A roller-coaster ride in the currency markets has led to a flurry of advisers seeking hedged share classes for the European funds they select.
The European Central Bank (ECB) has been trying to weaken the euro to help spur economic growth and the start of full-blown monetary easing this month has accelerated the decline.
This has led investors in European funds to move to share classes that hedge out the impact of currency fluctuations and thus mitigate the impact of a weaker euro on returns in sterling.
The single currency’s performance against sterling has been lacklustre, with £1 now worth ¤1.40 compared with just €1.25 three months ago.
The euro also plummeted against the dollar last week for the fourth week in a row, down to around $1.06 compared with $1.25 in December 2014.
The trend has already started in fund management, with Neil Woodford recently hedging his exposure to the euro.
Currency expert Kathleen Brooks, from Forex.com, said the $1.04-1.05 level appeared to be a “noted support zone on the way to parity for this pair”.
“But if this level is breached then we could see a sharper move that triggers a break below parity towards the 2001 highs of $0.98-0.96 [per euro].”
The drop – and the potential for more falls – has led to fund groups seeing a surge in interest for share classes that aim to remove the currency volatility.
JO Hambro Capital Management, which launched a hedged share class for its Continental European fund in November last year, said it had seen strong flows compared with its unhedged share class.
Gavin White, UK sales manager at the group, said Europe was “dominating clients’ thoughts at the moment”. He noted about 10 per cent of assets of the £1.4bn fund were already in the hedged share class.
JO Hambro has not been the only one to spot demand from investors for this product.
In 2013, Schroders launched hedged share classes for its Schroder European Alpha Plus and Schroder European funds.
Artemis has also seen rising interest in the hedged version of its European Opportunities fund. A spokesperson said: “The demand is a recent development. Investors were spurred on after the actions of the Swiss central bank and the ECB.”
In January, the Swiss National Bank removed the ceiling it had placed on the euro, which had kept its exchange rate pegged at ¤1 to SFr1.20 since 2011.
Investors who had opted for a hedged share class this year have been rewarded, said Mike Parsons, head of UK funds sales at JPMorgan Asset Management.
He said the hedged share class of the JPM Europe Dynamic ex UK fund had outperformed the unhedged share class by 8.5 percentage points so far this year.
The preference for hedged share classes is a trend that had already taken place for Japanese funds as investors tried to get ahead of plans to weaken the yen.
The Japanese currency has fallen dramatically since 2012 under the government’s quantitative easing programme.
It dropped from just less than ¥80 to $1 in 2012 to around ¥120 at the start of March.
However, Mr White noted the yen and the euro were at different stages in their cycles and now “there is a question mark over the yen”.
The trend has started to dissipate in recent months as investors debate whether the yen will fall much further.
Euro has further to fall against the dollar
The euro may have declined to lows against the dollar, but Roger Hallam, chief investment officer for global currencies at JPMorgan Asset Management, thinks it has further to fall.
He said the “powerful flows working against the euro in the near term will continue to weaken it”.
These “powerful flows” include US institutional investors, who are hedging their non-dollar exposure, and eurozone domestic investors, who are looking abroad for higher returns.
While he was confident the euro would continue to fall, he thought the outlook for the yen was uncertain. He noted the currency was cheap and Japan had improving fundamentals as its current account deficit had become a surplus.
However, the Bank of Japan is already aggressively easing its monetary policy and it could ease it further this year.