The Case For Active Currency Management

November 05, 2015

This article is part of a regular series of thought leadership pieces from some of the more influential ETF strategists in the money management industry. Today’s article features Tyler Mordy, president and chief investment officer of Toronto-based Forstrong Global.

An old Japanese proverb states that “many a false step was made by standing still.” So it is with currency exposures in investor portfolios.

Consider the recent experience of Brazilian, Russian and even Canadian investors, to name a few countries with steeply depreciating exchange rates. By electing to remain invested in their domestic currency, they have all experienced a steep “loss” in their own global purchasing power, even if nominal values held up. An ostensibly conservative position has cost them dearly.

Welcome to the new, hyperglobalized world. Since the financial crisis, unorthodox policies—with central banks trying to outdo the effects of one another by plunging into a subterranean universe of quantitative easing and negative interest rates—have driven currency volatility much higher.

Now, capital has a way of swiftly seeking out safe harbors and penalizing others who are not safeguarding their national currencies. Who would have thought that the once-august Swiss franc would lose its safe-haven status?

Indeed, currency exposures are having an outsized impact on portfolio returns. Currency-focused ETF vehicles could not have arrived at a better time, introducing yet another evolution in the portfolio management process. Today gaining global currency exposures is as easy as buying stocks.

Beyond The Academic View

Should investors respond or simply stand still? After all, the academic view has treated active currency management with an almost mythical disdain. Traditional thinking teaches that, rather than dive into the ethereal world of currency analysis, one should recognize that currency changes “wash out” over time and not try to actively manage them.

That’s true. Currencies do mean-revert to their fair values over very, very long periods—in many cases, on a 20-year-or-more time horizon. But almost all investors don’t have the luxury of these lengthy time horizons.

That said, can investors penetrate these mysteries and do better than this? To leapfrog over 750 or so well-chosen words, we suggest the answer is a strong “yes.”

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