How the falling pound can boost returns for globally diversified investors


Data shows the S&P 500 has returned 61.87% in pounds sterling since 1st July 2016, even though the index made a gain of 48.26% in dollar terms, a difference of 13.61 percentage points.

While sterling denominated assets outperformed across all the major investment markets over the same period, the greatest divergence in returns was found in China, where sterling investors would have seen a return of 62.30%, compared to a dollar return of 48.66%, a difference of 13.64 percentage points.

Even when analysing the major indices over the last year, the boost in returns caused by the falling pound is pronounced, with some markets producing a loss in local currency terms compared to a gain in sterling returns. For example, over this one year period emerging markets delivered a gain of 3.09% in sterling, whereas its dollar equivalent produced a loss of -6.68%. A similar trend was found in the Topix index, one of the main markets in Japan, where it returned a loss of -10.79% for Japanese yen investors while the same index returned 2.25% in sterling terms.

Sterling has fallen to new lows as a no deal Brexit weighs on the currency. In 2019 sterling has been the worst performing major currency globally, meaning that any overseas investment’s value is enhanced thanks to the exchange rate.

As a result, over one month, three month, year-to-date, one year and three year periods, sterling returns outperformed returns from the local currencies across every major market index.

The analysis illustrates the benefits of holding a globally diversified portfolio. Currency movements around the world have a significant impact on investment returns, so spreading a portfolio across different regions helps to protect against a big decline in one currency, and can deliver additional gains when the domestic currency falls.

Returns since EU Referendum

 

  MSCI AC World ($) S&P 500 ($) FTSE All Share (£) Europe (ex UK) (€) Emerging Markets ($) Asia (ex Japan) ($) Topix (¥) China ($)
Sterling 52.28 61.87 31.95 42.43 46.14 48.71 38.52 62.30
Local currency 39.49 48.26 31.95 30.17 33.85 36.21 34.28 48.66
Difference 12.79 13.61 0.00 12.26 12.29 12.50 4.24 13.64

  *Source: Quilter Investors, Percentage returns since 1st July 2016   Returns since summer 2018

 
    MSCI AC World ($) S&P 500 ($) FTSE All Share (£) Europe (ex UK) (€) Emerging Markets ($) Asia (ex Japan) ($) Topix (¥) China ($)
Sterling 16.66 25.85 4.24 7.40 3.09 5.34 2.25 0.70
Local currency 5.59 13.91 4.24 4.84 -6.68 -4.66 -10.79 -8.85
Difference 11.07 11.94 0.00 2.56 9.77 10.00 13.04 9.55

   *Source: Quilter Investors, One year percentage returns up to 31/07/2019

Sacha Chorley, portfolio manager at Quilter Investors, commented:

 “When your own currency weakens the natural instinct is often to assume this will have a negative impact on your investment portfolio. As this analysis shows that isn’t always the case and in fact it can be beneficial for globally diversified investors. While the pound has fallen rather spectacularly as the threat of a no deal Brexit looms large, investors with sterling denominated overseas assets have enjoyed a ‘Brexit boost’ to their returns.

“What this data does show is that it is crucial investors don’t have a home market bias, and instead look to diversify their portfolios with a healthy allocation to global equities. Just as international companies offer exposure to a diverse range of business opportunities, international currency exposure can offer exposure to a wide range of economic opportunities and help reduce unintended domestic biases. As proven, the difference in returns can be hugely significant.

“There is scope for the pound to fall further in the event of a no deal Brexit, so investors should use this time to ensure they are positioned appropriately. It is tempting to invest in what you know and stick to the UK, especially if you think there will be a deal with the EU, but it is clear that diversifying across several regions is key.

“It is important to add that a stronger pound would have the reverse effect. If the pound were to become more valuable relative to other global currencies, sterling investors holding overseas stocks would experience the opposite impact. The key then is to ensure you’re always globally diversified to balance your exposure to multiple different currency movements.”  

 

Notes to Editors: Quilter Investors is part of Quilter plc. It provides multi-asset investment solutions designed for advised clients in the UK and internationally and manages £19.2 billion on behalf of its investors (as at 31 March 2019). Quilter plc is a leading wealth management business in the UK and internationally, helping to create prosperity for the generations of today and tomorrow. Quilter plc oversees £114.9 billion in investments (as at 31 March 2019). It has an adviser and customer offering spanning: financial advice; investment platforms; multi-asset investment solutions; and discretionary fund management. The business is comprised of two segments: Advice and Wealth Management and Wealth Platforms. Advice and Wealth Management encompasses the financial advice business, Quilter Financial Planning; the discretionary fund management business, Quilter Cheviot; and Quilter Investors, the Multi-asset investment solutions business. Wealth Platforms includes Old Mutual Wealth UK platform; Old Mutual International, including AAM Advisory in Singapore; and the Old Mutual Wealth Heritage life assurance business. The Quilter plc businesses are being re-branded as follows: 

  • Quilter Financial Planning (previously Intrinsic)
  • Quilter Private Client Advisers (previously Old Mutual Wealth Private Client Advisers)
  • Charles Derby Group (becoming Quilter Financial Advisers)
  • Quilter Financial Adviser School
  • Quilter Cheviot
  • Quilter Investors
  • Old Mutual Wealth (becoming Quilter Wealth Solutions in 2020)
  • Old Mutual International (becoming Quilter International in 2020)

Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back any of the amount originally invested. Because of this, an investor is not certain to make a profit on an investment and may lose money. Exchange rate changes may cause the value of overseas investments to rise or fall. This communication is issued by Quilter Investors Limited (“Quilter Investors”), Millennium Bridge House, 2 Lambeth Hill, London, United Kingdom, EC4V 4AJ. Quilter Investors is registered in England and Wales (number: 04227837) and is authorised and regulated by the Financial Conduct Authority (FRN: 208543). This communication is for information purposes only. Nothing in this communication constitutes financial, professional or investment advice or a personal recommendation. This communication should not be construed as a solicitation or an offer to buy or sell any securities or related financial instruments in any jurisdiction. No representation or warranty, either expressed or implied, is provided in relation to the accuracy, completeness or reliability of the information contained herein, nor is it intended to be a complete statement or summary of the securities, markets or developments referred to in the document. Any opinions expressed in this document are subject to change without notice and may differ or be contrary to opinions expressed by other business areas or companies within the same group as Quilter Investors as a result of using different assumptions and criteria. This communication is for investment professionals only and should not be relied upon by retail investors.



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