MultiManager funds profit from dollar weakness

Although the pound has yet to hit the all-important $2 barrier, it’s certainly come close in recent days and as a result many sterling investors are counting the cost.

The dollar has fallen 11% this year, with almost 4% of this loss coming in the last two weeks. Investors will have seen the impact of this in the returns from the S&P 500 Index. Although the index is up by over 13% for the year to date, returns to sterling investors are negative. However, a dollar hedge put in place by Bambos Hambi and Marcus Brookes, co-heads of Gartmore’s MultiManager funds, means investors in these funds have been protected against the impact of the dollar’s recent slide.

“We have maintained a bearish view on the US economy for some time,” says Bambos. “This led us to hedge 100% of the funds’ fixed income dollar exposure and 40% of dollar exposure to equities. As a result of the dollar’s recent weakness, these positions have added considerably to the funds’ performance this year.

“Our concerns about the weakening fundamentals of the US economy go back several years now but the dollar has been under increased pressure this year after a surprisingly strong performance in 2005. In the past, the dollar’s value was buoyed by the continued strength of the US economy and an attractive yield differential, as interest rates continued to rise. Now that the economy is slowing down - and we are confident it’s just a mid-cycle slowdown rather than a recession - support for the dollar has been reduced. It’s also likely that the Federal Reserve is now at the end, or close to the end, of it’s policy of monetary tightening, which has eroded the appeal of the yield differential. As a result some of the more negative issues have begun to exert an influence, such as the over-burdened US consumer. International holders of the dollar, such as China and Russia, have also begun to sell the dollar, favouring other currencies instead. Support for the dollar remains weak and despite its steep decline, we believe the currency could fall further.”