Currencies are moving. The yen-dollar exchange rate has moved 16 per cent in the last three months. The trade-weighted basket of currencies exchanged with the euro has climbed nearly 9 per cent over the same period. In January of this year, the euro-sterling rate went from 0.81 to 0.87. Is foreign exchange an investment opportunity too good to miss?
One traditional investment approach is to see currencies as a cost of doing business, or a risk, or both. Many fund managers reckon that forex moves are only discernible in hindsight. Besides, this is a zero-sum game, so what’s gained on the swings is often lost on the roundabouts.
Such traditionalist thinking is by no means universal, and it looks increasingly old-fashioned. Global macro hedge funds are inveterate currency players, of course, if only by deciding whether to hedge other investments. Many active long-only managers also have FX exposure: even if it is by owning securities denominated in currencies other than their own.
But the paucity of opportunities to make conventional returns from top-grade sovereign bonds bumps currency-specific strategies up the asset-allocation agenda. Equity risk, meanwhile, needs balancing. Commodity prices have become less volatile, and while that’s a good thing for the real global economy, it squeezes investment potential from the asset class.
The “leave-well-alone” approach to FX comes about partly because it is difficult to judge value. Hard-to-read politics and macroeconomic policies make the task harder. But though tricky, it is not impossible – as the stellar recent performance of several global macro funds testifies.
Sure, forward-looking tools of fundamental currency analysis are problematic. But exchange rates are determined primarily by flows of cash cross-border, which in turn are determined by the health and wealth of national economies. It may take different skills to spot value in currencies compared to, say, stocks. But the task is not necessarily any more challenging.
Changing attitudes to currencies may be prompted by quite reasonable client desires to get value from fund management fees. For behaviours to change, some pension-fund mandates may also have to be updated. But if FX is where the action is, that’s where active asset managers should be.