Exchange rates remained high on the political agenda last week as Brazil’s finance minister Guido Mantega 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 concerns 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 per cent 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 Japanese currency to appreciate by about 45 per cent against sterling in the final three months of 2008, according to Financial Express. As a result, British inv-estors barely noticed the turmoil in Japanese equities – during 2008, their assets fell in value by just 1 per cent in sterling terms.
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 core alpha fund, with share classes hedged into euros, dollars and sterling. Last month, HSBC Global Asset Management announced sterling-hedged share classes for two of its offshore absolute return funds.
But while GLG and HSBC said they were responding to customer demand, Adviser Fund index panellists seem largely unconcerned at the impact of currency movements on their investments. RSM Tenon senior investment consultant Chris Wise 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.
He says: “We will probably look at more currency-hedged products but we are 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 is what we accept. If the investment calls are right, they will still make good returns even if the currency does not work in your favour.”
Allenbridge director of research Jonathan Wallis takes a similar view. He says: “It does not tend to be a major factor in our thinking. Most of the overseas equity funds we look at do not take a view on currency. They just say, ’we are 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’.”