Page 114 - DMGT549_INTERNATIONAL_FINANCIAL_MANAGEMENT

Unit 7: Management of Transaction Exposure

Notes

Caselet Team Work Plays Prime Part

F und managers are becoming increasingly aware that they need to take a view on
currency movements as well as on the prospects for bonds and equities.

John Stopford, a portfolio manager at UK fund management group Guinness Flight, is one
of a team which looks after the currency exposure of the group plus a range of onshore and
offshore currency and bond funds for retail and institutional investors. The team looks
after around $1.3bn of assets with a currency overlay.

“We have been managing currencies as a separate asset class from bonds and equities
since as far back as 1980s,” he says. “That means putting a currency overlay on all our bond
and equity funds. What is good for bonds and equities isn’t necessarily good for currencies.
So just because we have invested in US treasuries doesn’t mean we are in dollars to the
same extent.”

Frequently in recent years, currencies have been moving in the opposite direction from
the underlying asset class.
The decisions on currency strategy are taken by the entire team. “For us to have a reasonable
amount of success we feel it’s important to generate ideas internally,” says Mr Stopford.
The team has a disciplined process of quarterly, monthly and weekly meetings, during
which it looks at what Mr Stopford calls “Compelling forces – those key factors which we
think drive exchange rates over the medium and long-term.” Each month the factors are
“scored” by the team to help members reach a view on currency prospects.

“In the very long-term, currencies move to offset changes in competitiveness,” he says.
“Relative prices are important and while purchasing power parity doesn’t hold true all
the time, it does have an influence.” The team also considers other long-term factors such
as if a country runs a consistent currency account deficit.
But Mr Stopford says that “in the short-term, currencies can deviate quite a lot from their
long-term path.” The Guinness Flight team accordingly looks at factors which affect short-
term capital flows such as “short-term interest rates, real bond yields, direct investment
flows, whether the trade position is worsening or improving and whether central banks
are intervening.”

Chart patterns or technical analysis can also play a role in determining the team’s short-
term view as can non-economic factors such as policies. All in all, the scoring process
means that, according to Mr Stopford, “we might be wrong about individual factors but
on balance, hopefully, the totals are pointing in the right direction.”
The process also limits the tendency for managers to become involved in ceaseless dealing
activity. “We are strategic investors rather than traders and we add value by taking a long-
term view; we can’t out-trade the market,” says Mr Stopford.
Once the team has decided on its view, the appropriate funds will move in the same
direction (and at the same time). “Our dealing will be done using one of a number of city
financial institutions. For credit reasons, we spread the risk pretty carefully and we look
at pricing and quality of research.”
At the start of the year, he says, the currency decisions were relatively easy. Japan and
Germany had easy money policies, the Japanese current account was deteriorating and the
Contd...

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