The firm’s Global Portfolio Barometer found a weak dollar boosted US and Latin American (LatAm) investors’ portfolios in 2017, but European investors lagged in comparison because the strength of the euro against the dollar hurt their equity investments.
Natixis Investment Managers reviewed a global sample of 466 ‘moderate risk’ and ‘balanced’ model portfolios from nine regions between July and December 2017.
Equities drive performance
Perhaps unsurprisingly in a year in which all equity markets were up, the research found equities drove the performance of portfolios throughout the year.
LatAm and the US were among the best-performing regions in 2017 where investors had the highest allocations to US and global equities. US and LatAm investors saw average gains of more than 14% with an average weighting to equities of 55% and 45%, respectively.
In the case of the US, equities contributed about 12% of the 14.7% return and for LatAm, equities contributed about 11% of the region’s 14.2% return.
By contrast, continental European investors were generally overweight Europe and underweight global/US equities. This meant they did not perform as well, since European equities had lower performance than US and global equities.
The UK and Switzerland were the third and fourth best performing regions with returns of 10.8% and 9.4%, with equities contributing roughly 8% and 6% of that return, respectively.
The currency effect
Aside from the obvious benefit of being allocated to equities, Natixis noted a large driver of success for US and LatAm portfolios was the US dollar falling heavily against a host of major currencies last year. The greenback lost about 12% against the euro, 9% against sterling and 4% against the Swiss franc.
As a result, the international equity performance of European investors appears lower due to the depreciation of the dollar against the euro.
For example, Natixis said a euro-based investor investing in MSCI Europe would have gained 10.2% and in MSCI USA would have gained just 6.5%. However, a US dollar-based investor would have seen MSCI Europe up 25.5% and MSCI USA up 21.1%.
Matthew Riley, head of research in the Portfolio and Research Group and author of the Global Portfolio Barometer, says the findings highlight the “hidden danger” of currency risk across equities and fixed income.
He says: “Equities did well in 2017 – people with more equities on average did better than people with less equities – but what differentiated the best of the best was the currency which was the fact they were in dollars and so their foreign exposure in non-dollars did much better than the other way around.”
Currency was also a big story last year for UK investors. Last year’s barometer saw UK advisers leading the pack in terms of returns because of the fall in sterling after the Brexit vote.
“We did a barometer last year and UK advisers did the best in the world by a long way because of the Brexit vote and sterling fell 20-25% over the year,” says Riley. “UK allocates a lot to global equities so where sterling fell, other currencies rose.
“This year, it is a currency story again but more so dollar weakness and the fact that US equities are 60% of global equities by market cap so everyone therefore has an exposure to the dollar and if it falls it is going to affect everyone.”
Fixed income also hit
It wasn’t just equities affected. The research also found currency hitting fixed income holdings where investors had not hedged currency risk.
Riley said there have been several examples of European investors investing in US treasuries losing 10% because they did not consider the currency risk.
He added: “A lot of people don’t understand in general the impact of currency on their portfolio. We have seen big moves over the last couple of years it is possible there will be big moves in the next few years, but it is certain people will continue to not fully understand the role that currency has on their portfolios.
“It is the biggest hidden risk we see. It can hurt you where you’re least expecting it if you are not paying attention.”
