Currency exposure has been the main driver of gains for many UK investors this year, but managers are now turning their attention to hedging strategies as they predict further volatility in the FX market, while some are becoming more bullish on sterling.
This year has seen the pound plummet to a 31-year low after the UK voted for Brexit on 23 June, trading 15% lower against the US dollar year-to-date at $1.2521 and down 13% against the euro at €1.1795 (as at 1 December).
Sterling weakness has boosted UK large caps in particular, which derive a large proportion of their profits from overseas.
Holders of US equities have also benefitted from leaving their exposure unhedged, as the dollar appreciated when Republican candidate Donald Trump won the US Presidential Election in November, with his proposed fiscal policies expected to have a reflationary effect on the economy.
The latest quarterly Portfolio Barometer from Natixis Global Asset Management, which tracks 103 model risk-rated portfolios managed by UK advisers and wealth managers, showed they had continued to benefit from sterling weakness in Q3, which led to “substantial gains in non-UK assets, specifically equities where advisers typically do not hedge currency risk”.
However, Natixis said: “When the sterling floor is reached, advisers will need to address the currency exposure in their portfolios…The currency exposure that advisers are taking on via share classes is a more material asset allocation decision than the call on the asset class itself.”
Some wealth managers have already started taking action. For example, Whitechurch Securities is introducing a barbell approach to portfolios, with a core and value component, and will be hedging one of these back to sterling in each investment category, depending on the individual market.
Neil Birrell, CIO at Premier Asset Management, who runs the firm’s Diversified fund, said its best position so far this year has been currency exposure.
“We went into Brexit unhedged, so we got a lot of dollar and euro exposure. We have tried to lock in the gains by hedging the euro and dollar exposure, because much of the gains have been taken now,” he said.
“Currency could be the driver of returns over the next few years. There is a potential for more downside in sterling and we will look to lock in the gains as it weakens. We have to pay more attention to currency than before.”