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A sterling job?

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6 September 2019

David Prosser discusses the impact of exchange rates and how the AIC’s Global sector could offer attractive opportunities.  

The Global sector of the investment companies industry has been the place to be since the UK voted to leave the European Union three years ago. The average fund in the sector has delivered more than twice the returns of its UK stock market-invested equivalent.

The devaluation of the pound has been a crucial part of that story. With sterling now worth close to 20 per cent less against the dollar and the euro than prior to the EU membership referendum, funds invested in non-sterling assets have enjoyed a significant boost when translating their returns back into pounds.

However, not all Global sector investment companies are affected in the same way by exchange rate volatility – because not every fund in the sector has the same exposure to overseas assets. Indeed, data published in recent days by the investment companies analysis team at Stifel reveals a remarkable disparity between the 25 or so funds in the sector.

At one end of the spectrum, funds including Henderson International Income, AVI Global and Scottish Mortgage are almost entirely invested in non-UK assets, with less than 5 per cent of their portfolios held in the UK. At the other, Majedie, Lindsell Train and Law Debenture are currently almost 80 per cent invested in the UK.

Clearly, the first of those groups will be much more significantly affected by further moves in the value of sterling than the latter. The greater the proportion of your portfolio held in non-sterling assets, the more that exchange rate movements will impact on your performance.

Some of that impact may be reduced – for better or for worse – if fund managers choose to hedge currency exposure. In practice, however, Stifel says this is relatively rate in the Global sector. It picks out RIT Capital Partners as an exception, since it actively invests in order to manage currency exposure, while a few other funds, including JPMorgan Global Growth & Income employ more passive hedging strategies.

Still, the Stifel research is a reminder for advisers and investors that no two funds are the same. For those convinced that the current political impasse will end in a no-deal Brexit, with further negative implications for the value of the pound, the Global investment companies sector may offer attractive opportunities – but not every fund in the sector will feel the benefit equally.

Similarly, while a more consensual Brexit – or even a delay to the UK’s departure from the EU – would be likely to have positive implications for sterling, that wouldn’t be detrimental to every fund in the Global sector. Six funds in the sector have at least half their portfolios invested in the UK according to Stifel.

The analysis underlines the need to look beyond broad sector classifications when choosing investment companies. Even within the confines of a single sector, the closed-ended industry offers a wide choice of different investment styles and approaches.

Importantly, investment company managers are active investors prepared to take a view on shareholders’ behalf, rather than charging active fund management fees for an approach that passively tracks a benchmark. That view won’t, of course, always be right. But this should be where managers earn their money.

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