Presently GAM Discretionary FX manager Adrian Owens, who has been a macro investor since 1997, sees the best opportunities in his sphere in the currency markets. GAM Discretionary FX overlaps with the currency component of his GAM Star Global Rates fund, which also has Ucits hedge performance awards to its name. As it has no fixed income exposure, the discretionary FX fund tends to size currency positions about twice as large as those in Global Rates. Additionally, the FX fundcan and does take shorter-term currency positions that do not appear in Global Rates, such as a recent Australian versus New Zealand dollar trade.
Economist Owens’ investment philosophy is that macro-economic fundamentals shine through in the end, although short term prices get distorted by herd behaviour and differences of market opinion. GAM think that less volatile markets and lower correlations among currencies should now allow fundamentals to exert greater influence on markets.
Right now Owens opines that the economic recovery is coming through, which paves the way for certain currencies to start performing. The Mexican Peso is one of his favourites. In 2011 the Peso unfairly underperformed as investors perceived it as a warrant on global growth and used it as a quick and easy “risk off” proxy, partly due to it being the most liquid emerging currency. Now markets are noticing Mexico’s surging competitiveness, which has been especially enhanced by the strengthening of China’s currency. Mexico’s cost advantage is acting as a magnet for foreign direct investment, particularly from car companies.
Owens structures the trade to pinpoint the Peso, without taking an excessively large bet on global growth or risk appetite in general. Instead of using the US dollar to fund purchases of Pesos – which would entail a 75% correlation with US equities – Owens prefers to own the Peso against a basket of other currencies that also do well when markets move into “risk-on” mode. The Australian, New Zealand and Canadian dollars are all associated with global growth, and putting them on the other side of the Peso gets the basket’s equity market correlation down to 25%. Potentially offsetting this risk asset correlation is another core idea, owning the US dollar versus shorts in the Euro and Pound Sterling: historically, the US dollar has risen in response to risk aversion. Over the medium term, Owens expects to make money on both of these trades.
Interest rate differentials are only one of many factors that feed into the analysis. For instance while the Mexican Peso does yield about a percent more than the Australian and New Zealand dollars, the small yield gap is not a major rationale for the trade. If carry was the main motivating factor, a number of other emerging market currencies could create a basket that generated interest rate differences 3 or 4 times as high.
UCITS risk parameters are far broader than the fund’s needs. GAM itself decided to cap gross exposure at 8 times and the fund has rarely run gross leverage of more than 500%. The fund’s Value at Risk (VaR) targets are comfortably inside the UCITS ceilings. Recently volatility has been running at the lower end of the target range, with performance of 25% in 2012 at the higher end of the range. Owens admits that his hit rate has been exceptionally good over the past year. He argues that it is appropriate for the fund to be under-shooting its volatility target over a period when market volatility in general has been relatively low. Owens is well aware that volatility could spike quickly in a crisis situation, so keeps ample room for manoeuvre within the risk framework.
The currency strategy has been run since 2007 in an offshore fund that has just been wound down, with many of its investors switching into the ucits, which launched in 2009. The Rates fund has been using the same process to invest in currencies since 2004.