UK advisers earned substantial gains in non-UK assets in Q3 2016, having benefitted from sterling weakness, latest Natixis portfolio barometer has found out.
The Q3 Portfolio Barometer relies on the analysis of 103 model risk-rated portfolios, across 22 firms, in the three months from 1 July to 30 September 2016.
Moderate portfolios have especially enjoyed their greater exposure to the US dollar, the research highlights.
“However, this may turn into substantial risk in the years ahead. When the sterling floor is reached, advisers will need to address the currency exposure in their portfolios. Currency has worked for advisers in recent quarters but this may not hold true in quarters ahead,” it pinpoints.
Natixis GAM suggests a consequence of a weak sterling will result in “significant economic ramifications in the UK”, that eventually includes weaker economic conditions and higher net import costs.
The study notes advisers are adjusting their portfolios accordingly. On the equity segment, a notable shift away from UK mid-small cap funds in favour of UK large caps and global equities has been stressed.
“The shift away from sterling fixed income may be due to the significant returns year-to-date generated in the Gilt market with advisers choosing to take profit and shift exposure internationally. The shift away from mid/small-cap equities is another signal that advisers are moving away from assets that may be sensitive to the weaker sterling,” Natixis argues.
Adivsers have moved into inflation linked securities as Natixis’ research observes both conservative and moderate portfolios have significantly increased fixed income allocations.
Another shift has been stressed from largely alternative allocations in conservative portfolios and from allocation funds in moderate portfolios.
Natixis’ barometer touches on 2017 challenges, in particular the Brexit issue.
The firm believes that a floor to the decline in the value of the sterling is likely before or after the UK’s two-year transition period away from the European Union following the triggering of Article 50 by Prime Minister Theresa May.
Currency exposure will be at that time a hard topic for advisers, Natixis says.
James Beaumont, international head of Portfolio Research & Consulting Group at Natixis said of the findings: “The referendum result was clearly a surprise to many and what advisers have learnt is that currency exposure, intended or not, is a significant risk factor to which they are exposed.
“It is possible that the current heightened levels of currency volatility will remain for the foreseeable future, therefore it needs to be considered by advisers as an investment decision on its own. This consideration needs to be at both an absolute return level and versus any industry benchmark that is being used to bench adviser model portfolio returns.”
A hot spot in 2017 will be Japanese equities according to Natixis which foresees that advisers with unhedged yen exposure in Japanese equities would be benefitting from a much stronger yen.
“And, in fact, this exposure would be more than compensating for losses in Japanese equities,” the research suggests.