Sterling Fall

londoninvestor

AnotherJoe wrote: »

What would you define though, as a "UK" holding? Unless its a UK smaller companies fund, (which has its own set of risks, more so now than probably at any previous time since 1939), or you are holding individual company shares picked for the UK-centricity, it's very hard to invest in "the UK" and you are taking currency risk even if its not explicit. If for example the "perfect" Brexit solution* suddenly comes from left field and the Pound rises as a result, expect your "UK" shares to drop.

A thought experiment...

An equity analyst with a few days on their hands should be able to work out the size of the underlying cashflows in each currency into and out of the FTSE 100 companies.

That would enable a hedge to be constructed, so a fund manager could offer a "FTSE 100 (GBP Hedged)" tracker.

Would investors buy that in preference to a plain old "unhedged" FTSE 100 tracker? Should they? (Leaving aside the merits or otherwise of the FTSE 100 compared to other indexes - imagine just choosing between the unhedged and hedged versions of the fund.)

masonic

Intrigued by the possibility of hidden costs that would render hedging pointless, I've spent a bit of time on Trustnet multi charting comparing CSP1 (unhedged) and IGSP (GBP hedged, I would have picked GSPX which is cheaper but it was only launched less than 6 months ago).

Over a number of different time periods from 1-3 years, over periods where the pound strengthened, weakened or stayed the same, and over periods where the underlying assets went up, down or stayed the same in value, the hedged fund returns within ~2% of what it should taking into account the difference in GBP:USD. I was almost convinced this was a non-issue.

However, there are a small number of periods (including the date Sterling dropped like a stone following the Brexit vote) where the hedged fund underperforms significantly (e.g. 30% underperformance in the face of a 15% drop). That suggests this fund cannot cope with all market conditions and can behave unpredictably. That's probably enough to put me off at this point.

Alexland

Sure currency hedging is not perfect but, as part of a broader portfolio, should deliver anticipated results. We never get posters saying "I really don't understand why my VLS60 fund price movements bear no relation to market performance.." so the hedging in the bonds must be broadly doing its job keeping the ship steady.

Alex.

masonic

Yes, I've examined a specific example and found it wanting; that doesn't mean it won't work elsewhere. I don't really understand why it works just fine most of the time in the example I picked, but then occasionally gets it very wrong. Crucially, there doesn't seem to be a significant cost impact.

hoc

Any further thoughts on this, as pound continues to be the in news for all the wrong reasons.