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Adviser Fund Index

With the Greek crisis showing no sign of a quick resolution, currency risk is back on the agenda.

Having seen significant shifts in exchange rates over the past few years, which have had a huge impact on investment returns, how far should investors be looking at currency risk to protect their investments?

“Our position is we do not make tactical currency investment decisions,” says Chartwell investment research manager and Adviser Fund Index panellist James Davies. “There are longer-term trends you can observe and if you do not consider those you are basically throwing away a significant portion of potential return.”

One such trend over recent years has been the decline in the value of sterling. Over the past three years, the dollar has risen by 30.5 per cent against sterling while the euro and yen have strengthened by 29.2 per cent and 66.7 per cent respectively against the pound.

“I expect the dollar to continue to appreciate against sterling and the euro,” says Martin Currie director and manager of the Martin Currie North America fund Tom Walker. “I think the UK economy is particularly challenged and the euro has some serious issues to resolve as I do not think the Greece problem has in any manner gone away.”

The concerns over sovereign risk and the impact of removing economic stimulus measures such as near-zero interest rates have cast doubt over many developed market currencies. Walker says, however, that a weakening of developed market currencies against Asian currencies is a necessary factor in redressing the imbalances between surplus countries and those running large fiscal deficits.

Ashcourt Rowan head of research Tim Cockerill says: “I think it is an awareness issue. My experience is that knowing what currencies are going to do is very difficult. We are conscious of it but it would never be our sole reason behind a decision,” he says.

Most investment professionals will be hoping some of the more dramatic exchange rate movements are past.

“If you consider that from 2003 to 2006 the return on your US equity portion could have potentially been wiped out by the deterioration of the dollar if you did not take it into account,” says Davies.

Both Cockerill and Davies agree if there is a solid investment case for putting money into a particular fund, then currency risk is not the most pressing concern. But over the next few months, all eyes will be on Greece. It is already being discussed as a proxy for potential future problems with sterling and ultimately perhaps even the dollar.

“I think the recovery will be slow and there are still headwinds but I do not think there is any threat of a default in the US,” says Walker. “If it did then the game would be completely up.”

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