UK portfolios with significant non-sterling assets strongly benefited from currency depreciation post the Brexit vote, with an average performance in excess of 13%, according to the findings of Natixis Global Asset Management’s annual Global Portfolio Barometer.
Performance in UK portfolios was substantially higher than the US which came second with average returns of around 8.2%.
The new findings are based on in-depth proprietary research and review of “moderate” or “balanced” model portfolios offered by advisers and wealth managers across the US, the UK, France, Italy, Luxembourg, the Netherlands, Singapore, and Latin America.
“UK advisers may not always take into consideration the impact that currency plays within a portfolio, but in 2016 investors who held non-sterling assets strongly benefited as the pound depreciated following the Brexit vote in June 2016,” James Beaumont, international head of Portfolio Research & Consulting at Natixis, said.
The variation in 2016 returns can almost wholly be explained by the difference in the return contributions from exposure to equities. In the UK equity performance contributions were 11% out of the total of 13.5%, and of that 9% was overseas equity. Equities were just 0.8% out of the 3% average returns in Luxembourg. Strong equity markets also drove performance in the US and the Netherlands.
The best performing major equity index in 2016 was the FTSE 100 which was up 14.4%. The S&P 500 also did well, up 9.5%, whilst the Euro Stoxx 50 was flat with a performance of 0.7% and global equities in the middle with around 5.3%.
Excluding the UK, survey returns from equities were generally in the 5-8% range, with fixed income in the 4-5% range and allocation funds 3-5%.
The biggest difference in asset class returns were from alternative strategies, which varied from -2.1% for Lux-based advisers to +3.9% in the UK. Although the returns are relatively modest, they underline advisers’ tendency to allocate to low risk, low return, alternative strategies as a replacement for fixed income, rather than to higher risk, higher return strategies.
Additionally, currency risk had a significant impact on UK portfolios invested in non-domestic equities, the report found.
“A substantial part of the explanation is currency risk which is no surprise since currency moves in 2016 were the highest since 2008 and had a large impact on the surveyed portfolios. For example, a UK investor with unhedged US equity exposure would have gained an extra 19% return in 2016 due to the depreciation of the pound versus the dollar,” says Matthew Riley, head of Pesearch of the Portfolio Research & Consulting Group at Natixis.
“For eurozone equities, this would have been around 16%, and for Japanese equities this would have been 23%. Currency impact was also seen in allocation funds, EM debt and high yield debt funds, which are often not hedged by advisers,” Riley says.
He adds: “In equities, these currency-related returns were more than the returns of the underlying equity markets. In fact, adding up all of the currency impact, we find that about 7% of the return contribution to UK adviser portfolios, or 50% of the total returns in 2016, came from currency risk.”