Multi-Asset Insights
Key Highlights:
- Historical data confirms that investors who embrace geographic diversification tend to achieve superior risk-adjusted returns. However, this approach also introduces currency risks, necessitating careful analysis to mitigate hedging costs and capture potential performance benefits
- We examine how the hedging strategy can be optimised. We follow a systematic approach to formalise considerations, including the relationship between currencies and the asset, and the potential return of the holding currencies
- Our house view projects a ‘great rotation’ ahead in markets, with laggards set to play catch-up. UK assets are worthy of closer examination as a potential value standout
Currency hedging – an evolving solution to an age-old problem
When investors take exposure to foreign assets, they face a decision regarding the associated currency exposure, which can materially impact performance. This edition of Multi-Asset Insights explores granular portfolio considerations to support enhancing returns.
It takes a look at how currency exposures can be optimised based on an intuitive and rigorous framework. It shows that the standard ‘one size fits all’ industry approach of systematic hedging for bond exposure and unhedging for equity exposure is not optimal, and that any strategic exposure should depend on the base currency.
Considering UK assets as an undervalued opportunity
After a decade of sluggish economic growth and declining international investment, valuation discounts for UK assets have extended. UK equities are currently trading at a forward P/E of around 12x, offering a dividend yield of 4.1per cent and a total shareholder yield (including buybacks) of 6per cent. This is almost twice the level of the S&P 500. Economic green shoots could support a shift in market dynamics, making it an opportune time to reassess allocations to a market most global investors currently have little exposure to.