Global financial markets that seem to move together in one direction or another based on the decision of central bankers or the latest shift in macroeconomic trends make it difficult to find sources of real diversification.
The search for effective alternative investments, offering markets deep enough to enter and exit with ease, may seem challenging. Andreas König, Portfolio Manager of Pioneer Investments’ Absolute Return Currencies strategy, believes currency markets can provide exactly that.
“It’s by far the most liquid and biggest capital market in the world with $5 trillion turnover a day,” says König. “Sometimes that [liquidity] is plentiful and sometimes it is less so, but in the end it still tends to be very flexible and transaction costs are likely to be low.”
Currencies are certainly influenced by big economic and political global events that affect equity and fixed income markets. But they can offer true diversification from stocks, bonds and other investments over time.
“In risk off times, we’ve seen correlations go up, and currencies are there as well,” says König. “But over the longer term, they are lowly correlated to almost all other asset classes – e.g. commodities, equities, fixed income, money markets or real estate.”
Most investors look at currency markets from the worlds of global equity or fixed income. They have existing currency exposure in their investments, and need to decide what to do with it. Many will hedge it, some will do nothing and some will actively manage currencies to enhance performance.
Pioneer Investments’ Absolute Return Currencies strategy approaches the FX market from a different angle. There is no benchmark and no predefined currency exposure. The managers invest only when they see opportunities in the market. They can invest globally in any freely and non-freely convertible currency.
König believes this is an ideal time for certain investors to consider currency strategies as alternatives because many investors search for diversification, low correlation, flexibility and deep liquidity. There are opportunities in currencies he says. “We see more and more interest.”
Some investors worry over currency market volatility, but König points out that currencies tend to be subject to less volatility than many other asset classes, including equities.
“In historical terms, currencies move on average with 11 percent volatility, roughly half the volatility of equities,” he says. “Many people feel comfortable with 20 percent equity volatility, but they are afraid of FX volatility.”
Pioneer Investments’ Absolute Return Currencies strategy seeks to deliver a gross annualised return of EONIA + 5%-7% over a rolling three-year timeframe1. It typically holds 10 to 20 positions at any given time, and historically has placed 200 to 500 trades per year.
In times of higher volatility, the depth of FX markets can make it relatively easy to enter or exit fast. Low transaction costs can provide flexibility and tend to make those moves or related option strategies cost-effective.
Managers like König welcome some volatility to create trading opportunities.
“In 2014 and 2015 we had clear themes,” he says. “It was a weak euro, a strong dollar, a weak Japanese yen and pressure on EM and commodity currencies. Now I would say we’re in a bit more of a range. I believe that most of the big dollar bull market is over.”
Disclaimer: Unless otherwise stated all information and views are as at 29 April 2016 and are subject to change at any time. There can be no assurances that countries, markets or sectors will perform as expected. Diversification does not guarantee a profit or protect against a loss.
This content of this document is approved by Pioneer Global Investments Limited (“PGIL”). In the UK, it is approved for distribution by PGIL (London Branch), Portland House, 8th Floor, Bressenden Place, London SW1E 5BH. PGIL is authorised and regulated by the Central Bank of Ireland and subject to limited regulation by the Financial Conduct Authority. Details about the extent of our regulation by the Financial Conduct Authority are available from us on request. Pioneer Investments is a trading name of the Pioneer Global Asset Management S.p.A. group of companies.
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