After a dismal decade, active currency managers see light at the end of the tunnel.
As a decade of ultra-accommodative monetary policy after the 2008 crisis now appears to be nearing its end, funds that invest in currencies as an asset class are hopeful of a rebound. Specialist firm Record Plc as well as multi-asset funds Insight Investment Management and Russell Investments are among those betting on higher volatility — a prerequisite for improving returns and ending outflows — and a return of the carry trade.
As global interest rates rise, currency managers are hoping that the threat of a bond bear market and high equity valuations will help foreign exchange regain some shine as an asset class. Still, they face an uphill task convincing investors to return given the industry’s poor performance after the financial crisis — quantitative currency funds’ assets fell from $35 billion in early 2008 to just $6 billion as of end-2013, according to the Bank for International Settlements.
“We might be close to the point where it’s about as difficult as it gets for currency managers and about as good as it gets for everybody else,” said Paul Lambert, London-based head of currencies at Insight Investment, a Bank of New York Mellon Corp. unit that manages about $522 billion. “So far this year we’ve seen it get worse for equities,” and stocks losing appeal could work in favor of currency funds, he said.
Current valuations of global equities and bonds suggest investing in either asset and holding them for a long period will likely result in mediocre returns, said Van Luu, head of currency and fixed-income strategy at Russell Investments in London.
The profit-earnings ratio on the Stoxx 600 index remains high relative to historical levels, at 14.5 compared to 8.25 in 2008. Bill Gross, the billionaire fund manager with Janus Henderson Group Plc, has called the end of the bond bull market and warned investors to expect zero to one percent returns.
Not everyone agrees that the end of easy monetary policy will benefit active currency management. The return of interest rates as a tool to manage the economy means currencies will have less to do, according to Geraldine Sundstrom, a London-based managing director at Pacific Investment Management Co.
“We had a more active currency position last year because I was expecting a big euro move, a big dollar move,” said Sundstrom. “But now for 2018, as the world goes back to normal, as most currencies are much closer to their fair value, my expectation for large moves is a lot less. So in fact I have reduced the amount of active exposure I have in currencies.”
Even the fund managers betting on a turnaround say the industry is unlikely to return to the pre-crisis glory days. Assets managed by Record’s active currency fund have slumped to $1.7 billion from $29 billion in 2008, while demand for passive hedging has ballooned to $58.8 billion from $18.3 billion.
“I wouldn’t want to be at all hubristic about it,” said James Wood-Collins, Record’s chief executive officer. “The argument I would make for investors thinking about a distinct currency allocation is less that we’re going to go back to the go-go years pre-2007 and everything is going to be making loads of money. It’s more about the fact these are based in different sources of return and investors can tailor the amount of correlation they want.”
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