As Jim Wood Smith, head of research at Hawksmoor Investment Management told Portfolio Adviser: “Currencies are more important now than they have been from a portfolio construction point of view. In the QE world of 0% interest rates and gilt yields, any form of available return has taken on a greater importance.”
But, he warns, while currency can be a valuable tool in a wealth manager’s arsenal, especially when many of his or her traditional yield-hunting weapons have been depleted of ammunition, it is important to ensure that one knows how to use it properly.
“It certainly can raise the risk level involved in a portfolio,” he said.
Roger Hallam currency chief investment officer within JP Morgan’s global fixed income, currency & commodities group, agrees that currency exposure forms an important part of portfolio construction at the moment, but does not believe its importance has changed.
What has changed, however, he said, is that in a world of low returns, every part of one’s portfolio needs to be working as hard as possible.
For Hallam, the benefit of currencies is that they are a two-sided asset class, which means there is always opportunity and, he says, while the level of volatility in currency markets presently is largely in line with longer-term averages, there remain a significant number of risk events on the horizon that will provide opportunities.
However, he added, as the movements around Brexit illustrate, taking no currency risk is not always the best hedge as there is often an embedded hedge to be found in equity markets. As such, it is important to have a clear understanding, not only of one’s explicit currency exposure, but also of from where the earnings of one’s equity holdings come.
For Natixis the message is even more simple. It writes: “Currency exposures can have a significant impact on performance, both positively and negatively… advisers should remember that currency exposure, whether intended or not, is a significant risk factor to which they are exposed.
“We have no view on whether advisers should or should not be taking currency risk, but any risk exposure taken in portfolios should be assessed properly, taking the following questions in to consideration:
1. Is this a risk that you want to take?
2. Precisely how much risk are you taking?
3. Will you be adequately compensated for it?
