• Home
  • Equities
    • UK
    • Global
    • Europe
    • US
    • Asia
    • Emerging markets
    • Specialist
  • Bonds
  • Multi-asset
    • Managed funds
    • Property
    • Commodities
    • Alternatives
    • Absolute Return
  • Markets
    • UK
    • Global
    • Economics
    • Currencies
  • Funds
    • Unit trusts/OEICs
    • Investment Trusts
    • VCTs/EIS
    • Platforms
    • ETFs
    • Pensions
  • Regulation
  • Diversity
  • People moves
  • Events
  • Financial library
  • Industry blogs
  • Thematics spotlight
  • Investment Europe
  • Newsletters
  • Sign in
    • logged-in-corporate-menuYou are currently accessing Investment Week via your Enterprise account.

      If you already have an account please use the link below to sign in.

      If you have any problems with your access or would like to request an individual access account please contact our customer service team.

      Phone: +44 (0) 1858 438800

      Email: [email protected]

      • Sign in
     
      • Account details
      • Newsletters
      • Contact support
      • Sign out
     
  • Follow us
    • Twitter
    • LinkedIn
    • Newsletters
    • Facebook
    • YouTube
    • Instagram
  • Register
  • Events
    • Upcoming events
      event logo
      Women in Investment Awards 2019

      Investment Week is delighted to announce our Women in Investment Awards 2019, in partnership with HSBC Global Asset Management, will take place on 27th November in London. Nominations now open!

      • Date: 27 Nov 2019
      • Finsbury Square, London EC2, London
      event logo
      Investment Marketing Leaders Conference

      Investment Week is launching the Investment Marketing Leaders Conference. This conference will aim to bring together the top decision makers from asset management firms, advisory firms and investment banks to share their own experiences, discuss future strategies and workshop practical solutions.

      • Date: 29 Nov 2019
      • Sofitel St James 6 Waterloo Place London SW1Y 4AN , London
      event logo
      Tax Efficiency Awards 2019/20

      Investment Week is delighted to announce the Tax Efficiency Awards 2019/20

      • Date: 29 Nov 2019
      • One Moorgate Place Chartered Accountants Hall 1 Moorgate Pl London EC2R 6EA, London
      event logo
      Investment Week Select

      Your time. Your Choice. Tuesday 4th February 2020

      • Date: 04 Feb 2020
      • Meet in Place, London
      View all events
      Follow our events

      Sign up to receive email alerts about our events

      Sign up

  • White papers
    • Fidelity logo whitebackground1200 630px 1 120x194
      The ETF Evolution

      In this exclusive magazine exploring the evolution of quality and income ETF strategies, King reveals that each ETF follows an investment strategy developed by the group's in-house research team that leverages fundamental active insights to inform the factor definitions and applies portfolio construction principles to mitigate the unintended biases.

      Download
      7ded04ac5957a69da8d1df41c8f21a0c33988d8f 1 120x194
      A bet on the UK bounce back

      David Cumming, Aviva Investors' chief investment officer for equities, last year witnessed turbulent times for UK equities but he remains positive about the market in which he has a personal as well as a professional stake.

      Download
      Find white papers
      Search by title or subject area
      View all white papers
  • Industry blogs
  • Thematics spotlight
  • Investment Europe
Investment Week
Investment Week
Sponsored by BMO
  • Home
  • Equities
  • Bonds
  • Multi-asset
  • Markets
  • Funds
  • Regulation
  • Diversity
  • People moves
  • logged-in-corporate-menuYou are currently accessing Investment Week via your Enterprise account.

    If you already have an account please use the link below to sign in.

    If you have any problems with your access or would like to request an individual access account please contact our customer service team.

    Phone: +44 (0) 1858 438800

    Email: [email protected]

    • Sign in
 
    • Account details
    • Newsletters
    • Contact support
    • Sign out
 
  • Trending
  • Financial planning
  • Jupiter: Big Interview
  • Gold Standard winners
  • Consistent 50
  • Bonds

Managers warned unhedged global bonds could see 'huge losses' if sterling rebounds

Pound hovering over $1.23 region amid Brexit fears

The pound had fallen around 16% since the EU referendum in 2016
The pound had fallen around 16% since the EU referendum in 2016
  • Anna Fedorova
  • Anna Fedorova
  • @FedorovaIW
  • 24 September 2019
  • Tweet  
  • Facebook  
  • LinkedIn  
  • Share on Whatsapp
  • Send to  
0 Comments

UK investors have been warned global bond funds that do not hedge their holdings back into sterling are exposing themselves to potential huge losses in the event sterling bounces back from its current lows, with many investment professionals agreeing the currency is undervalued.

Having fallen around 16% since the EU referendum in 2016, the pound has been hovering around lows of $1.23 to $1.25 over the last couple of months amid Brexit fears.

However, industry experts have warned the currency could rebound sharply if an agreement between the EU and the UK is reached, which could hit foreign fixed income exposures.

Related articles

  • Kames Capital bond fund fee cut a 'sign of things to come'
  • Brexit Blog: Conservatives promise to 'get Brexit done' in election manifesto
  • Pacific AM hires former GAM UK wholesale distribution chief Lemis
  • Consistent 50: Bond funds dominate new entrants
  • Why US real estate remains attractive amid a 'mixed' economic picture

Wealth managers dump UK assets in favour of global bond funds

Chris Peel, CIO at Tavistock Wealth, said: "Sterling is significantly undervalued against the dollar and should be closer to $1.45, so investors could see potential losses of 18% in FX alone. It is hard to get this loss back."

Peel pointed to the high correlation of returns between the IA Global Bond sector and the dollar rising against a falling pound, saying he was "staggered" to learn that a large proportion of UK funds that invest globally do not offer hedged share classes. 

This is a "huge problem" in the global bond market, he said, where investing on an unhedged basis could mean taking on triple the risk.

"There will be huge losses [in global bonds] that could take over a decade to recover," he said.

"It has not come home to roost yet because sterling has fallen from around $1.60 to where we are now, so fund managers have been able to hide behind poor asset allocation decisions and be bailed out by the fall in FX. But they will have to give it all back."

Adrien Pichoud, head of total return strategies at Syz Asset Management, who sees sterling potentially rising to trade at around $1.35 in the near-term, agrees these worries are warranted.

The unlikely country boasting the best fixed income opportunities

"If sterling were to rise and someone has bonds in dollar or in euro unhedged, the impact will be quite negative; it will be very difficult to see that the yield generated offsets the impact of the FX," he said.

His base case when it comes to overseas bonds is to always hedge: "It would be wrong to buy a bond outside the base currency of a portfolio as then you are expressing an FX view, and bonds may not be the best way to
do that."

Different currencies

Anthony Carter, fixed income fund manager at Sarasin & Partners, agrees there is a "case to be made for hedging" assets from low interest rate environments, such as European and Japanese bonds, as "you increase your yield if you hedge back to sterling".

However, in higher interest rate environments, such as the US, where hedging means giving up yield, the question is more "nuanced".

"If you are holding US fixed income you do it to hedge against a negative market outcome, and part of this would be the dollar rallying against sterling, so I would be happier to leave dollar exposure unhedged," he said, but added that further cuts in US interest rates would make hedging more attractive.

Meanwhile, Will Mcintosh-Whyte, fund manager on the Rathbone Multi-Asset Portfolio funds, said some currencies, such as the Australian dollar, tend to be "risk-on currencies", so should always be hedged back to sterling.

"We hold some Australian government bonds to hedge against a risk-off environment, and if the Australian dollar is falling at the same time, this does not give you protection," he said.

When it comes to emerging market exposure, the key question is whether currency or rates are the greatest source of return, said Carter: "If it is rates, then you might hedge; but if it is FX then you leave it unhedged".

Peel added hedging EM bond exposure may not be worthwhile due to the high costs.

  • Tweet  
  • Facebook  
  • LinkedIn  
  • Share on Whatsapp
  • Send to  
  • Topics
  • Bonds
  • Global
  • Chris Peel
  • Adrien Pichoud
  • UK
  • global bonds
  • sterling
  • currency
  • Brexit
  • FX
  • Syz AM
  • interest rates

More on Bonds

SJP has come under fire in the national and trade press in recent weeks
UK equity managers back St James's Place as hedge funds up short positions
Some fund selectors argued Kames' fees could have been reduced further
Kames Capital bond fund fee cut a 'sign of things to come'
Craig Veysey of Man GLG
Why 'extra caution' is required on interest rate and credit exposure
Andrew Sveen of Eaton Vance
An active approach: High loan yields signal buying opportunity
Managers are racing against time ahead of the 12 December poll
Managers rotate back to UK domestics ahead of General Election 'clarity'

Most read

Franklin Templeton names Jennifer Johnson as new CEO
Franklin Templeton names Jennifer Johnson as new CEO
Janus Henderson distribution head departs
Janus Henderson distribution head departs
Brooks Macdonald snaps up Cornelian AM for £39m
Brooks Macdonald snaps up Cornelian AM for £39m
FCA fines Henderson £1.9m for overcharging customers in 'closet trackers'
FCA fines Henderson £1.9m for overcharging customers in 'closet trackers'
Baillie Gifford's Mileva: Hargreaves Lansdown needs to 'grow up'
Baillie Gifford's Mileva: Hargreaves Lansdown needs to 'grow up'
blog comments powered by Disqus
Back to Top
Trustpilot

 

  • Contact us
  • Marketing solutions
  • About Incisive Media
  • Terms and conditions
  • Policies
  • Careers
  • Twitter
  • LinkedIn
  • Newsletters
  • Facebook
  • YouTube
  • Instagram

© Incisive Business Media (IP) Limited, Published by Incisive Business Media Limited, New London House, 172 Drury Lane, London WC2B 5QR, registered in England and Wales with company registration numbers 09177174 & 09178013

Digital publisher of the year
Digital publisher of the year 2010, 2013, 2016 & 2017