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What’s the role currency management plays? Almost every single portfolio has non-U.S.
stocks and non-U.S. bonds, and along with those securities comes exposure to currencies.
Sometimes that currency exposure is actively managed sometimes it’s not. From a fundamental
perspective, investing in currencies can be very, very powerful. What we’ve determined
is that fundamental value is a very powerful force drawing the exchange rate or the currency
price toward it. And for that reason fundamental investing in currencies is a very important
aspect of a portfolio. Many investors really don’t even pay attention to their currency
exposures that exist in their portfolios. They focus only on the stocks and the bonds.
Most investors actually look at the currencies from a very, very short-term perspective what’s
known as momentum driven type of framework, trying to anticipate where the exchange rate
will move over short-term horizons. We on the other hand take more of a fundamental
approach because we feel that that fundamental value is a very, very powerful draw on price
over time, and that’s really a tremendous benefit. In the end, we find that currencies
actually provide the opportunity to enhance return as price reverts to fundamental value,
and they provide a very, very powerful diversifier to the rest of the portfolio.
as well as leverage and may subject a portfolio to potentially dramatic changes (including
losses) in a portfolio’s value. Alternative investments commonly include the use of derivatives,
or investments where the investor does not own the underlying asset, but instead makes
a bet on the direction of the price movement of the underlying asset. Examples of derivatives
include options, swaps, futures and forward contracts. Derivatives are generally used
as an instrument to hedge risk but also can be used for speculative purposes. There are
various types of risks associated with derivatives such as market risk, liquidity risk, credit
risk, legal risk and operations risk. These investments are intended for sophisticated
investors who are willing to bear the loss of their entire investment and may not be
suitable for all investors. © William Blair & Company, L.L.C