Diversifying Across the Corporate Lifecycle
December 3, 2019
Active Currency: The “Forgotten” Alpha Video Transcript:
Tom Clarke: I think currency is a poorly managed risk because in general, investors ignore it, or don’t make a conscious decision about the currency exposure that is part of their portfolio. It’s not really seen as anything other than an unwelcome guest at the party. The street wisdom about currency includes beliefs such as: number one, it’s wildly volatile; number two, random or very unpredictable; and number three, not amenable in any way to being actively managed. All of those beliefs, I think, are wrong. Active management of currencies is great for the macro diversification of a portfolio, because exchange rate movements over time tend to be very uncorrelated with equity and bond movements.
At William Blair, active currency is just as much a source of return as is active management of equity and bond exposures. Our currency universe is more than 30 currencies, so it goes well beyond the G7 of the developed world, and more than half of the currencies in our universe are actually emerging currencies. We separate the currency decision from the asset decision, and by doing that it’s able to add return, generate excess value, in a way that can be diversifying to the whole.
We generally take more currency risk over time than is common among our peers. And what that means is that currency is not really a side show for us but it’s part of the main show. Many people don’t really know or believe that exchange rates even have a fundamental value—still less that it is more robust in respect of pulling the price towards it than the same for equities and bonds. I find the exchange rates revert to their fundamental value. It’s slightly quicker than is the case for equity returns and real bond yields.
The shorter reversion period is important, because if you have to wait less time for that correction to happen with currencies than you do for other assets, then the signal is more robust and capable of generating more return per unit of risk over time. Currency management’s vitally important to the Dynamic Allocation Strategies team’s investment process. We think it works, so therefore we want it in the portfolio, and not just in a small measure.
Filmed September 2018
The views and opinions expressed herein are those of the speakers as of the date of publication, are subject to change without notice as economic and market conditions dictate, and may not reflect the views and opinions of other investment teams within William Blair. Factual information has been obtained from sources we believe to be reliable, but its accuracy, completeness, or interpretation cannot be guaranteed. This material may include estimates, outlooks, projections, and other forward-looking statements. Due to a variety of factors, actual events may differ significantly from those presented.
This video has been provided for informational purposes only and should not be considered as investment advice or a recommendation of any particular strategy or investment product, or as an offer to buy or sell any securities or related financial instruments in any jurisdiction. Investment advice and recommendations can be provided only after careful consideration of an investor’s objectives, guidelines, and restrictions.
Investing involves risks, including the possible loss of principal. Investing in foreign denominated and/or domiciled securities may involve heightened risk due to currency fluctuations, and economic and political risks, which may be enhanced in emerging markets. Currency transactions are affected by fluctuations in exchange rates; currency exchange rates may fluctuate significantly over short periods of time. Diversification does not ensure against loss. Any investment or strategy mentioned herein may not be suitable for every investor.
Past performance is not indicative of future results. Charts or graphs referenced herein are provided for illustrative purposes only and are not indicative of the past or future performance of any William Blair product or strategy. Half-life is a statistical measure of the time required for the discrepancy between price and value to contract by half of its starting value. Half-life reversion to value is shown based on a 40-year observation period ended April 2014. Fundamental value estimates are based on the Dynamic Allocation Strategies team’s proprietary research.
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