The Sharpe ratios for both the sterling and sterling-hedged versions of the index are identical at 0.58.
Rathbones’ research shows that hard currency EMD has delivered a higher Sharpe ratio over the 14-year period, at 0.79. Whether hedged or unhedged, sterling-based returns were higher, while volatility was also a little higher.
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Of course, this is a smaller universe and liquidity might be at stake when most needed – investors are still exposed to currency risk indirectly. What happens to the local currency impacts the ability to repay debt denominated in foreign currencies, thereby affecting yields.
Who said investing is easy?
Ed Smith is an asset-allocation strategist at Rathbones
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