According to the firm’s Q3 2016 UK Portfolio Barometer, which tracks 103 model risk-rated portfolios, sterling weakness has provided a significant tailwind to portfolio performance in recent quarters but could “turn into a substantial risk in years ahead”.
Using the recent moves in Japanese equities as a case study, Natixis showed just how beneficial sterling weakness can be.
But, because of the volatility, it is a dangerous bedfellow and one on whom it is hard to rely. As a result, whether or not to expose a portfolio to currency risk “needs to be considered by advisers as an investment decision on its own. This consideration needs to be at both an absolute return level and versus any industry benchmark that is being used to bench adviser model portfolio returns," Natixis said.
In the case of Japanese equity returns, the outsize performance of unhedged exposure has left Natixis wondering what advisers are likely to do from here and whether or not there will be a shift into hedged share classes now, a increase in repatriations into UK assets or, whether the use of ETFs to actively manage currency risk is likely to rise.
At a broader level, as is evidenced by the graph below, currency had a significant impact on portfolio performance in the period.
There remains a “long road ahead” for both the UK and sterling, especially with the triggering of Article 50 of the Lisbon Treaty (and thus the starting of the Brexit countdown) looming on the horizon.
And, while Natixis acknowledges that it is impossible to know where sterling will go next, it added: “At some point before or after the two-year period there is likely to be a floor to the decline in the value of the sterling. Leading into and at this point advisers will need to address the currency exposure in their portfolios.”