Following Brexit, many pension schemes benefited considerably by a lack of currency hedging. Potentially in isolation, as other Brexit related factors may have negatively impacted funding levels. The depreciating pound meant that overseas equities which were not hedged against sterling gained around 7%-8% on currency movement alone. The majority of this would be attributed to the dollar movement.
This tended to be due to a lack of proactive advice, rather than a tactical masterstroke as many schemes historically have not really thought about currency hedging. Post Brexit the majority of investment advisers have brought currency hedging to the table, and if they haven’t they should be. The argument being that the 7-8% gain would be lost should the pound dollar rate revert to more long term levels. With the Brexit uncertainty, the general feeling was to hedge your bets, and to implement a 50% currency hedge. Or hedge your hedge, so to speak!
This conversation should not be limited to your passive equity mandates. The currency movement will have also impacted DGFs who have made good or bad tactical calls. It is important that trustees understand how their DGFs are positioned, and test the benefit (or not) of the active management.
There was very much a feeling at $1.20 that there was more room to go up, than down and some trustee boards who were more tactically inclined may have gone further (I will not comment on the appropriateness, or not, of short term market plays with a trustee hat on) and set up a higher hedging level.
We sit this morning with a dollar rate of $1.43 and it strikes me that trustees should be checking two things:
- Does your dollar hedge decision remain appropriate? Especially if you have made a short term call.
- Have you set your hedge to rebalance? Or are you in a blended fund which naturally rebalances? If the answer to both is no, then your original hedge will now undoubtedly have moved as the hedged allocation protects against the currency movement. If you fail to rebalance this, and sterling depreciates, you will have lost recent gains.
Therefore, it is worth trustee boards having a quick sense check of what they have, to make sure they bank gains (if they want to) and continue to have a balanced portfolio.
However, on a cautionary note I am booked to go to the States in June, and sod’s law dictates that sterling will fall!