Performance of index over 1 month
Source: FE Analytics
With many UK funds exposed to Swiss companies such as Roche, Novartis and Nestle, particularly in the Equity Income space, there was some immediate worry these funds could see further pressures in what has been a shaky start to the year for the popular sector.
Less than one in three funds in the sector and only one in ten funds in the IA All Companies sector are up so far this year.
While the dust has yet to settle on the swift action by the SNB it is clear that the collective £25bn – much of it from income hungry investors - managed by FE Alpha Managers Neil Woodford (pictured) and Mark Barnett actually took a boost from the fall thanks to their conviction bets on Swiss Pharmaceutical giant Roche.
In Woodford’s £4.2bn CF Woodford Equity Income fund, the stock represents 3 per cent of the total portfolio. Barnett, meanwhile has 5.6 per cent of his £12.6bn Invesco Perpetual High Income fund in Roche, 4.51 per cent of his £6.6bn of Invesco Perpetual Income fund and 3.8 per cent of his £1bn Invesco Perpetual UK Strategic Income fund.
The stock plunged on the SNB’s news as its share price fell 8.6 per cent in a matter of hours and has continued to move lower in this morning’s trading; bringing its losses to almost 10 per cent.
However, as Woodford and Barnett’s exposure to the Swiss franc is unhedged, the value of their Roche holdings has increased by almost three per cent.
While this has not been the only driver of returns over this very short period, the graph below shows how it has helped outperformance for all five funds compared to the FTSE All Share.
Performance of funds and index since 15 January
Source: FE Analytics
A spokesman for Woodford says last week’s events are a pertinent example of how currency exposures can have a meaningful impact on a portfolio’s performance and that the manager will be sticking with Roche due the fundamental strength of the business.
“Ultimately, the investment case for Roche remains very attractive, despite the short-term turmoil. It is a great business and its valuation is very appealing, particularly in yield terms,” he said.
“Roche is expected to pay a dividend in March 2015 - it only pays out once a year - of CHF 8.20, putting the shares on a yield of 3.3 per cent, at the time of writing. This looks like an attractive return, especially when compared to the Swiss 10 year Government Bond yield of negative 0.01 per cent. From a UK sterling investors perspective, that dividend just became a lot more attractive.”
The spokesperson adds the fund’s marginal gain, despite the pandemonium in the currency markets, was symptomatic of the team’s wider views on sterling.
“Our policy is to hedge currency exposures unless we have a strong investment view that sterling will weaken in the medium-to-long term against a particular currency, which would thereby be to the portfolio’s benefit.”
“That is the case currently – since the fund’s launch, we have been convinced that sterling would weaken against most major currencies, but particularly against the dollar and the Swiss franc. All of our currency positions have therefore been unhedged.”
Further, the spokesperson says moves such as these usually play out over a longer period of time with last week’s impact on investors “unusually extreme,” reflecting the severity of the market’s miscalculation of the of the SNB’s intentions.
While Woodford and Barnett will be pleased with the effect of last week’s turmoil, the strength of the volatility brings into question the effect of currency positioning on investors’ portfolios, a dynamic mostly overlooked by all but the professional investor.
James Stanton, head of foreign exchange at the deVere Group says last week’s events “herald the start of a new currency war”.
“Due to the enormity of this tide shift and the scope of volatility it has generated, we expect that turbulence is here to stay for a while yet,” Stanton said. “Investors cannot and will not shrug off what has happened over night; the undercurrent of volatility will last for weeks as the markets gradually readjust.”
“The SNB’s shock ditching of the cap has triggered a significant flight to safety, as the once-assumed ‘safety’ of the Swiss Franc is eradicated. The dollar will make significant gains as investors plough into the world’s safe havens.”