Three-quarters of the investors surveyed for this month’s Focus Group hedge some of their foreign exchange (FX) risk, while just one fund hedges it all. This is a similar proportion to when investors were last polled in April 2013 (81% in 2015 compared with 78% in 2013).
“We hedge the dollar, the pound and the yen 100% to the euro, to reduce the currency and overall risk of the portfolio,” says a Dutch fund.
A UK fund that does not hedge any of its FX risk says “long-term investing will mitigate the impact of currency movements”.
Four-in-ten respondents use an active approach to FX hedging. A Norwegian fund gives its reason for doing so: “Simply, we want to smooth fluctuations in the results. Over time, currency is a zero-sum game. Play a little bit on historical trends – sell when a currency is historically high and buy when historically low.”
Just four respondents invest in currency alpha strategies. “The strategy aims at momentum, value and inherent value,” says a Dutch fund. A Spanish fund that does not invest states: “We do not consider currency an asset class, but an ‘accident’ or ‘feature’ of our foreign investments (outside the euro-zone).” Some 85% do not invest in currency alpha strategies, compared with 91% in April 2013.
Over three-quarters of respondents identify equities as being one of the asset classes that would be affected most by further foreign exchange-rate volatility. Twelve respondents highlight emerging market local currency fixed income; nine, alternatives; eight, global bonds; and four apiece, emerging market hard currency fixed income and real estate.
“Emerging market FX is the obvious painful element in the portfolio, in light of the relentless US dollar rise versus all currencies, not just emerging markets,” says a Dutch fund.
Sixteen of those polled say the US Federal Reserve should take the impact on currency markets into account when deciding the timing of interest rate rises, although a UK fund expresses little confidence in the Fed were it to do so: “They are most likely to make it worse and compound the issue.”
A Swiss fund comments: “A rate hike is like a real interest rate shift in the short term and this could lead to a stronger US dollar, which might be, to some extent, a risk to the US economy.”
Over a third of funds agree that a ‘currency war’ is likely to break out in the near future; indeed, four respondents say it is already happening. However, most disagree, with a Dutch fund saying “it is in nobody’s interest”. A Spanish fund adds: “It seems that it is compelling for these countries to regain competitiveness, but it can imply problems of inflation and a decrease of the purchasing power of their citizens.”
More than 80% of respondents agree that the role of the renminbi as a global currency is increasing. “It has the potential to become the currency of choice,” according to a UK investor. A Swedish fund states it is “a top priority for Chinese leadership”. Yet just three funds intend to build renminbi holdings in the near future.
Over three-quarters of the investors surveyed say that the recent depreciation of emerging market currencies has not led them to review their emerging market assets holdings. For a Dutch fund, “the long-term view is still that emerging markets are attractive and, as a long-term investor, we rarely adjust on short-term volatility”.
Real assets are the most attractive asset class in the context of today’s currency volatility, according to 13 respondents. This is followed by US high yield (10 respondents); gold, global infrastructure and unhedged foreign assets (nine respondents each); and global real estate and currency alpha strategies (eight respondents each).
Ten funds have over 30% of their assets denominated in foreign currencies; seven respondents, 21-30%; three, 11-20%; five, 1-10%; and one, 0%.
Twelve of those polled have over 20% of their assets denominated in dollars; all but one have less than 10% in the yen; 18 have up to 9% in Swiss francs; and 18 have less than 20% in sterling.