The Schroder ISF global managed currency fund has a target return of 3 per cent above the global currency index that was built for Schroders by JPMorgan. The index comprises 34 currencies, including emerging market currencies, but the fund will not be constrained by this index.
The fund was back tested to ensure that the target return could be achieved. During back testing, Schroders found that when US dollar is strong, the fund would be down 5 per cent, but when dollar is weak, the returns were 15 to 20 per cent. The company currently has a negative view of the dollar, so expects strong returns.
This fund differs from many currency funds in that it is not a hedge fund, it is not geared and it is not limited to the G10 countries which include the UK, US and Japan. It has a broad geographical remit, including emerging market currencies, so that it can find the best opportunities.
The fund is overweight relative to the benchmark index in eastern European currencies which collapsed in 2008, but Schroders thinks the worst of the crisis in the region is over and that these currencies are looking cheap.
Flexibility to be very aggressive or very defensive depending on market conditions is another characteristic of the fund. Manager Clive Dennis will look at currencies on a regional and individual basis and has set limits for each currency based on liquidity. More liquid currencies will have higher maximum weightings in the fund.
Dennis has more than 22 year’s currency experience. He joined Schroders earlier this year, having previously worked at Morgan Stanley and Deutsche Morgan Grenfell Investment Management.
Dennis will not use complex derivatives in the fund, but will use options to hedge a position or gain exposure to a currency if options provide the best way to do so.
This fund may be appeal to investors as a diversifier but the high volatility of currency movements that provides the potential for strong returns also increases risk.