Currency risk is often overlooked during periods of strong US market performance, but for UK investors it can have a significant impact on returns. Ben Gilbert of Sarasin & Partners says that advisers should look beyond headline equity gains and question how managers are managing dollar exposure on behalf of clients.
British clients retire on pounds, not dollars. An obvious point, perhaps, but one worth remembering when judging a portfolio full of American investments.
A rising US stock market is only part of the return a British client receives. The exchange rate can improve it, erode it or wipe it out.
For much of the period since 2010, investors could be forgiven for focusing only on the shares. US equities pulled ahead of their global peers, while the dollar often strengthened when markets stumbled.
For multi-asset managers in Britain – and Europe and Japan for that matter – this was a helpful arrangement. American companies delivered growth; their currency could cushion the occasional fall.
Success has a way of discouraging awkward questions. If an exposure keeps rewarding you, why challenge it? Yet the longer one market dominates, the easier it becomes to mistake a favourable period for a permanent feature of investing.
History gives us little reason to do so. Leadership changes, often painfully for those who have stopped considering the possibility.
The arithmetic is straightforward. If the S&P 500 returns 10% in dollars, but each dollar then buys 10% fewer pounds, an unhedged sterling investor loses approximately 1%, before fees.
A £100 investment becomes £110 before the currency movement, then £99 after it. Good stock selection cannot spare a multi-asset manager the responsibility of deciding how much currency risk a client should bear.
We remain underweight the dollar today. It is expected to weaken against a basket of global currencies over several years. America can remain the pre-eminent innovative, productive economy and still have a currency that is too expensive.
Importantly, though, a bearish dollar view does not require a prediction that it will completely lose its reserve status. The case need not be quite so dramatic.
Our valuation model put the dollar’s overvaluation above 10% in August, compared with around 15% when we began our underweight in May 2025.
Although valuation offers no appointment with destiny – an expensive currency can remain expensive for years – it does give us reason to question how much exposure we want at the prevailing price.
The dollar’s reputation as a refuge also needs examining. Our research suggests its response to equity market stress has weakened recently, though the evidence is not strong enough to declare a permanent change.
It still rose in 71% of the worst equity weeks in our sample. We would be foolish to dismiss that protection, but would be equally foolish to assume it will always arrive in sufficient size.
There is a further complication, and it challenges our own position. We underestimated America’s AI investment boom.
The scale of spending and demand for US equities has supported capital inflows, offsetting some of the pressure from weaker official demand for Treasuries. This matters. A currency view that cannot accommodate inconvenient evidence is of little use to a portfolio manager.
Sterling has its own problems. The ERM crisis in 1992, the Brexit vote in 2016 and the Truss mini-budget in 2022 all brought abrupt falls.
Recoveries can be slow and incomplete, though the mini-budget sell-off did reverse as quickly as Liz Truss was replaced. These episodes should not, however, lead investors to mistake familiarity for safety: overseas currencies can help to protect clients when the trouble starts at home.
Nor does dollar weakness against a global basket guarantee an equivalent fall against the pound. Indeed, our framework sees scope for more adjustment against Asian currencies than the pound.
For a multi-asset manager, currency should primarily be a risk to manage in pursuit of the client’s objectives rather than an opportunity to be exploited.
There is no obligation to turn every view into a trade. Equally, leaving an exposure untouched is still a decision. Hedging has costs and can sacrifice useful protection; doing nothing can leave the client carrying more risk than intended.
When selecting an MPS or multi-asset fund, advisers should press managers on their actual exposures, including those held through underlying funds.
What would a simultaneous fall in US equities and the dollar do to returns? What would prompt action? Can that action be taken across the platforms on which clients hold the portfolios, at an acceptable cost?
The manager should be able to explain this in the language of client outcomes. How much could currency add to a loss, and would that be tolerable for the people invested?
A discussion confined to exchange rate forecasts misses the reason for managing the money at all.
A persuasive presentation is no substitute for evidence. Ask how the manager has handled currency risk before, whether its framework stands up to scrutiny and whether it has the tools to act.
The next few years may punish exposures that the last decade rewarded. Clients should not have to discover, after the event, that their manager’s currency policy amounted to faith in the dollar.
Main image: background, currency, eyestetix-studio-DbdKo2zANgI-unsplash
