UK investors have had it pretty good over the past year, despite some of the greatest geopolitical shocks seen in a generation.
Equities markets on both sides of the Atlantic have climbed significantly as the pound has slid, meaning there has been a double-whammy for portfolios, with assets invested in America and elsewhere worth a lot more when converted into home currency.
The pound sits at $1.24 today, having been at $1.48 immediately before the referendum.
A new research report provides some firm numbers on the effect this has had on portfolios. The Natixis Global Portfolio Barometer is based on the review of 564 ‘moderate risk’ or ’balanced’ model portfolios between July and December 2016.
It found that a ‘favourable currency effect’ involving overseas equities investments and the depreciation of sterling had lifted UK portfolios to the top of the table of eight regions in terms of performance.
UK portfolios returned an average of 13.5% over the six months, according to the report, in large part due to the lower pound. This was some distance ahead of second placed US portfolios with average returns of around 8.2%. Of the 13.5%, 11% came from equities and 9% from overseas equities benefiting for the low pound.
“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,” said Matthew Riley, head of research of the portfolio research and consulting group at Natixis GAM. “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. 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.”
“In equities, these currency-related returns were more than the returns of the underlying equity markets,” he added. “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.”
The central danger attached to this situation is that investors underestimate the impact the lower pound is having, become complacent or overly confident in their asset allocation or investment strategy, while making no contingencies for a recovery in the pound.
