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Issued in May 2009
For professional investors and advisers only
Schroder ISF* Global Managed Currency
Fund Focus
But aren’t currencies very volatile?
You’re quite right – currency movements
can, indeed, be extremely volatile – and we
actually think that is only going to intensify
going forwards. This is the precise reason why
investors should start thinking about currencies.
Where there is significant volatility, there is an
opportunity for strong returns.
Clive Dennis, Fund Manager
Currencies have been hitting the
headlines all around the world.
Over the past year alone, sterling
has experienced its worst slide
since 1931, questions have been
raised about the cohesion of the
European monetary union, and
the US dollar soared as global
stockmarkets plunged.
On 2 June 2009, Schroders is
launching Schroder ISF Global
Managed Currency (with EUR, GBP
and USD share classes available).
We spoke to the fund’s manager,
Clive Dennis, to find out more.
What are the attractions of investing in
currency?
Many people today are holding their assets in
cash deposits but, with interest rates as low as
they’ve ever been, that’s not a terribly attractive
option. Moreover, with inflation expected to rise
again in the future, the value of those deposits
risks being steadily eroded over time, destroying
an individual’s purchasing power.
We want to offer clients an alternative to cash
deposits and government bonds that can deliver
a higher yield, the potential for capital gains
and, most importantly, help them to preserve
their global purchasing power. For people who
are looking to begin re-investing their capital,
currencies are the cheapest and most liquid
way to re-enter the market.
It’s probably also worth pointing out that
currencies have a very low correlation to
other asset classes, making them a useful
diversification tool.
How will the fund be run? There are many
currency funds already open to investors
– how is your fund different?
Our fund is an actively managed, long-only
vehicle which invests exclusively in multiple
currencies and forward currency contracts.
I suppose it could be described as a ‘World
Cash Fund’.
There are, indeed, a great number of currency
funds available. However, there are some very
significant differences between our fund and
the majority of what’s already out there.
For a start, most other currency vehicles only
invest in a very narrow band of currencies –
generally speaking, the G101 currencies.
We strongly believe that this approach is
limited as, historically, a lot of value has been
generated by emerging market currencies.
As such, we wanted to ensure that our fund
has the flexibility to invest in any currency in
the world. We want to be able to move where
we see the very best opportunities.
The other thing that sets us apart from the
competition is that most other currency funds
are run as hedge fund strategies and are highly
leveraged. We do not believe it is necessary
to use leverage within this strategy in order
to achieve returns.
So, do you use derivatives at all?
We don’t use any complex derivative
instruments but we do use options either to
hedge a position, or to gain exposure to a
currency where that is the best way of
doing so. For us options are about insurance
and access, not leverage.
Will the fund be measured against
a benchmark?
When it came to researching how we would
reference performance, we found that existing
currency benchmarks are extremely limited in
terms of the number and range of currencies they
are exposed to. This isn’t really surprising as, as
I’ve already mentioned, most other vehicles only
invest in a narrow range of (chiefly, developed)
currencies. So, we asked JP Morgan to build
us our own benchmark which consists of 34
currencies – including many emerging market
currencies. What’s great though is that we do
have the freedom to invest in any currency in the
world – not just those dictated by our benchmark,
as the fund is benchmark unconstrained.
Is there a limit to how much you can invest
in any single currency?
To be honest, the limits we’ve set ourselves are
pretty generous. This was because we wanted
the flexibility to be very aggressive or very
defensive depending on market conditions.
We look at exposures across the portfolio on
both a regional and an individual currency basis
with the set limits reflective of liquidity. So, for
example, we can hold a maximum of 50% of
the portfolio in euros but only a maximum of
10% in Thai baht or Chilean pesos.
What returns are you targeting? How do
you know that the strategy works?
We are targeting a return of 3% above our
proprietary index over a market cycle and
we spent a long time testing the product to
make sure that this was achievable.
We back-tested the index and a model portfolio
to 1993 and, over that period, we’ve seen a
risk/return profile which is comparable to that
of government bonds. However, with yields
on government bonds expected to rise going
forwards, we believe currencies are the better
bet for future returns.
In what environment would you expect the
portfolio to perform best?
Well, the trend we observed during the backtesting was that in years when the US dollar
performs well, we could expect the fund to
return about -5%. However, when the dollar is
weak, we would anticipate returns somewhere
in the range of 15-20%.
I think it’s important to say at this point that we
do have a very negative view on the dollar.
The Federal Reserve has expanded its balance
sheet dramatically and recent reports suggest
that it could double from current levels.
In our view, the extent of leverage within the
US economy has extremely worrying implications
for the long-term strength of the currency.
So, where are the best opportunities
for currency investors today?
We think that many of the most exciting currency
opportunities are arising in the developing world.
So, we are currently overweight eastern
European currencies such as the Polish zloty,
the Czech koruna and the Hungarian forint. It is
true that these currencies collapsed dramatically
in 2008 – there were a lot of concerns about
the health of the eastern European economy.
However, we think the extent of the collapse was
somewhat overdone and, since it appears that
the worst of the crisis in the region is now over,
these currencies are looking extremely cheap.
We also think the appreciation of the Chinese
renminbi has further to go. Don’t forget that the
Chinese government slammed the brakes on
1 The G10 or Group of Ten countries are: Belgium, Canada, France, Italy, Japan, the Netherlands, the UK, the US, Germany and Sweden.
*Schroder International Selection Fund is referred to as Schroder ISF throughout this document.
Schroder ISF Global Managed Currency Fund Focus
credit growth about five years ago which meant that the Chinese economy
was pretty well contained during the credit boom. The Chinese have also
taken steps to diversify their enormous foreign exchange reserve – the
world’s largest – away from the US dollar.
How is the team structured and how do you conduct your research?
Our team is part of Schroders’ Emerging Market Debt, Commodities and
Currencies Team which is headed up by Geoff Blanning. As head of the
currency team I will be the lead manager of the fund and will be supported
by another specialist currency analyst.
In terms of the research, we will be drawing on both the team’s global
network of local analysts and the views of the Schroders economists
based here in London.
Fund Manager biography
Clive joined Schroders in 2009 having previously worked for seven
years as an Executive Director, Foreign Exchange Sales at Morgan
Stanley. Prior to this, Clive spent 15 years at Deutsche Morgan Grenfell
Investment Management, where he was Chairman of the Currency
Committee and a member of the Group Investment Policy Committee.
Currency
Global government bonds
0.73
EMBI+
0.62
Commodities
0.30
US Equities
0.53
Japanese Equities
0.44
US REITs
0.17
Emerging Market Equities
0.26
European Equities
0.20
Global High Yield
0.60
Euro Government Bonds
-0.18
Euro Corporate Bonds
-0.21
Euro High Yield
0.05
Source: Schroders; Bloomberg; Saloman Smith Barney; Morgan Stanley;
Lehman; Standard & Poor’s; Index calculated by JP Morgan.
Exposure % Benchmark
US Dollar
5.0
27.8
Canadian Dollar
3.0
2.9
Brazilian Real
4.0
2.6
Mexican Peso
4.0
2.1
Argentinean Peso
1.1
0.5
–
0.4
Chilean Peso
1.3
0.3
Peruvian Sol
–
0.2
Colombian Peso
Correlations to Global Currency Index (10 years to March 2009)
Americas
Europe
23.1%
Schroder ISF Global
Managed Currency
(Model portfolio)
Currency
Japanese Yen
Exposure % Benchmark
9.0
8.8
Currency
Exposure % Benchmark
EURO
45.0%
15.0
24.6
UK Pound
8.0
5.7
Russian Ruble
4.9
2.6
Polish Zloty
5.0
0.9
Swiss Franc
–
0.9
South African Rand
–
0.6
2.0
0.4
Egyptian Pound
–
0.3
Hungarian Forint
5.0
0.3
Romanian Lei
2.0
0.3
Turkish Lira
3.1
1.3
Czech Koruna
Chinese Renminbi
5.0
6.6
Indian Rupee
3.0
2.2
South Korean Won
6.0
2
Australian Dollar
3.0
1.8
Indonesian Rupiah
2.9
0.9
Taiwan Dollar
2.0
0.8
Thai Baht
2.0
0.5
Average duration
Hong Kong Dollar
–
0.4
Average credit quality
AAA
Malaysian Ringgit
2.0
0.4
–
0.3
% Emerging Markets
56.0%
1.7
0.3
Portfolio implied yield
4.03%
Philippine Peso
Singapore Dollar
31.9%
Asia
1 month
Source: Schroders.
Important Information: This document does not constitute an offer to anyone, or a solicitation by anyone, to subscribe for shares of Schroder International Selection Fund, (the
“Company”). Nothing in this document should be construed as advice and is therefore not a recommendation to buy or sell shares. Subscriptions for shares of the Companies
can only be made on the basis of their latest prospectus together with the latest audited annual report (and subsequent unaudited semi-annual report, if published), copies of
which can be obtained, free of charge, from Schroder Investment Management (Luxembourg) S.A. In accordance with the current prospectus, other than for Schroder ISF Global
Property Securities, Schroder ISF Asia Pacific Property Securities, Schroder ISF European Defensive and Schroder ISF Middle East, the Company will seek UK distributor status
for all distribution A and C shares. An investment in the Companies entails risks, which are fully described in their prospectus. Please consult your financial professional or the
respective prospectus for more detailed information. Past performance is not a guide to future performance and may not be repeated. Investors may not get back the
full amount invested, as prices of shares and the income from them may fall as well as rise. Exchange rate changes may cause the value of any foreign investments to
rise or fall. Schroder ISF Global Managed Currency is within the scope of the European Union Directive 2003/48/EC (Taxation of Savings Income in the Form of Interest Payments),
as implemented in Luxembourg Law. This document is issued by Schroder Investment Management Limited, 31 Gresham Street, London EC2V 7QA. Registered No: 2015527
England. Authorised and regulated by the Financial Services Authority. w33440