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Justin Urquhart-Stewart on Currency Confusion

“That would have been a great investment- pity about the currency though”. I forget how many times I have seen a well constructed portfolio with all the attributes of diversification , invested across a range of asset classes, broadly spread around the globe, only to then finally come to grief because of the one factor many think they can have no control over – currencies.

For many investors, managing currencies is the imponderable factor. They go up and down, often erratically move against each other and there is little apparently that you can do about it. The phrase is often used (and often by me as a limp excuse) that trying to forecast currency movements is rather like trying to catch a falling knife. Trying to call a currency frankly is a mug’s game!

Obviously for most investors in the UK, they will be Sterling based and so an appreciation of the more exotic world of currencies would seem very far away. However, closer examinations of investments are likely to reveal quite a significant exposure almost unintentionally. Recent events would show some dramatic examples. For instance, the Japanese directly targeted devaluing the Yen, as has the Euro Zone. Additionally, many of the recently popular emerging markets have suffered sometimes near catastrophic falls as we have seen most notably with the Russian Rouble. Equally, the mighty ‘Greenback’ has been showing its strength as the world’s largest reserve currency and as the US economy has powered ahead, so the Dollar has gone with it. Thus, for Sterling investors, what can be a great added boon, can also be painful when all your Japanese gains are washed away by a sagging Yen. So… currencies are to be ignored at investors’ peril.

For many private investors trying to create your own currency hedging programme could be quite expensive and certainly time consuming. Even for most advisers, the opportunity of running a currency hedging and management programme is often beyond the capability of their systems and platform as well as their own particular expertise.

For some more adventurous investors (or are they just fool hardy?) there is always the “opportunity” of using one of the retail foreign exchange on-line trading platforms. Now for professional investors with experience, these have been an astonishing technological development. However, I have become concerned over the promotion for some of these platforms, often from overseas, which always sound very butch and enticing for the individual lured in to trade like the “professional”.

The adverts on some of the more specialist television channels portray both the slick and the beautiful against a background of exciting trading markets ready for you to participate in with the enticing goal of garnering trading profits alongside the investment banks with all their teams and capital. Beaches, babes and boundless riches are yours for the taking if you just sign up to the foreign exchange trading platform of dreams – or may they turn out to be nightmares.

To add some paraffin to this already heated conflagration, punters are often encouraged to increase their “get rich quick” odds by borrowing to further ramp up their bets in the hope of magnifying their gains – without necessarily appreciating the downside of this when the markets reverse and the punter is wiped out.

Ah but fear not… they have an answer to ‘protect’ you – the stop loss orders which people are often encouraged to take – for potentially another small fee. The effect of the stop loss though is to ensure that successful trades are capped, and although the downside may have been protected, the benefit of any such leverage would have been lost.

Actually, for many such platforms they don’t care as they just want the trading and their real benefit comes from the spread in the dealing trade which is why they often promote themselves as commission free – which is certainly not the same as free!

The reality – though – can be frightening, be they FX platforms or any other form of spread betting. The figures show that most of their clients lose their money, and thus they depend upon a constant replenishment of new clients to replace the burn outs. Figures from France indicate that nearly 90% of clients actually end up losing money and the average loss is around 11,000 Euro. Additionally, the figures seem to show that there was no correlation between trading experience and making money, and that those who carried on trading just saw their losses pile up higher!

Frankly, these on-line gambling sites are no more than that… but some slick advertising built around them adds an air of credibility and apparent strength. This industry encourages the worst aspects of “investing”. It is not investing but punting in an unregulated and dangerous world, which contributes little to the reputation of the investment sector, by enticing inexperienced customers into dangerous areas, and of course manages to avoid taxation which proper investors have to suffer when buying shares for real investing.

In my view, to run investment portfolios correctly and responsibly, currency management is essential. A well run portfolio may use currencies, even as a separate asset class in its own right, but an effective currency hedging programme to manage the volatility for portfolios is essential – especially for those needing the greatest protection such as personal injury or trust and charity portfolios.


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