MAB-Quarterly-Review-Q2-2025-Cautious - Flipbook - Page 9
Currencies
Currency markets are another area where there
is a well populated graveyard of managers who
have lost their shirt trying to make bold calls on
the direction of currencies. Recall, entering this
year, it was the well-held conventional wisdom that
President Trump’s pro-US policy agenda would
mean the US Dollar would reign supreme. However,
mid-way through 2025, the Dollar is one of the
worst-performing developed market currencies
globally. The US Dollar has depreciated against the
Pound by nearly 10% this year. At YOU, we approach
currencies somewhat differently. All the Funds’
equity exposures are “unhedged”, which means, for
example, that with our US equity exposure, we also
get exposure to the US Dollar, our Japanese equity
exposure also brings exposure to the Japanese Yen,
and our European equity exposure provides some
exposure to the Euro. As a result, alongside equity
market diversi昀椀cation, we also achieve multiple layers
of diversi昀椀cation from global currencies. This does
mean that when the US Dollar is weak, the returns
from our US equity exposure are depressed in Sterling
terms. However, we also recognise that US Dollar
weakness is also typically good for Emerging Markets,
which your Fund also has meaningful exposure to.
For example, in a period of US Dollar weakness, the
MSCI Emerging Market equity index was up +5.5% in
Sterling terms this quarter.
Within our Fixed Income component, we also
have exposure to some local Emerging Market
Government Bonds. These assets also tend to bene昀椀t
from US Dollar weakness and, indeed, our holding
in the Morgan Stanley Local Emerging Market Debt
Fund was up +8.5% over the quarter and is up more
than +14% over the year to date. Not only did we
believe that local Emerging Market debt was offering
an opportunity that was attractive in its own right
(currently providing a substantial running yield) but,
from an overall portfolio construction perspective, we
were attracted to the diversi昀椀cation bene昀椀ts it should
provide against other parts of the portfolio whenever
the US Dollar is weak. We also have an exceptional
team managing this exposure, which is not an asset
class one wants to manage passively.
Absolute Return
For our Absolute Return component, we use funds that
“hedge out” their currency exposure back to Sterling.
This means that our Absolute Return exposure reaps
the signi昀椀cant bene昀椀t of the diversi昀椀cation these
strategies provide without being subject to the
whims of the currency markets. This approach has
meant this component has delivered a return of over
5% in Sterling terms this year in a pattern which has
little to no sensitivity to the equity market gyrations.
Such a return is again attractive in its own right, but
the “anchor windwards” nature of the return stream
has been particularly helpful in mitigating our own
drawdowns in periods like the tariff-induced market
sell-off observed in April.
Conclusion
Predicting government policy or the outcome
of major geopolitical events and their impact on
markets is not our primary focus. Instead, we focus
on ensuring your Fund has exposure to a broad range
of attractive investment opportunities in different
asset classes and different regions that will, over the
long term, deliver you an attractive level of return
commensurate with your chosen risk pro昀椀le. Sticking
to this disciplined strategy is one that has served us
well over the long term and saved us from making
the mistake of succumbing to the ever-present,
troublesome newspaper headlines.
Instead, our focus is on tilting your portfolio towards
the very best return opportunities we see globally,
like those we currently observe within Japanese
equities and local Emerging Market Debt, as well as
ensuring you are in the hands of the very best fund
managers we can identify within each asset class.
We will also tilt your portfolio away from strategies
where we believe risks may be elevated, like we
currently observe in passive exposures in Emerging
Markets. We will always strive to deliver you a highly
diversi昀椀ed return stream. Making bold calls in and
out of markets can sometimes be lucky enough to
work over short periods, but this quarter provided a
fantastic reminder of its dangers and reinforces why
we adhere strictly to the disciplines that have served
us and our clients well over the last 20 years.
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