Unhedged portfolios; performing well over the past 12 months, but at what cost?Ben Raven - Director
Equity markets have made significant gains all over the world; Japan has seen the Nikkei 225 return 25% whilst in Europe the MSCI European Small Cap Index TR rose 24%. Not to be left out, the S&P 500 jumped 28% and the FTSE All-Share Index rose 31%.
So, a UK retail client with exposure to Asia, Europe, America and the UK would have made consistently good profits across their entire equity portfolio. In fact, if a client had an equal allocation to each of the 4 geographical areas their aggregate return would be somewhere in the region of +27%. What is interesting however, is that UK clients with unhedged overseas exposure have actually made considerably more than this over the past 12 months.
The returns I have quoted are for the indices in question, in local currency terms.
How does this happen?
It is because over the same 12-month period the GBP has depreciated vs the Japanese Yen, the Euro and the US Dollar.
A UK client’s return of 38.17% is made up of the 24.85% return of the underlying equity markets and a 13.32% ‘boost’ from the currency markets. This ‘boost’ is equal to 54% of their original return – in other words the UK client has achieved 154% of the return they should have made.
In this example, and over the past year…
The client is able to benefit from the gains made through the depreciation in the GBP, even though it was not part of their intended strategy. Neither was it what they necessarily signed up for when they agreed to invest in an equity portfolio.
Consider however, if the GBP had rallied instead of depreciating over the past 12 months, and the client had then received a return of only 11.54% (24.85% less the 13.32% currency impact). In this instance the adviser may have a very difficult time explaining why the return was lower than it should have been. The client signed up to a global equity portfolio. The underlying markets produced an aggregate gain of 24.85%. The client was not told how much currency risk they were exposed to, nor how much it could impact their return or the excess volatility they would experience in order to generate that return. In this instance, the client would have been exposed to a type of risk they were not made aware of that resulted in a lower return than they were entitled to expect.
Like any market, currency markets move in both directions. When the GBP rallies, UK retail clients invested in unhedged portfolios will suffer in terms of performance. Many will also realise that they are being exposed to a type of risk they did not sign up for. They will ask their financial adviser for the reason why.
The answer you give is down to you…
This investment Blog is published and provided for informational purposes only. The information in the Blog constitutes the author’s own opinions. None of the information contained in the Blog constitutes a recommendation that any particular investment strategy is suitable for any specific person. Source of data: Tavistock Wealth Limited and Lipper for Investment Management. Date of data: 10thFebruary 2017.
Want to know more about Currency Hedging?
Please contact us here:
The polls have become notoriously unreliable and nothing can be taken for granted ahead of Thursday’s general election.read more
Speaking to CNBC, Christopher Peel discusses the upcoming UK general election, sterling and UK equities.read more
Christopher Peel, chief investment officer at Tavistock Investments, says Brexit is the big focus for investors this week when it comes to Europe.read more
Welcome to the Q4-2019 ‘Quarterly Perspectives’ publication, which aims to explain our outlook for financial markets over the rest of the year.read more
Chief investment officer at Tavistock Investments, says the trade war is hurting both the U.S. and China. Christopher Peel discusses with CNBC.read more
The ongoing China-US trade war, the potential of another Fed interest rate drop and the continuation of the current bull market. Christopher Peel discusses all of this with CNBC.read more
Christopher Peel provides his views on global financial markets for the second half of the year on CNBC.read more
Welcome to the Q3-2019 ‘Quarterly Perspectives’ publication, which aims to explain our outlook for financial markets over the rest of the year.read more
Recent news events have brought to light the risk of suspended funds and the unhappiness these restrictions can cause for investors.read more
Christopher Peel discusses what’s coming next in global financial markets in a recent interview on CNBC.read more
Christopher Peel gives his views on global financial markets…read more
Welcome to the Q2-2019 ‘Quarterly Perspectives’ publication, which aims to explain our outlook for financial markets over the rest of the year.read more