Investment performance commentary

At our recent investment committee meeting, we took the opportunity to review the current geopolitical situation and consider whether any changes are warranted for our portfolios.

The situation in the US

News headlines over the last few months have covered the impact the US tariffs may have and some commentators have called for investors to reduce their US equity and dollar exposure.

Largely, in our portfolios, we have a ‘market weighting’ to country exposure.  Consequently, the US equity market is broadly in line with its share of the global stock market and therefore forms the majority of growth asset exposure. This is not unprecedented, as historically, over the last hundred years, the US has consistently been among the largest stock markets.

This was not a new point being discussed at the investment committee.  With the rise of the large tech stocks, this has been an item on our agenda for the last five years or more. We wrote last month that for more than a decade, the US stock market has outperformed nearly every other major equity market. This outperformance has been driven in  large part by a handful of dominant technology firms such as Meta (Facebook), Google, and Microsoft.

Looking ahead, several significant factors could challenge the sustainability of US market dominance. Geopolitical tensions are intensifying. A potential return to American isolationism – particularly under a second Trump administration – raises uncertainties. On the fiscal side, ballooning deficits and a national debt now exceeding $37 trillion present additional risks.

Practically for those in our portfolios, the exposure to the US and these large technology companies has already been reduced by our diversification of growth assets through the exposure you will have to Emerging Markets, Smaller Companies, Value Stocks and Property Shares.

As an example, for an investor in our medium risk Portfolio 50, their exposure to Apple Inc.at the time of writing, is about 1% compared to the percentage in the world stock market index, which is over 4%.

Currency exposure

Currency movements can affect investing outcomes and investors owning overseas assets are therefore  naturally concerned about what to do with this risk. One of the risks is the exposure of portfolios to the US dollar in the growth part of portfolios.

The two options open to us are to either accept currency risk, or transfer it to another party willing to accept it through a process called hedging, albeit this comes at a cost. The decision of what to do with currency exposure differs based on the role of the asset class in the portfolio.

So far in 2025, most major currencies have appreciated against the dollar, with Sterling, the Japanese Yen and the Euro all up somewhere between 5-12% YTD^[1]. For UK investors, this has meant that the value of dollar assets has fallen. Naturally, this has brought currency movements back into sharp focus for globally diversified investors.

Currency markets are notoriously difficult to profit from consistently. Therefore, any decision about hedging has to be made, accepting that one cannot predict the direction of currency movements. This is explored in more detail below.

Component parts of an investment portfolio

Your portfolio is broadly split into two distinct parts: growth assets and defensive assets. The former is designed to be the engine room for higher returns and the latter to dampen volatility and therefore risks providing protection during times of economic turmoil.

The importance of protecting from currency exposure in defensive assets

For defensive assets such as high-quality bonds, currency risk is significantly greater than the risk of the underlying asset itself; therefore, transferring currency risk in this part of the portfolio is key. This is achieved through ‘currency hedging’ within the underlying funds, which ensures that any currency movements are removed from the returns achieved. There is a material reduction in risk through the process of hedging currency exposure to overseas bonds.

Defensive assets are intended to provide stability, and exposure to currency fluctuations can undermine their role and make them act more like higher risk investments. Despite the additional cost associated with hedging, the marked reduction in volatility justifies this approach, ensuring defensive assets act defensively and meet their objectives, particularly during market downturns when currency movements can be higher.

Growth assets

In the context of growth assets, typically comprising stocks, the decision to hedge currency risk is more nuanced. For defensive assets, currency movements can be more than the expected return from the asset. Growth assets are naturally more volatile and expected returns are higher. So, hedging currency within the growth assets does not consistently reduce overall risk.

Historical correlations between currency movements and global stock markets have been inconsistent across markets, making outcomes unpredictable, and the volatility of currency markets and stock markets typically similar over time. With the US dollar strengthening (making US assets worth more) over the last decade, not hedging the growth assets has added to the return you have received from your portfolio.

Retaining unhedged exposures in growth assets avoids the cost of hedging.

In summary

On balance, therefore, leaving the growth asset currency exposures unhedged makes good sense.

As described above, the three key considerations when it comes to dealing with currency risk are:

• In growth assets, hedging currency exposure is neither expected to enhance returns nor reduce volatility, and may increase complexity and costs.
• Protecting against currency exposure in defensive assets is an effective way to reduce volatility.
• Avoid trying to predict currency markets – few, if any, can profit from doing so reliably.

[1] Source: Koyfin as at 12/06/2025. All rights reserved.