Watching what fate befell funds investing in US assets has not been a pretty sight in recent years. Most of them, especially those based in the Asia-Pacific region, suffered dismal losses once their overseas US-dollar investments were converted back to local currencies. They would have been better off if they had just invested in their domestic market. But given the fluctuations of the US dollar, making a straightforward call on currencies is not easy these days. Its sudden rally promises to create a major whip lash for some funds which took aggressive bets against the US currency.
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| Loong: anticipating directions | |
In an interview published in The Asset in January this year, Dwyfor Evans, a Hong Kong-based currency strategist at State Street Global Markets, predicted the US dollar would rebound, driven – ironically – by the darkening prospects of the US economy. The development, he argued, would substantially cut US demands for foreign goods and reduce its accounts deficit and make the US dollar much scarcer to obtain abroad.
His colleague, Chris Loong, the Sydney-based head of the asset allocation and currency management group for State Street Global Advisors (SSgA), the institutional investment management arm of State Street Corporation, says the strengthening of the US dollar serves to highlight the importance of developing a hedging strategy that is dynamic enough so as to allow portfolio managers to quickly change the amount of hedging undertaken depending on the swings of the market. Loong’s group manages the A$25 billion exposure of 40 mostly Australia-based fund accounts. SSgA, he says, has been developing an investing model where the hedge ratio is dynamically adjusted, or in other words the amount of hedging is reduced or increased depending on what is happening in the market.
A client can thus reduce the amount of hedge used in the portfolio if they expect their home currency to depreciate against the US dollar and increase it if they expect otherwise. “It’s called a strategy because it more or less anticipates medium and long term directions in the market. It is not something that you change on a day-to-day basis.” The hedging model, he adds, is currently available to Canadian, Australian and UK clients of SSgA, but will be made available to clients in the Asia-Pacific region as well, given the strong interest among funds around East Asia and South East Asia anxious to get a better grip on their currency's exposure.
Hedging becoming an issue
Loong says the recent experience of funds still braving the risk of investing offshore highlights the need for a greater emphasis on their currency exposures. “What we are witnessing is a tidal sweep in the way funds from the region investing in cross-border assets are grappling with their currency exposures. They are much more focused now than they used to be,” he says.
Loong notes that hedging used to be not such a major issue, especially in countries where currencies are pegged to the US dollar. But the latter’s volatility and the strengthening of domestic currencies clearly had a significant impact on the returns of funds whose currencies are allowed to float freely (such as the Australian dollar) or currencies whose values are calculated based on a basket of currencies (such as the Singapore dollar).
SSgA has a strong sales support and business development team in Singapore, Hong Kong and China, says Loong, but its portfolio management is done in Sydney because of the scale of the work and also because most of the cross-border assets they manage now come from Australian funds.”
Loong says the fund that they are managing is steadily growing, with an ever larger share of the assets going outside Australia. “Many of the funds need to diversify their exposure especially when it comes to the equity markets, simply because there is only just a narrow list of stocks that they can invest in.”
The Australian equity market is mostly focused on resource-based companies and a few financial and retail concerns, according to Loong. “This is why these funds have to look offshore to obtain a more diversified portfolio. At the same time they have also started investing in bonds, infrastructure and even private equity.”
