Issued in May 2009 For professional investors and advisers only
Schroder ISF* Global Managed Currency
But aren’t currencies very volatile? Is there a limit to how much you can invest
You’re quite right – currency movements in any single currency?
can, indeed, be extremely volatile – and we To be honest, the limits we’ve set ourselves are
actually think that is only going to intensify pretty generous. This was because we wanted
going forwards. This is the precise reason why the flexibility to be very aggressive or very
investors should start thinking about currencies. defensive depending on market conditions.
Where there is significant volatility, there is an We look at exposures across the portfolio on
opportunity for strong returns. both a regional and an individual currency basis
How will the fund be run? There are many with the set limits reflective of liquidity. So, for
currency funds already open to investors example, we can hold a maximum of 50% of
– how is your fund different? the portfolio in euros but only a maximum of
Our fund is an actively managed, long-only 10% in Thai baht or Chilean pesos.
vehicle which invests exclusively in multiple What returns are you targeting? How do
currencies and forward currency contracts. you know that the strategy works?
I suppose it could be described as a ‘World We are targeting a return of 3% above our
Cash Fund’. proprietary index over a market cycle and
Clive Dennis, Fund Manager There are, indeed, a great number of currency we spent a long time testing the product to
funds available. However, there are some very make sure that this was achievable.
Currencies have been hitting the significant differences between our fund and We back-tested the index and a model portfolio
headlines all around the world. the majority of what’s already out there. to 1993 and, over that period, we’ve seen a
Over the past year alone, sterling For a start, most other currency vehicles only risk/return profile which is comparable to that
has experienced its worst slide invest in a very narrow band of currencies – of government bonds. However, with yields
generally speaking, the G101 currencies. on government bonds expected to rise going
since 1931, questions have been We strongly believe that this approach is forwards, we believe currencies are the better
raised about the cohesion of the limited as, historically, a lot of value has been bet for future returns.
European monetary union, and generated by emerging market currencies. In what environment would you expect the
As such, we wanted to ensure that our fund
the US dollar soared as global portfolio to perform best?
has the flexibility to invest in any currency in Well, the trend we observed during the back-
stockmarkets plunged. the world. We want to be able to move where testing was that in years when the US dollar
we see the very best opportunities.
On 2 June 2009, Schroders is performs well, we could expect the fund to
The other thing that sets us apart from the return about -5%. However, when the dollar is
launching Schroder ISF Global weak, we would anticipate returns somewhere
competition is that most other currency funds
Managed Currency (with EUR, GBP are run as hedge fund strategies and are highly in the range of 15-20%.
and USD share classes available). leveraged. We do not believe it is necessary I think it’s important to say at this point that we
We spoke to the fund’s manager, to use leverage within this strategy in order do have a very negative view on the dollar.
to achieve returns. The Federal Reserve has expanded its balance
Clive Dennis, to find out more.
So, do you use derivatives at all? sheet dramatically and recent reports suggest
We don’t use any complex derivative that it could double from current levels.
What are the attractions of investing in
instruments but we do use options either to In our view, the extent of leverage within the
hedge a position, or to gain exposure to a US economy has extremely worrying implications
Many people today are holding their assets in
currency where that is the best way of for the long-term strength of the currency.
cash deposits but, with interest rates as low as
doing so. For us options are about insurance So, where are the best opportunities
they’ve ever been, that’s not a terribly attractive
and access, not leverage. for currency investors today?
option. Moreover, with inflation expected to rise
again in the future, the value of those deposits Will the fund be measured against We think that many of the most exciting currency
risks being steadily eroded over time, destroying a benchmark? opportunities are arising in the developing world.
an individual’s purchasing power. When it came to researching how we would
So, we are currently overweight eastern
reference performance, we found that existing
We want to offer clients an alternative to cash European currencies such as the Polish zloty,
currency benchmarks are extremely limited in
deposits and government bonds that can deliver the Czech koruna and the Hungarian forint. It is
terms of the number and range of currencies they
a higher yield, the potential for capital gains true that these currencies collapsed dramatically
are exposed to. This isn’t really surprising as, as
and, most importantly, help them to preserve in 2008 – there were a lot of concerns about
I’ve already mentioned, most other vehicles only
their global purchasing power. For people who the health of the eastern European economy.
invest in a narrow range of (chiefly, developed)
are looking to begin re-investing their capital, However, we think the extent of the collapse was
currencies. So, we asked JP Morgan to build
currencies are the cheapest and most liquid somewhat overdone and, since it appears that
us our own benchmark which consists of 34
way to re-enter the market. the worst of the crisis in the region is now over,
currencies – including many emerging market
these currencies are looking extremely cheap.
It’s probably also worth pointing out that currencies. What’s great though is that we do
currencies have a very low correlation to have the freedom to invest in any currency in the We also think the appreciation of the Chinese
other asset classes, making them a useful world – not just those dictated by our benchmark, renminbi has further to go. Don’t forget that the
diversification tool. as the fund is benchmark unconstrained. Chinese government slammed the brakes on
1 The G10 or Group of Ten countries are: Belgium, Canada, France, Italy, Japan, the Netherlands, the UK, the US, Germany and Sweden.
*Schroder International Selection Fund is referred to as Schroder ISF throughout this document.
Schroder ISF Global Managed Currency Fund Focus
credit growth about five years ago which meant that the Chinese economy
Correlations to Global Currency Index (10 years to March 2009)
was pretty well contained during the credit boom. The Chinese have also
taken steps to diversify their enormous foreign exchange reserve – the Global government bonds 0.73
world’s largest – away from the US dollar.
How is the team structured and how do you conduct your research?
Our team is part of Schroders’ Emerging Market Debt, Commodities and Commodities 0.30
Currencies Team which is headed up by Geoff Blanning. As head of the US Equities 0.53
currency team I will be the lead manager of the fund and will be supported
by another specialist currency analyst. Japanese Equities 0.44
In terms of the research, we will be drawing on both the team’s global US REITs 0.17
network of local analysts and the views of the Schroders economists Emerging Market Equities 0.26
based here in London.
European Equities 0.20
Global High Yield 0.60
Fund Manager biography
Euro Government Bonds -0.18
Clive joined Schroders in 2009 having previously worked for seven
years as an Executive Director, Foreign Exchange Sales at Morgan Euro Corporate Bonds -0.21
Stanley. Prior to this, Clive spent 15 years at Deutsche Morgan Grenfell Euro High Yield 0.05
Investment Management, where he was Chairman of the Currency
Committee and a member of the Group Investment Policy Committee. Source: Schroders; Bloomberg; Saloman Smith Barney; Morgan Stanley;
Lehman; Standard & Poor’s; Index calculated by JP Morgan.
Currency Exposure % Benchmark
US Dollar 5.0 27.8
Canadian Dollar 3.0 2.9
Brazilian Real 4.0 2.6
Mexican Peso 4.0 2.1
Argentinean Peso 1.1 0.5
Colombian Peso – 0.4
Chilean Peso 1.3 0.3
Peruvian Sol – 0.2 Americas
Europe Currency Exposure % Benchmark
EURO 15.0 24.6
UK Pound 8.0 5.7
Russian Ruble 4.9 2.6
Polish Zloty 5.0 0.9
Swiss Franc – 0.9
Schroder ISF Global 45.0% South African Rand – 0.6
Managed Currency Czech Koruna 2.0 0.4
(Model portfolio) Egyptian Pound – 0.3
Currency Exposure % Benchmark Hungarian Forint 5.0 0.3
Japanese Yen 9.0 8.8 Romanian Lei 2.0 0.3
Chinese Renminbi 5.0 6.6 Turkish Lira 3.1 1.3
Indian Rupee 3.0 2.2
South Korean Won 6.0 2
Australian Dollar 3.0 1.8
Indonesian Rupiah 2.9 0.9
Taiwan Dollar 2.0 0.8
Thai Baht 2.0 0.5 Average duration 1 month
Hong Kong Dollar – 0.4 Average credit quality AAA
Malaysian Ringgit 2.0 0.4
% Emerging Markets 56.0%
Philippine Peso – 0.3
Singapore Dollar 1.7 0.3 Portfolio implied yield 4.03%
Important Information: This document does not constitute an offer to anyone, or a solicitation by anyone, to subscribe for shares of Schroder International Selection Fund, (the
“Company”). Nothing in this document should be construed as advice and is therefore not a recommendation to buy or sell shares. Subscriptions for shares of the Companies
can only be made on the basis of their latest prospectus together with the latest audited annual report (and subsequent unaudited semi-annual report, if published), copies of
which can be obtained, free of charge, from Schroder Investment Management (Luxembourg) S.A. In accordance with the current prospectus, other than for Schroder ISF Global
Property Securities, Schroder ISF Asia Pacific Property Securities, Schroder ISF European Defensive and Schroder ISF Middle East, the Company will seek UK distributor status
for all distribution A and C shares. An investment in the Companies entails risks, which are fully described in their prospectus. Please consult your financial professional or the
respective prospectus for more detailed information. Past performance is not a guide to future performance and may not be repeated. Investors may not get back the
full amount invested, as prices of shares and the income from them may fall as well as rise. Exchange rate changes may cause the value of any foreign investments to
rise or fall. Schroder ISF Global Managed Currency is within the scope of the European Union Directive 2003/48/EC (Taxation of Savings Income in the Form of Interest Payments),
as implemented in Luxembourg Law. This document is issued by Schroder Investment Management Limited, 31 Gresham Street, London EC2V 7QA. Registered No: 2015527
England. Authorised and regulated by the Financial Services Authority. w33440