When a hedge means sitting on the fence

At 12.30pm on Wednesday 29th March, Sir Tim Barrow, British Ambassador to the European Union, delivered a letter from Prime Minister Theresa May to European Council president Donald Tusk notifying the European Council of the United Kingdom’s intention to withdraw from the European Union. And so the long goodbye begins…

The water will be cloudy for quite some time, which means that the short, medium and long term impact on Sterling is uncertain, even though economic forecasters are constantly publishing their predictions.  I think it was John Kenneth Galbraith who once said “We have two kinds of forecasters: Those who don’t know, and those who don’t know they don’t know”.

If we were forced to choose, we would probably put ourselves in the first kind.  We don’t know what will happen to the value of Sterling against other international currencies.  Consequently, we don’t want our members’ money to be exposed to the possibility that the portfolio’s foreign holdings experience big price movements, just because Sterling moves in the opposite direction to what the markets were expecting.  In essence, we believe that having exposure to currency exchange is a risk that isn’t rewarded with a good enough potential upside.

The Trustees regularly review this decision, but have recently maintained the view that a 100% currency hedge is appropriate for the portfolio.  That means that regardless of whether Sterling goes up or down in value, there will be limited direct impact on the value of our members’ fund values.

It will be a while before the dust finally settles on what Theresa May’s letter means for our currency, but we are confident that having a full hedge removes one of the biggest potential gambles of investing over the next few years.  We believe this is the approach which our members would want us to take.

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