Published On: Wed, May 13th, 2015

Yield-Hungry Investors Are Re-fueling the Currencies Trading Market




Igarashi Says Yen Sales Most Effective When ‘Surprise’


Foreign-exchange managers are back in vogue.

Millennium Global Investments has received $1.7 billion this year for funds that manage currency exposure to boost returns, after attracting no new cash in the same period of 2014. Adrian Lee & Partners, another specialist in the so-called overlay strategies, has grown its funds by 50 percent in the past year to $6 billion.

The reason? Investors are looking for an antidote to negative bond yields and overpriced stocks as unprecedented monetary stimulus pushes up asset prices. Meanwhile, opportunities to profit in currency markets have been ample, as volatility averages the most this year since 2011 amid surprise central-bank decisions and the Federal Reserve’s preparations to raise interest rates.

“There’s little value left in the fixed-income, credit and equity markets,” said Mark Astley, the London-based chief executive officer of Millennium, which oversees $13.4 billion. “We’ve seen a big increase in interest among our investors to use currencies to generate extra returns.”

More than half of investors in a Bank of America Corp. survey last month said stocks and bonds have become too expensive — the biggest proportion in 12 years.

Valuations ‘Stretched’

Returns for foreign-exchange strategies are beating those a year ago, when volatility fell to the least on record. A Parker Global Strategies LLC index tracking 14 top currency funds has climbed 7.3 percent from last August’s low — more than in any full year since the gauge started in 2003 — and is now less than 2 percent away from its peak in March.

“The use of currencies to generate extra returns is extremely important these days,” said Dirk Aufderheide, head of foreign exchange at Frankfurt-based Deutsche Asset & Wealth Management Investment GmbH, which oversees $1.3 trillion. “With bond yields so low and stock valuations at stretched levels, investors might face deeper losses from these assets around the start of the Fed interest-rate increases.”

The money manager said its currency investments have outperformed benchmarks by as much as 50 percent in the past six months.

The asset class’s gains are fueling a comeback for the $5.3 trillion-a-day foreign-exchange market, which has been been hurt by years of dwindling returns, scandals over rate fixing and increased regulation.

Policy Differences

Investors have channeled $35.9 billion into 40 currency-hedged U.S. exchange-traded funds this year, data compiled by Bloomberg show.

The divergence between central banks that are easing — such as the European Central Bank and Bank of Japan — and the Fed’s plan to start raising rates is among the reasons Milan-based investor Aletti Gestielle SGR SpA has increased its involvement in foreign exchange. About 20 percent of its $16 billion of funds is in currencies, double the percentage two years ago.

“The policy and balance-sheet differentials among central banks is conducive for solid currency performance,” said Fabrizio Fiorini, Aletti Gestielle’s chief investment officer. “We see it as a crucial source of returns.”

While the MSCI All-Country World Index of stocks has returned 5.9 percent this year including re-invested interest, more than in the whole of 2014, investors are paying about 17 times companies’ estimated earnings for the privilege, according to data compiled by Bloomberg. That’s close to the highest valuation since 2009.

In debt markets, more than $1 trillion of sovereign bonds have negative yields now, meaning investors effectively pay governments — about a dozen of them in all — to take their money.

Negative Yields

The situation is particularly acute in the 19 countries that share the euro. In Germany, Europe’s largest economy, the ECB’s quantitative-easing program has helped drag yields on about 40 percent of securities tracked by Bloomberg below zero.

That backdrop has investors eyeing foreign exchange as a new way to boost returns. The Illinois Teachers’ Retirement System says on its website that it’s looking for a firm to manage the currency exposure of its $44.8 billion fund, which would be a first for the pension plan.

“We’ve seen a surge in interest over the last few months, particularly from U.S. investors,” said Adrian Lee, chief investment officer of the eponymous company. “We’ve received more inquiries in the past three months than we’ve had in the past three years.”