Conventional wisdom suggests investing is best done by focusing on fundamentals. In our world of multi-manager/multi-asset portfolios, this usually means the funds themselves, as well as their managers, teams and approaches.
Once we appreciate and understand these aspects, the next fundamentals we focus on are the latent potential in the portfolios relative to the market as a whole – in other words, bottom-up fund selection. But from time to time the investment world’s focus is not on these fundamentals.
We may have reached ‘peak politics’ in terms of the awareness of, and preoccupation with, the array of elections and geopolitical tensions that we are in the midst of. Thus as a result of some of the political fall-out, currency is the next, or even the current, big thing.
This is not at all helpful to a fundamental world.
Currency markets are among the deepest and most liquid in the industry. In theory, the International Monetary Fund has clear rules against things like competitive devaluations and the World Trade Organisation can levy tough sanctions on currency manipulation, though many believe these rules to be vague and untested.
Add to the mix the experimental world of quantitative easing – in which currency is created freely, even if it is then reinvested by buying bonds – and it is arguable that currency markets are more opaque than equities and other markets.
This is an inconvenient conclusion when events such as Brexit, and most recently the French elections, create significant moves in major currencies.
As a result currency is playing a far more significant part in our thoughts than normal. But what does all this mean for our portfolios?
Fortunately, today there are hedged share classes available across several currencies on many asset classes. We have also found a number of groups willing to set up new hedged share classes quickly where demand exists.
In addition, the use of currency exchange-traded funds and efficient portfolio management techniques mean there are tools at our disposal.
Having said this the best way to deal with currencies is to talk to as many good fund managers as you can, triangulate their opinions and make sure you are not exposed to undoing all the good fundamental work by ignoring the impact of currency.
Currently, our European exposure is deliberately fully exposed to the euro, whereas our Japanese exposure is on average 25 per cent hedged, but into US dollars. Our other positions are also unhedged.
Our future focus is on whether there is scope for a sterling revival beyond the election announcement bounce, and whether the references by Donald Trump and Janet Yellen to a weaker dollar are just talk or not. Either way, in our view we are not out of the woods yet for further significant currency impact on markets for the rest of the year.
Rob Burdett is co-head of multi-manager at BMO Global Asset Management
