Wealth Manager - the site for professional investment managers

Register to get unlimited access to Citywire’s fund manager database. Registration is free and only takes a minute.

This is why you shouldn't just accept currency risk

In a global portfolio, currency can be an opportunity or a threat. Either way, you bear currency risk when investing in any overseas asset. In this week’s passive blog, in association with Lyxor ETF, we look at how you can manage currency risk in a global portfolio.

What is currency risk? Why does it happen?

Currencies fluctuate daily, usually as macro-economic events happen, such as interest rate changes, economic data releases and geopolitical events. Hurricane Irma prompted the US dollar to fall, whilst Trump’s election helped it soar. If you’re investing in overseas assets or even assets with a sizeable overseas exposure, currency moves could make a big difference to how your portfolio performs.

Dividends are also subject to currency risk. Even in the UK, many companies pay their dividends in US dollars, including income stalwarts like BP, HSBC and Rio Tinto. When the payments are converted to sterling, the amount you receive will depend on the exchange rate – if the pound is strong, the less you are going to be paid, consequently eating into returns.

More: Lyxor launches the lowest cost UK dividend ETF with TER 0.19%

Even so-called safe haven currencies are not necessarily ‘safe’ from currency risk. In January 2015, the Swiss National Bank depegged the Swiss franc from the euro, sending it soaring by 30%. This hit shares– the Swiss Market Index fell 7.6%, excluding dividends, that same month.

However not all consequences of currency movements are negative; they can sometimes be positive. For example, sterling dropped in the aftermath of the Brexit vote, which benefits the likes of Glaxo or Rio Tinto indirectly when overseas earnings are converted into pounds. In these instances, stocks that pay dividends in euros or dollars are a good bet. A weak pound also improves the competitiveness of UK exports – foreign tourists are likelier to visit the UK, foreign investors are more likely to look for British assets and then there are the UK firms who earn profits abroad that will benefit.

A passive solution

As an example, the Lyxor US TIPS GBP Monthly Hedged (DR) UCITS ETF costs 0.2%, while the Lyxor US TIPS (DR)UCITS ETF is only 0.09%. The chart above shows the long term performance of the indices tracked by each fund – as you can see the difference can be sizeable. Without the currency exposure, the hedged index is much less volatile, behaving much more like a defensive asset. The unhedged has greater chance for performance, but greater possibility of loss too.

Of course, this illustration is historic and the past is no guide to future returns. But currency risk can be a choice – not an obligation. Currency hedged ETFs are a handy tool to have in an ever changing economic climate.

Lyxor offers over a dozen currency hedged ETFs, including USD, EUR and GBP hedged variants of the the $1bn Lyxor JPX-Nikkei 400 (DR) UCITS ETF. Find out more at LyxorETF.co.uk

Disclaimer

THIS COMMUNICATION IS FOR ELIGIBLE COUNTERPARTIES OR PROFESSIONAL CLIENTS ONLY

Source for fund and charge data: Lyxor ETF, market data Bloomberg, correct as at 17th October 2017. Chart correct as at 17 October 2017.

This document is for the exclusive use of investors acting on their own account and categorized either as “Eligible Counterparties” or “Professional Clients” within the meaning of Markets in Financial Instruments Directive 2004/39/EC. These products comply with the UCITS Directive (2009/65/EC). Société Générale and Lyxor International Asset Management (LIAM) recommend that investors read carefully the “investment risks” section of the product’s documentation (prospectus and KIID). The prospectus and KIID are available free of charge on www.lyxoretf.com, and upon request to client-services-etf@lyxor.com.

The products mentioned are the object of market-making contracts, the purpose of which is to ensure the liquidity of the products on the London Stock Exchange, assuming normal market conditions and normally functioning computer systems. Units of a specific UCITS ETF managed by an asset manager and purchased on the secondary market cannot usually be sold directly back to the asset manager itself. Investors must buy and sell units on a secondary market with the assistance of an intermediary (e.g. a stockbroker) and may incur fees for doing so. In addition, investors may pay more than the current net asset value when buying units and may receive less than the current net asset value when selling them. Updated composition of the product’s investment portfolio is available on www.lyxoretf.com. In addition, the indicative net asset value is published on the Reuters and Bloomberg pages of the product, and might also be mentioned on the websites of the stock exchanges where the product is listed.

Prior to investing in the product, investors should seek independent financial, tax, accounting and legal advice. It is each investor’s responsibility to ascertain that it is authorised to subscribe, or invest into this product. This document is of a commercial nature and not of a regulatory nature. This material is of a commercial nature and not a regulatory nature. This document does not constitute an offer, or an invitation to make an offer, from Société Générale, Lyxor Asset Management (together with its affiliates, Lyxor AM) or any of their respective subsidiaries to purchase or sell the product referred to herein.

Lyxor International Asset Management (LIAM), société par actions simplifiée having its registered office at Tours Société Générale, 17 cours Valmy, 92800 Puteaux (France), 418 862 215 RCS Nanterre, is authorized and regulated by the Autorité des Marchés Financiers (AMF) under the UCITS Directive (2009/65/EU) and the AIFM Directive (2011/31/EU). LIAM is represented in the UK by Lyxor Asset Management UK LLP, which is authorized and regulated by the Financial Conduct Authority in the UK under Registration Number 435658. Société Générale is a French credit institution (bank) authorised by the Autorité de contrôle prudentiel et de résolution (the French Prudential Control Authority).

Lyxor International Asset Management (“LIAM”) or its employees may have or maintain business relationships with companies covered in its research reports. As a result, investors should be aware that LIAM and its employees may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Please see appendix at the end of this report for the analyst(s) certification(s), important disclosures and disclaimers. Alternatively, visit our global research disclosure website www.lyxoretf.com/compliance.

CONFLICTS OF INTEREST This research contains the views, opinions and recommendations of Lyxor International Asset Management (“LIAM”) Cross Asset and ETF research analysts and/or strategists. To the extent that this research contains trade ideas based on macro views of economic market conditions or relative value, it may differ from the fundamental Cross Asset and ETF Research opinions and recommendations contained in Cross Asset and ETF Research sector or company research reports and from the views and opinions of other departments of LIAM and its affiliates. Lyxor Cross Asset and ETF research analysts and/or strategists routinely consult with LIAM sales and portfolio management personnel regarding market information including, but not limited to, pricing, spread levels and trading activity of ETFs tracking equity, fixed income and commodity indices. Trading desks may trade, or have traded, as principal on the basis of the research analyst(s) views and reports. Lyxor has mandatory research policies and procedures that are reasonably designed to (i) ensure that purported facts in research reports are based on reliable information and (ii) to prevent improper selective or tiered dissemination of research reports. In addition, research analysts receive compensation based, in part, on the quality and accuracy of their analysis, client feedback, competitive factors and LIAM’s total revenues including revenues from management fees and investment advisory fees and distribution fees.

This article was provided by LYXOR ETF and does not necessarily reflect the views of Citywire

Citywire TV
CIO Tapes 2: two warnings and a lot of optimism

CIO Tapes 2: two warnings and a lot of optimism

Our group of leading asset management CIOs see a lot of opportunities – and overseas investors are buying UK too

Play Wealth Manager Retreat 2017: size isn't everything

Wealth Manager Retreat 2017: size isn't everything

We asked our delegates at the Wealth Manager Retreat what they think about the recent wave of consolidation in the industry.

1 Comment Play CIO Tapes - part 3: 'passive funds are anti-capitalist'

CIO Tapes - part 3: 'passive funds are anti-capitalist'

Citywire recently gathered three of the UK's leading fund investment heads to discuss their hopes, fears and the issues that their jobs throw at them daily.

Read More
Your Business: Cover Star Club

Profile: Kleinwort Hambros' boss on how to manage five banks

Profile: Kleinwort Hambros' boss on how to manage five banks

Welding together Kleinwort and Hambros – two of Britain’s most historic banks, founded in 1786 and 1839 respectively – was always going to be a challenge.

Wealth Manager on Twitter