aversion that drove stockmarkets down in the wake of Lehman Brothers’ collapse also boosted demand for yen, causing the currency to appreciate by about 45% against sterling in the final three months of 2008, according to Financial Express. As a result, British investors barely noticed the turmoil in Japanese equities – during 2008 their assets fell in value by just 1% in sterling terms. (article continues below)
Several fund managers have launched sterling-hedged products to remove the risk of adverse currency movements for British investors. In February, GLG unveiled a Dublin-domiciled replica of its £800m Japan CoreAlpha fund, with share classes hedged into euros, dollars and sterling. Last month HSBC Global Asset Management announced sterling-hedged share classes for two offshore absolute return funds.
But while GLG and HSBC claimed that they were responding to customer demand, Adviser Fund Index (AFI) panellists seem largely unconcerned over the impact of currency movements on their investments.
Chris Wise, a senior investment consultant at RSM Tenon, says his firm’s multi-asset approach means that it is well-diversified in terms of currency exposure. He prefers to focus on fund manager skill. “We’ll probably look at more [currency-hedged products],” says Wise. “But we’re picking managers on the strength of their investment skills, intellect, the right stocks and bonds, and whatever they are going to do in their local currency. Whatever it translates into back in the UK, that’s what we accept. If the investment calls are right they’ll still make good returns even if the currency doesn’t work in your favour.”
Jonathan Wallis, the director of research at Allenbridge, is invested in Neptune Japan Opportunities, which began hedging out its yen exposure last year – a strategy that hurt the fund’s performance over the past 12 months.
Wallis says Allenbridge is not “suitably qualified” to make calls on currency movements and, like RSM Tenon, it focuses its resources on areas where it can “add value”, such as fund research.
“If the investment calls are right they’ll still make good returns even if the currency doesn’t work in your favour”
“The majority of the overseas equity funds that we look at don’t take a view on currency,” says Wallis. “They just say: ’We’re invested in that market and if the currency is weak, the investments go down, but that is probably benefiting companies – so it all comes out in the wash.’ With equities it’s more a question of the quality of the companies than currency factors.”
However, both panellists have considered products that trade in foreign exchange markets as a central strategy. Wallis says he has looked at Absolute Insight Currency – a fund from Insight Investment that aims to generate returns irrespective of market conditions.
The portfolio, which uses derivatives for exposure to global currencies, was net long dollars and net short euros at the end of August, according to Insight.
Wise, meanwhile, uses Standard Life Global Absolute Return Strategies (Gars). The fund, which has £5 billion in assets under management and appears in all three AFI indices, employs a range of techniques. Strategies on August 31 included long dollars versus euros and yen, and long sterling against euros and South African rand.
“With Gars, you’re getting some currency strategies but within a bigger strategic call – it’s not just currency, it’s all asset classes,” Wise explains. “So they’ll do things like Brazilian currency against the yen.
“They’ve got the brain power and the resource to believe that in those markets there’s money to be made by taking those positions.”