Currency risk takes centre stage
If there is one thing many believe will result from this summer’s volatility in global markets it is that currencies have claimed a more important part of portfolio decision making.
Once upon a time – the 1970s, to be precise – the issue of foreign currency exposure or hedging was simple: the dollar.
Since then, the introduction of European monetary union and the rapid shift in global economic power has resulted in strains around currency assumptions that have created new threats and opportunities for investors.
In an increasingly globalised economy, the effects of currency changes against each other are more acutely felt.
For example, if an equity funds sold in one currency but actually invests most of its money in companies that do most of their business in another currency, then swings in foreign exchange rates can have a big impact on returns.
Hedging against such threats is one reason investors are looking at currencies, but opinions differ as to what extent this is necessary.
Hans Peterson, head of investment strategy at SEB, says currency funds tend to have free-ranging mandates.
They are not a hedge against, say, the euro. But as an asset class, currency is interesting and in that sense could be seen as a hedge: “There is a lot of return to be found in currency.”
Possibilities identified by Peterson included the dollar/rouble: “If risk appetite returns, then commodity currencies will do well.”
On the euro, SEB’s view has been that it should survive. It is not just a currency, but serves as a solidarity pact between stronger and weaker countries in a monetary union.
Credible alternative scenarios seem far less likely, particularly given the views of countries in surplus, looking for assets in which to invest.
In Asia, for example, SEB maintains an ongoing interest when it comes to currency – particularly given the state of equity markets, which face challenges of deleveraging and poor economic growth.
Currency as an asset class is something more investors should look at, particularly as institutional investors certainly have been doing so, Peterson adds.
Back on the question of hedging currency, Per Torpare, deputy head of asset management and saving products at Nordnet, the Swedish online bank and funds distributor, says his firm does not have an official view. However, a total collapse of the euro is not something envisaged.
Torpare confirmed that over the summer, Nordnet’s own portfolios and fund of funds were not hedged against currency effects.