Surprise yen strength polarises fund buyers

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Surprise yen strength polarises fund buyers

A renewed surge in the yen has produced a divergent set of reactions from fund buyers as they wrestle with how best to access Japanese equities for clients.

The Bank of Japan (BoJ) took markets by surprise earlier this year when it introduced negative interest rates as part of its latest stimulus package, partly in a bid to keep the yen down.

The strategy has failed to pay off so far, as factors including a falling US dollar and the yen’s renewed status as a safe haven instead push the currency upwards.

The yen has strengthened by 12.9 per cent year to date in sterling terms, hurting investors whose use of hedged share classes means they are effectively betting on the yen to depreciate.

However, F&C’s Rob Burdett said the 2016 leap had left him more convinced that the yen was set to weaken in future.

As a result, Mr Burdett and co-manager Gary Potter are beginning to materially increase their hedging.

“On balance, we think it likely that [the yen] weakens from here, possibly triggered by some action by the BoJ.

“On average, across each of the 10 products we run, the yen exposure is approximately one third hedged. We were 30 per cent hedged and are moving to 50 per cent.”

But others are considering the opposite. James Calder, research director at City Asset Management, said he was in the process of reconsidering a decision made two years ago to hedge his Japanese equity exposure.

He said: “We are reassessing our position on Japan. We have been hedged because we thought that things would align for the currency to go down.

“For some reason [the yen] still seems to be a safe-haven currency. When things go wrong or markets take a tumble, the yen rallies.”

The opposed reactions have highlighted how controversial the currency call has become among fund buyers, complicating their ability to access a Japanese market that is still viewed by many as one of the best prospects for equity investors.

Ryan Hughes, a fund manager for Apollo Multi Asset Management, said this year’s reversal had not affected his currency decisions.

“We bought hedged share classes two years ago to make sure our positions were 100 per cent hedged,” he said.

“We have been completely hedged... and expect to remain completely hedged.”

Mr Hughes noted that while this strategy could provide a drag on performance, he still expected further stimulus from the central bank.

“I have given up speculating [on BoJ decisions] because the market keeps guessing, and guessing wrong,” he added.

“But they have to do something. I would expect them to do something and it could come as soon as next month.”