A Portfolio with Global Intelligence
The last 10 years have delivered varied returns for investors in stocks, bonds and other assets, largely dependent on the unfolding of economic and policy events.
Last Wednesday, the Supreme Court of Nigeria upheld President Buhari’s 2019 election victory, in reaction to a challenge by the Opposition leader, questioning the President’s eligibility for the post. Nigeria’s ASI responded by advancing 2.3% week-on-week.
At the other end of the spectrum, sentiments across global equities markets strengthened, buoyed by an easing of trade tensions between the United States and China. Leading the gainers W-o-W were: Japan’s Nikkei 225 (3.7%); South Africa’s FTSE/JSE index (2.8%), and Hong Kong’s Hang Seng index (2.5%)
Yet volatility across global economies and markets is expected to continue, thanks to unpredictable US-China trade spats, a drop in oil prices, fiscal and monetary policies, and political tensions.
How do investors position their portfolios to tap into the gains to be had in local and international markets, at any point in time?
In this article, we explore why a broader portfolio diversification strategy – adding a foreign currency component by investing in foreign currency denominated assets – should be considered in the current global financial environment.
Plan. Protect. Grow: Multi-Currency Portfolios
As part of their funds management process, investors will traditionally hold a combination of equities and bonds in their portfolio for diversification purposes. The objective is to hedge against a potential economic downturn so that bonds continue to pay interest if equities lose value.
However, this diversification strategy in equities and bonds alone may not be enough to protect an investment when economic conditions deteriorate, and inflation begins to erode the value of the currency. In this scenario, the interest on bonds will not adequately compensate for the capital loss on an equity investment.
Depending on your investment objectives, the inclusion of different currencies to your portfolio can add diversification and balance.
Investment Vehicle: Foreign Currency-Denominated Fund
One of the ways that global diversification and handsome returns can be achieved is through a foreign currency-denominated Mutual Fund, containing a mix of fixed income securities (Eurobonds, foreign currency treasury bills and commercial papers – circa 75% of the portfolio), attractively priced term deposits, and foreign equity instruments.
Potentials For Gain
Risk Diversification: A foreign currency diversified portfolio mitigates investment risk by allocating capital across a diverse range of foreign currency assets in order to shield against concentration risk, and provide better risk-adjusted returns
Income generation: As well as providing excellent hedging against exchange rate risk, the portfolio is commonly actively managed to provide a compelling combination of liquidity, low volatility and attractive returns.
AVERAGE YIELD (US$) | 2017 | 2018 | YTD 2019 |
Multi-Currency Portfolio | 6.52% | 7.43% | 7.02% |
Capital protection: In addition to maintaining a low correlation with other asset classes, currencies also have low correlation with each other. It or example, as the Euro moves up against the Yen, another currency may move down or vice versa. Clearly, the benefit of investing in more than one currency can have a positive risk-adjusted return over any single currency.
Conclusion
The political arena, economic standing and currency performance of both your home country and any country you choose to invest in can heavily impact your returns. At a basic level, multi-currency investments can help offset the poor performance of your local currency. Build your portfolio around your goals, not necessarily your risk tolerance, by using three key strategies – liquidity, longevity, and legacy. This allows you not to take on too much risk, or too little risk, but the right amount of risk.
*Disclosures: This material does not provide individually tailored investment advice. It has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. ARM Investments (ARMI) advises investors to independently evaluate particular investments and strategies, and seek the advice of a financial advisor or wealth manager. The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives.
