The dollar has been plummeting against other currencies so far in 2025. For example, it is down 7.7% against the pound year-to-date. This has created a scenario where non-US investors have been able to make better returns elsewhere, while US investors have also been paid to send their money overseas.
For instance, the S&P 500 has gained 10.3% so far this year in dollar terms, but is up just 1.9% when this is converted into sterling, far below what many domestic investors have come to expect. For US investors, the inverse is equally pronounced: the FTSE 100 has gained 14.9% in pounds but is up a whopping 24.4% in US dollars.
Nersen Pillay, senior investment director at W1M (formerly Waverton), said a weaker dollar at the same time as a resurgent UK market is “rare” but “can happen”, as has been the case so far in 2025.
While his funds have some natural hedging towards this through its sterling exposures in the bond, real assets and absolute return components, it is exposed elsewhere, such as in equities, where the high US weighting has impacted gains so far this year.
“We seek to buy the stocks we consider most attractive regardless of geography”, he said, defending the large US weighting but acknowledging “the rare occurrence of UK equities outperforming US equities and a weak US dollar” as a headwind to performance.
To mitigate this stock-market and currency phenomenon, he has taken an unusual 0.05% hedge, built specifically for the purpose.
The option means that if the dollar falls by 5% and FTSE outperforms the S&P by 5%, the position would go up by around 39%. It is even better in more catastrophic scenarios. If the dollar fell by 15% and FTSE outperformed the S&P by 15%, the position would go up 2,678%, he said.
“Allocating just 0.05% of our equity exposure to get this protection seems a small price to pay if we see both material weakness in the dollar and UK equity outperformance of US equities over the course of the next year,” said Pillay.
However, he stressed that this trend continuing for a short time would “not present a significant problem” as over the long term it will “come out in the wash” – meaning it will look insignificant the further into the future we get away from these conditions.
Still, he said: “We are not trying to make short-term currency or stock calls and are not driven by performance in a month or a quarter, but we do need to be able to mitigate potentially sustained currency and equity-market moves, should they go against our positioning.
“One choice is to be passive and let portfolios take the rough with the smooth, but where we can use strategies to give portfolios valuable protection without significant cost, there can be a significant benefit for investors."