My colleague Elliot Farley did some analysis recently to bring home the impact of currency volatility recent investor returns. The results were fascinating.
First, he looked at the levels of currency volatility of the euro, yen and dollar in terms of standard deviations. The past 18 months has seen a big spike – currency volatility has been broadly two to three times greater in that period than in the rest of the past decade.
Next, he looked at the impact on investor returns – using data from Lipper – between the beginning of September 2009 and the end of February 2010. In summary, an investor who bought into emerging markets at the beginning of this period would typically have seen their investment rise by nearly 9 per cent over the subsequent six months, in local currency terms. But that return would have shot beyond 20 per cent if he or she had chosen to redeem at that point and exchange the proceeds back into sterling.
The same currency effect would have almost doubled returns on the S&P 500 – it would have turned a 6.7 per cent loss in Japan into a 4.2 per cent gain and more than doubled returns in an MSCI Far East ex Japan investment.
We expect the currency rollercoaster to continue for some months. As countries begin introducing quantitative tightening at different times and different rates we can expect heightened currency volatility throughout 2010.
Many investors may have benefited from currency volatility but the next part of the ride may not be so pleasant. We feel multi-manager offers a solution.
Management of currency risk has played an increased role in our own asset allocation decisions in recent months, influencing which global regions and asset classes we allocate to and encouraging us to use hedging when appropriate.
For example, we have just gone overweight to Japanese equities but introduced a currency hedge because we expect the yen to weaken. This should boost company profitability and equity returns but, without a hedge, we would risk losing those gains.
A good multi-manager always looks to take account of the opportunities and threats posed by currency movements. It is clear that those opportunities and risks are now much greater than they have been for some years.
Philippa Gee is head of sales, marketing and communications at T Bailey