Active Currency Management A portfolio’s total return can be largely impacted by currencies if an investor’s entry or exit point occurs at a time when the relevant exchange rates are at extreme levels. Given the unpredictable and volatile nature of currency markets, CIIC regards foreign currencies as a meaningful source of portfolio risk, which is best managed using a disciplined, valuation- based framework. CIIC also views certain currencies such as the U.S. dollar as a risk management tool that can help to offset equity risk given its safe haven characteristics combined with the pro-cyclical nature of our domestic currency. CIIC applies a mean reversion-based strategy that adjusts currency exposures by increasing exposures when cheap and reducing exposures when expensive – effectively “buying low and selling high”. Inputs that go into determining the long-term fair value of exchange rates include purchasing power parity (PPP), historical averages and productivity differentials. The desired currency exposures can be achieved through any combination of asset mix changes, holding foreign cash and hedging existing exposures using derivatives contracts. Signature’s integrated approach to portfolio management includes active currency management. The currency management strategy is not done in isolation, but forms a part of the overall risk management of a portfolio, taking into account, among other factors, the fund’s objective and mandate, as well as the correlation between different asset classes and currency movements. Taking the currency hedging decision in isolation of portfolio construction and investment decisions can have unintended and even counter-productive implications. Different mandates require different strategies. Given the differences between the global, domestic, yield, and fixed-income products, Signature employs individualized currency strategies for each of these fund types. Cambridge takes a fundamental approach to currency management. The objective of the strategy is to be a component of a larger risk management framework, and not a source of incremental returns. Fundamental currency exposure takes into account numerous factors, including company attributes (where revenue/costs/income are generated), commodity exposure and other factors that dictate how the market value of the portfolio fluctuates with currency movements. For fixed-income investments, Cambridge aims to hedge in order to protect coupons in Canadian dollars. For equity investments, the group identifies drivers of return sensitive to currency fluctuations and manages accordingly. Gross/net exposure is managed through security selection, cash management and currency forward contracts. Harbour recognizes that currency can be a major cause of unwanted volatility. As a result, the group uses currency hedging as a component of its portfolio strategies. Within the balanced portfolios, Harbour takes a more active and shorter-term approach to hedging, with the goal of volatility and risk reduction being paramount. Harbour’s equity funds are known for their longer-term, stock-picking approach. As such, the hedging policy within the equity funds is aimed at mitigating the effect of currency movement on the group’s stock selection, and tends to be longer term in nature. Harbour has a neutral hedge position of 50% for its Canadian funds. Black Creek takes a fundamental, company-specific approach to identifying sources of currency risk. Economic exposures to currencies in the portfolios are determined primarily based on underlying drivers of company cash flow and profitability. Black Creek looks at global currencies and compares them to the Canadian dollar on a purchasing power parity (PPP) basis and will act if the Canadian dollar is materially below PPP to an exposed currency. Black Creek manages that exposure by selling investments that are exposed to the higher valued currency, buying investments in areas of undervaluation, or using currency forward contracts to hedge when necessary. Understanding the drivers that contribute to a fund’s total return and volatility is fundamental in portfolio management. Risk/return cannot be effectively managed unless one knows how these drivers behave in relation to one another and how they aggregate from security to fund level. Currency is just one component of total return, but it interacts with numerous others in dynamic relationships. As a result, currency cannot be effectively managed in isolation from other components. Active portfolio management demands active currency management.
Welcome message from author
This document is posted to help you gain knowledge. Please leave a comment to let me know what you think about it! Share it to your friends and learn new things together.
Transcript
Active Currency Management
A portfolio’s total return can be largely impacted by currencies if an investor’s entry or exit point occurs at a time when the relevant exchange rates are at extreme levels. Given the unpredictable and volatile nature of currency markets, CIIC regards foreign currencies as a meaningful source of portfolio risk, which is best managed using a disciplined, valuation-based framework. CIIC also views certain currencies such as the U.S. dollar as a risk management tool that can help to offset equity risk given its safe haven characteristics combined with the pro-cyclical nature of our domestic currency. CIIC applies a mean reversion-based strategy that adjusts currency exposures by increasing exposures when cheap and reducing exposures when expensive – effectively “buying low and selling high”. Inputs that go into determining the long-term fair value of exchange rates include purchasing power parity (PPP), historical averages and productivity differentials. The desired currency exposures can be achieved through any combination of asset mix changes, holding foreign cash and hedging existing exposures using derivatives contracts.
Signature’s integrated approach to portfolio management includes active currency management. The currency management strategy is not done in isolation, but forms a part of the overall risk management of a portfolio, taking into account, among other factors, the fund’s objective and mandate, as well as the correlation between different asset classes and currency movements. Taking the currency hedging decision in isolation of portfolio construction and investment decisions can have unintended and even counter-productive implications. Different mandates require different strategies. Given the differences between the global, domestic, yield, and fixed-income products, Signature employs individualized currency strategies for each of these fund types.
Cambridge takes a fundamental approach to currency management. The objective of the strategy is to be a component of a larger risk management framework, and not a source of incremental returns. Fundamental currency exposure takes into account numerous factors, including company attributes (where revenue/costs/income are generated), commodity exposure and other factors that dictate how the market value of the portfolio fluctuates with currency movements. For fixed-income investments, Cambridge aims to hedge in order to protect coupons in Canadian dollars. For equity investments, the group identifies drivers of return sensitive to currency fluctuations and manages accordingly. Gross/net exposure is managed through security selection, cash management and currency forward contracts.
Harbour recognizes that currency can be a major cause of unwanted volatility. As a result, the group uses currency hedging as a component of its portfolio strategies. Within the balanced portfolios, Harbour takes a more active and shorter-term approach to hedging, with the goal of volatility and risk reduction being paramount. Harbour’s equity funds are known for their longer-term, stock-picking approach. As such, the hedging policy within the equity funds is aimed at mitigating the effect of currency movement on the group’s stock selection, and tends to be longer term in nature. Harbour has a neutral hedge position of 50% for its Canadian funds.
Black Creek takes a fundamental, company-specific approach to identifying sources of currency risk. Economic exposures to currencies in the portfolios are determined primarily based on underlying drivers of company cash flow and profitability. Black Creek looks at global currencies and compares them to the Canadian dollar on a purchasing power parity (PPP) basis and will act if the Canadian dollar is materially below PPP to an exposed currency. Black Creek manages that exposure by selling investments that are exposed to the higher valued currency, buying investments in areas of undervaluation, or using currency forward contracts to hedge when necessary.
Understanding the drivers that contribute to a fund’s total return and volatility is fundamental in portfolio management. Risk/return cannot be effectively managed unless one knows how these drivers behave in relation to one another and how they aggregate from security to fund level. Currency is just one component of total return, but it interacts with numerous others in dynamic relationships. As a result, currency cannot be effectively managed in isolation from other components. Active portfolio management demands active currency management.
This document is intended for advisor use only and is not a sales communication. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. ®CI Investments, the CI Investments design, Cambridge, Harbour Advisors and Harbour Funds are registered trademarks of CI Investments Inc. Signature Global Asset Management and Signature Funds are trademarks of CI Investments Inc. Published June 2016.
1606-1201_E (06/16)
2 Queen Street East, Twentieth Floor, Toronto, Ontario M5C 3G7 I www.ci.comCalgary403-205-43961-800-776-9027
Head Office / Toronto416-364-1145 1-800-268-9374
Montreal 514-875-00901-800-268-1602
Vancouver 604-681-33461-800-665-6994
Client Services English: 1-800-563-5181French: 1-800-668-3528
Active Currency ManagementMay 31, 2016
Current rates
CAD USD EUR JPY GBP
CAD 1 1.26 1.44 0.0118 1.83USD 0.80 1 1.15 0.0084 1.46EUR 0.70 0.9 1 0.0082 1.28JPY 85 106 122 1 156GBP 0.55 0.7 0.784 0.0064 1
Currency returns vs. CAD
YTD 1 Yr 3 Yr 5 Yr 10 Yr
USD -5.4 5.1 8.1 6.2 1.7EUR -3.1 6.5 2.6 0.9 0.3JPY 2.7 17.8 4.6 -0.1 1.9GBP -7.0 -0.4 6.3 3.5 -0.8
Fund StrategyForeign Content
(inc. Foreign cash)% foreign content
hedged to CADForeign currency
exposure after hedge Hedged currency
Portfolio Series Balanced Combined 76% 19% 62% USD & othersPortfolio Series Maximum Growth Combined 79% 16% 66% USD & othersPortfolio Select Series 40i60e Dynamic 37% 40% 23% USD & othersPortfolio Select Series 100e Dynamic 64% 40% 39% USD & others
Signature Global Bond Tactical 82% 0% 82% n/aSignature Corporate Bond Tactical 58% 69% 18% USD & othersSignature High Income Tactical 75% 34% 49% USD & othersSignature Diversified Yield II Tactical 82% 36% 53% USD & othersSignature Income & Growth Tactical 53% 38% 33% USD & othersSignature Global Income & Growth Tactical 94% 10% 84% USD & othersSignature Global Dividend Tactical 93% 12% 82% USD & othersSignature Select Canadian Tactical 52% 38% 32% USD & othersSignature Select Global Tactical 99% 11% 89% USD & others
Cambridge High Income Tactical 66% 56% 29% USD & othersCambridge Asset Allocation Tactical 53% 45% 29% USD & othersCambridge Canadian Dividend Tactical 24% 41% 14% USDCambridge U.S. Dividend Tactical 98% 7% 91% USDCambridge Global Dividend Tactical 80% 6% 75% USD & othersCambridge Canadian Equity Tactical 50% 29% 35% USD & othersCambridge American Equity Dynamic 100% 35% 66% USDCambridge Global Equity Tactical 91% 11% 81% USD & othersCambridge Growth Companies Tactical 84% 17% 70% USD & others
Harbour Growth & Income Tactical 31% 60% 12% USD & othersHarbour Global Growth & Income Tactical 69% 43% 39% USD & othersHarbour Fund Strategic 36% 86% 5% USD & others
Black Creek Global Balanced Tactical 83% 15% 70% USD & othersBlack Creek Global Leaders Tactical 95% 0% 95% n/aBlack Creek International Equity Tactical 98% 0% 98% n/a
* Source: RBC Investor Services, CI Investment Consulting
FOR ADVISOR USE ONLY – NOT FOR DISTRIBUTION TO CLIENTS
Related Documents
