Smith & Williamson hedges currency exposure

Mark Pignatelli, manager of the Smith & Williamson European Growth Trust, has hedged the fund’s currency exposure from euros into sterling.

The fund has previously been unhedged. However, Pignatelli, who took over the £8.5m vehicle in December last year, says changing fortunes for sterling and the euro lead him to hedge half of the portfolio into the British currency.
In terms of sterling, Pignatelli says not only is it undervalued, but it will benefit from the relative strength of British exports.

“UK exports have outperformed all the other major global economies over the past five months, and we expect to see a dramatic improvement in the current account deficit,” he says.

“This means the UK will start to be seen as competitive and cheap, rather than being toxic, which will improve sentiment towards the currency.”

Meanwhile, Pignatelli expects the euro to come under growing pressure from the twin factors of the funding costs to bail out eastern Europe and the lag effect of a slowing German economy.

“Given the fact it is heavily export and industry-based, Germany tends to get hit later in the cycle than the US
and UK, which are more consumer driven economies,” says Pignatelli. “This late German cycle will put pressure on the euro.”

As such, the manager has taken out a three-month forward contract, which effectively hedges half of the portfolio to the British currency.

The fund was formerly outsourced to New Star’s institutional team, where it was managed by Richard Lewis. Pignatelli previously managed money for his own company Remus Capital, and has also worked at Barings and Schroders.