When currency moves distort fund performance

You’d expect a fund manager to take credit when things go well, but that’s not always the case. I remember presentations from 2017 where stockpickers seemed almost at pains to distance themselves from double-digit gains made in the previous year.

Why? Because the nosedive that the pound took after the Brexit vote massively increased the Sterling value of Overseas assets, ramping up the Returns of many an Overseas portfolio.

Funds invested in US dollar assets enjoyed a particularly notable bounce: the average fund in the Investment Association (IA) North America sector made a US dollar total return of 8.4 per cent in 2016 and this translated into nearly 30 per cent in Sterling terms. The average fund from the IA Global sector posted a 3.4 per cent gain in dollar terms – a return that amounted to 23.3 per cent for a Sterling investor.

I mention this because once again we are seeing such a phenomenon. The US dollar has strengthened against various currencies this year while, as IC Economist Hermione Taylor has written, the pound has had a dismal showing versus the greenback and many of its other peers. Such currency differentials have really helped to offset the weak underlying performance of many funds with dollar assets for a Sterling investor: as of mid-September the average IA North America fund was down by 18.7 per cent in the year to date in dollar terms but down by just over 4 per cent in Sterling terms. The average IA Global fund was sitting on a 22.3 per cent paper loss in dollar terms for that period, and down by a painful but more palatable 8 per cent when translated into sterling.

To a lesser extent, we’ve seen distortions move the other way for funds invested in Japan, whose currency has been pretty weak recently. The average IA Japan fund is down by 3.5 per cent for the year so far in its own currency but suffering to the tune of an 8.7 per cent paper loss in Sterling terms.

The IA’s Global and North America fund sectors can be especially popular among UK investors, suggesting many should at least see their portfolios benefit from these recent shifts. But it’s useful to understand that such fluctuations might be the main thing helping recent performance rather than a fund manager’s savvy market calls. In times like these it can be worth paying attention to the commentaries issued by investment teams, so as to pick up clues about the real causes of good or bad returns.

Such big currency moves also help to drive home a few of the usual Sensible lessons: that diversification across different geographies can help offset such fluctuations, and that it can generally be helpful to look beyond the UK. Investors can attempt to do things such as currency hedging, but this can incur extra costs and seems as difficult to get right as other forms of market timing.

On a similar note, it’s worth being ready for the possibility that things might one day move in the opposite direction. One hope for Japanese equity funds is that the currency holds its own once again, while a stronger pound versus the dollar would be a challenge for global funds. The odds might seem slim for the second scenario, but it’s always a valid “what if”.


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