Currency considerations hit investment trusts

The Association of Investment Companies (AIC) said that, for example, currency fluctuations form a central part of investment strategy for The Bankers Investment Trust.

Alex Crooke, fund manager of The Bankers Investment Trust stated: "History tells us that currency exchange rates generally remain in fairly fixed trading ranges but on occasion events can transpire to violently wrench a currency into a whole new range. These big moves can create opportunities but are hard to directly profit from and it is better to think more about reducing the risk of loss from devaluation in a currency."

"We focus on sterling based returns from the regions we invest in, and over the long-term investors have benefited from a high exposure to non sterling equities. The impact of currency fluctuation forms a central part of our investment strategy, as recently with our overweight exposure to Japanese equities we have benefited from a re-rating upwards in the value of the Japanese yen."

As of 21 July, the trust had 11 per cent of its assets invested in Japan, its fourth largest geographic allocation according to WINS data.

The strength of the yen against sterling, however, has also caused difficulties for UK investors buying into Japan but longer-term the Yen could be a safe haven.

Alliance Trust also said management of its currency exposure is an integral part of this trust’s investment process.

George Renouf, director, investment strategy at Alliance Trust, stated: "Our in house economics team forecasts currencies on a six and 12 month basis and where we have a particularly high conviction about the future direction of a currency we would hedge that currency. For instance, in the spring, we took out a position to protect the value of some of our European assets since we believed the euro would weaken, as it has subsequently."

"Any decision to invest outside the UK has to be taken in the context of total return and should not just be based on returns in local currency. From the third quarter of 2008 through to the first quarter of 2009, the dollar has weakened substantially against sterling and therefore our relative underweight position in US equities has benefitted us not only from an equity perspective but from a currency perspective as well."

The trust has also been underweight the US for some time: as of 21 July 28 per cent of its assets were invested in North America, according to WINS data.

Foreign & Colonial Investment Trust is also cautious on the US dollar, believing it could weaken although its manager Jeremy Tigue expects emerging markets currencies to strengthen considerably against sterling as their economies out perform the UK.

Tigue stated: "In the last year the weakness of the pound has had a particularly big impact on our income. This has affected not just international companies but also several very large UK companies who pay dividends in US dollars."

When Foreign & Colonial Investment Trust reported its final results for 2008 in March, Tigue told Investegate that dividends denominated in dollars were likely to be most beneficial including those from emerging market companies which pay in dollars or whose currencies which are closely linked to it, as well as UK stocks paying dollar dividends such as BP and Royal Dutch Shell.

These continue to be the trust’s second and third largest holdings and as of 30 June BP accounted for 3 per cent of the trust’s assets and Royal Dutch Shell accounted for 2.7 per cent of its assets, according to Trustnet data.

Tigue continued: "The risk now is that after a period of sterling weakness other currencies, especially the US dollar, may weaken and this would reverse some of the benefit we have had in the last year. In the longer term we think many currencies in emerging markets are likely to strengthen considerably against sterling as their economies outperform the UK, in which case investors will get the double benefit of superior growth and a rising currency."