Analysis: Currency hedging takes on new importance for global stock funds
22/03/2015 05:00
By David Randall
NEW YORK, March 22 (Reuters) - As the dollar surged in the
last 12 months, David Marcus, head of the Evermore Global Value
fund EVGBX.O , steadily increased his stake in Europe. He now
has 60 percent of his portfolio invested in companies in the
euro zone, the largest stake among any global fund tracked by
Lipper.
The gains in those stocks wouldn't matter if the fund wasn't
actively hedging against euro weakness, which it is, helping the
fund rise 8.8 percent so far in 2015, putting it among the
top-performing global stock funds this year.
"We're stockpickers, and by hedging currencies we can be
pure stockpickers without the currency risk," said Marcus.
Concerns over currency have prompted a surge of assets to
hedged equity funds, with investors moving $12.1 billion to
exchange-traded funds that hedge currencies over the year to
date, according to Lipper data. One such fund, the WisdomTree
Hedged European Equity fund, is up 18.9 percent for the year so
far.
Demand for a way to hedge currency exposure while investing
in Europe helped the WisdomTree Europe Hedged Equity Fund
HEDJ.P bring in $5.3 billion in new assets over the first two
months of the year, the most of any equity fund, according to
Lipper.
The fund's top holdings include Anheuser-Busch InBev NV
ABI.BR , Telefonica SA TEF.MC , and Daimler AG DAIGn.DE .
Following behind it was the Deutsche X-trackers MSCI EAFE
Hedged Equity DBEF.P , with $2.7 billion in new assets. The
fund tracks an index of developed-market equities outside of the
United States and Canada, and has its largest positions in
Nestle SA NESN.VX , Novartis AG NOVN.VX , and Roche Holding AG
ROG.VX .
The dollar's rally looks to be eating into the returns of
actively managed funds, fund analysts say. While major stock
indexes in Japan, Germany, and France are up 11 percent or more
in local currency for the year to date, the average global fund
is up just 2.6 percent in dollar terms over the same time,
according to Lipper data.
Investors have few ways of knowing whether a global fund
hedges its currency exposure. Lipper has no way of tracking it,
said Jeff Tjornehoj, head of Lipper Americas Research, a unit of
Thomson Reuters. Morningstar MORN.O , another fund tracking
service, does not track currency hedges either, according to a
spokeswoman.
Fund returns this year suggest most global funds do not
hedge against currency risk, even though most are allowed to do
so. The difficulty of getting such a move correct keeps managers
from actively hedging.
"When you hedge a currency you have to be right twice. You
have to be right about the market, and right about the currency.
I'm not sure that's something one can do on an ongoing basis,"
said John Manley, chief equity strategist at Wells Fargo Funds
WFC.N .
The track record of the Evermore Fund shows the difficulty
with timing on currencies: Over the last three years, the fund
has posted an average annual return of 9.2 percent a year,
trailing 75 percent of its peers, according to Morningstar data.
This year, the Evermore Global has benefited from
significant gains in companies such as Belgian construction firm
CFE SA CFEB.BR , French conglomerate Bollore SA BOLL.PA and
Italian engineering firm Maire Tecnimont SpA MTCM.MI .
Marcus has been pulling back from investing in U.S.
companies that get a significant portion of their revenues in
Europe.
Lately, he has been adding to positions in companies such as
German materials company ThyssenKrupp AG TKAG.DE , best known
for making elevators. The cheaper euro will likely boost its
exports, while lower energy costs will amount to "found money,"
he said.
(Reporting by David Randall; Editing by Chizu Nomiyama)
((David.Randall@thomsonreuters.com; 646-223-6607; Reuters
Messaging: david.randall.thomsonreuters.com@reuters.net))
Keywords: DOLLAR GLOBALFUNDS/