Standard Life Investments

Published Article

Citywire - Investment Committee


 

Standard Life Wealth’s Target Return portfolios aim to deliver a range of cash plus returns regardless of market conditions and have been in favour of US dollar assets since 2008.

The portfolios contain around 30 different strategies and include a number of opportunistic currency positions. Three of these are specifically in favour of the US dollar relative to the euro, Canadian dollar and Japanese yen. We removed our US dollar versus New Zealand dollar strategy last October having taken significant profit.

Given the resurgence of the dollar year to date, with a 12 year high reached against the euro in March, our monthly Investment Committee has been debating with Standard Life Investments’ Multi Asset Investment Team as to whether the dollar trade is over-extended.

With the severe pull-back in commodity prices and oil in particular, the resource backed Canadian dollar lost 10% relative to the ‘greenback’ in Q1. With Brent picking up again to around $65 per barrel from a low of $45 in January, we scaled back the size of the USD versus CAD position should energy prices continue to advance.

Our conviction in the dollar v euro strategy remains. Monetary divergence between the Federal Reserve and the European Central Bank both in terms of interest rate differentials and the path of Quantitative Easing (implemented in the eurozone this year, off the table now in the US), should underpin the fundamentals. Additionally, the dollar helps provide some tail risk protection as the standoff in Greece with its creditors continues to rumble on. After all, the dollar, not the euro, is the world’s foremost reserve currency, and currently has a positive nominal yield primed for ‘lift-off’, in contrast to the alternative ‘safe haven’ the Swiss Franc, which we don’t hold, where the Swiss National Bank now penalises deposit holders with negative interest rates.

Having had a strong run from US equities we have now hedged our position in the Target Return models. One of the reasons behind that decision is that dollar strength is a headwind for US exporters. In addition, a strong dollar allows overseas competitors to boost market share and so through the year we have increased our European and Japanese equity exposure.

Given that the opportunity set in European ex-UK equities is so diverse, we use a blend of four active mangers per model to capture a broad range of underlying companies across the full market cap spectrum. We introduced John Bennett’s Henderson European Focus Fund last September in portfolios targeting returns of Libor plus 4% net of fees and we have been very pleased with his returns in both absolute and risk-adjusted terms and his fund has complemented the other holdings extremely well.

Similarly, in our long-only, Conventional Return portfolios, we have been adding to Japan. One of the key themes in our global equity Falcon Fund is ‘shifting consumption’. We like retailer Ryohin Keikaku (‘Muji’). The company has an ambitious programme of store expansion globally, particularly in the US and has significant traction in Asia, especially Singapore. The Muji brand also resonates well with young middle class Chinese. Like many companies in Japan, management has been seeking to improve the Return on Equity (ROE), in this case hiking up the pay-out ratio. Another theme in the Fund is ‘policy influence’. From the 1st of June, the Governance Code in Japan comes into effect. The government wants unproductive capital put to work to increase wages, encourage capex, and fuel some M&A. This will see a number of blue chips restructuring their balance sheets potentially unlocking value. We think that MUFG, the largest financial group in Japan trading at below 1x book value has the potential to significantly enhance their ROE and is a recent addition to Falcon. For additional Japanese exposure in our Target Return and Conventional MPS range we use industry veteran Andrew Rose at Schroders via his Tokyo Fund which has an outstanding risk-adjusted pedigree.

Jason Day, Senior Investment Manager, Standard Life Wealth

First published in Citywire Wealth Manager – June 2015