NEW YORK: Overseas asset managers and pensions are adding protection against a weakening dollar, concerned about the US currency’s diminishing ability to diversify their US equity portfolios.
Because such stock funds carry built-in dollar exposure, investors with other home currencies that had not neutralised the foreign-exchange (forex) risk were cushioned when the dollar was strong if Wall Street performed badly.
But the dollar’s correlation with other US assets, and the impact of its fall on portfolio performance, came into sharper focus when the Trump administration announced far-reaching global tariffs on April 2, sending US stock indexes and the greenback sharply lower.
The US dollar hit a three-year low against a basket of currencies, raising risks for investors whose portfolios once benefitted from the natural hedge.
Now, managers are reducing dollar exposures and increasing the hedge ratios for US stock portfolios where clients’ investment policies allow them to do so.
About 10% of Russell Investments pension fund clients in Europe and the United Kingdom have already increased hedge ratios on their international stock portfolios, said Van Luu, global head of solutions strategy for fixed income and forex for Russell in London.
One client raised it to 75% from 50%, highlighting the desire to have a greater portion of US stocks protected against the weakening dollar.
“If what we’re seeing persists, then you will have more clients taking action in that direction,” said Luu.
The dollar is down 10% for the year, and 6.5% since US President Donald Trump’s so-called Liberation Day in April.
Meanwhile, the S&P 500, the benchmark US stock index, has recovered 24% since an April slump and is up 5.3% this year, flirting with record highs.
The MSCI gauge of global stocks, minus the US, has risen 16% for the year.
“It’s not enough to look at the stock market and say it is more or less back to where it was, so nothing happened,” said Peter Vassallo, foreign exchange portfolio manager at BNP Paribas Asset Management, who manages currency exposures across its asset classes.
BNP has been reducing dollar exposures for its clients that include pension funds, sovereign wealth funds and central banks.
It has sold US dollars across stock and fixed income portfolios, and built up what Vassallo described as a sizable position in options for funds that allow these strategies.
He said the euro, yen and the Australian dollar are among the primary currencies it bought against the US dollar, a big contrast to how the asset manager ended the previous year with a small “overweight” in the US dollar.
“This switch towards a more uncertain policy regime created an environment where we as market participants see the US as more hostile to international capital flows, international trading,” Vassallo said.
After a June review, Justin Onuekwusi, chief investment officer at St James’s Place, said it is maintaining a strategic hedge that allows it to reduce overseas currency exposure in favour of sterling by up to 20%.
The strategy “has been beneficial for our clients’ returns year-to-date”, he said.
Onuekwusi said he now sees the US dollar as closer to its longer-term fair value and has marginally reduced dollar hedging across managed portfolios.
Foreign investors hold more than US$30 trillion in US securities, about US$17 trillion of which is in equities and more than US$12 trillion in long-term debt, according to data published in April by the US Treasury Department.
Marcus Fernandes, global head of currency management at Northern Trust, said the divergence in the correlation of risk was more than in the past.
“That’s why people are thinking faster than before, ‘I need to increase my hedge ratio’,” he said. “Once those conversations start, they usually end with increased hedge ratios.”
Data from Russell showed that a euro-hedged version of the MSCI USA index was flat for the year through May, while the euro-unhedged version was down 8.3%, showing the benefit of hedging for euro-based investors.
The US dollar is down 13% against the euro on concerns about flip-flopping US trade policies and growth. — Reuters
