Currencies & Currency Hedging

Transcription

1 Ugo Egbunike, Moderator Director of Business Development ETF.com Currencies & Currency Hedging Juliana Bambaci, Panelist Index Applied Research MSCI Jonathan Citrin, Panelist Founder & CEO Citrin Group Luke Oliver, Panelist Director, Portfolio Manager Deutsche Asset & Wealth Management

2 Juliana Bambaci Panelist Index Applied Research MSCI Ugo Egbunike Moderator Director of Business Development ETF.com Jonathan Citrin Panelist Founder & CEO Citrin Group Luke Oliver Panelist Director, Portfolio Manager Deutsche Asset & Wealth Management

3 Hedging FX Exposure in Global Equity Portfolios Juliana Bambaci Panelist Index Applied Research MSCI

4 The US Dollar

5 Currency Exposure Currency exposure in MSCI ACWI 33 foreign FXs in MSCI ACWI Top 10 Currencies in MSCI ACWI Currency Weight (%) US Dollar Euro Pound Sterling 8.10 Japanese Yen 7.71 Canadian Dollar 3.82 Swiss Franc 3.31 Hong Kong Dollar 3.28 Australian Dollar 3.02 Korean Won 1.72 Brazilian Real 1.42 New Taiwan Dollar 1.31 Swedish Krona 1.18 Indian Rupee 0.81 South African Rand 0.79 Data as of November Source: MSCI.

6 Importance of Currency Risk Performance of Hedged and Unhedged MSCI Indexes (USD) Data period November Source: MSCI.

7 Currency Risk: Why Hedge? Comparison of MSCI Europe Index returns in local currency vs. the EUR/USD Source: MSCI, * Data as of November 29, 2013.

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9 Producing Alpha via Currencies Jonathan Citrin Panelist Founder & CEO Citrin Group

10 In Search of Alpha: Agriculture, 4.65% Energy, 2.77% urrency, 4.87% Metals, 17.71% Global Equity, 70.00% Asset Target Developed Markets 32.20% U.S. Market 28.91% Emerging Markets 8.89% Platinum 6.00% Gold 6.00% U.S. Dollar 4.87% Tin 3.71% Unleaded Gas 2.77% Sugar 2.65% Agriculture (Inverse) 2.00% Silver 2.00%

11 Return (%) Std Dev (%) Ratio Historic Performance ( ) Russell Fundamental US Sm Company TR Russell Fundamental US Lg Company TR Russell Fndmntl Dv ex US Lg Cmpny TR Russell Fndmntl Dv ex US Sm Cmpny TR Russell Fundamental Emerging Mkts TR Gold London PM Fixing Platinum Spot Swiss Franc S&P GSCI Crude Oil Japanese Yen DB Long USD ER

12 Return (%) Std Dev (%) Ratio Historical Performance ( ) Russell Fundamental US Lg Company TR Russell Fundamental US Sm Company TR Russell Fndmntl Dv ex US Sm Cmpny TR Russell Fundamental Emerging Mkts TR Russell Fndmntl Dv ex US Lg Cmpny TR Swiss Franc Gold London PM Fixing Platinum Spot S&P GSCI Crude Oil Japanese Yen DB Long USD ER

13 Historical Correlations ( ) ) Russell Fundamental US Lg Company TR ) Russell Fundamental US Sm Company TR ) Russell Fndmntl Dv ex US Lg Cmpny TR ) Russell Fndmntl Dv ex US Sm Cmpny TR ) Russell Fundamental Emerging Mkts TR ) S&P GSCI Crude Oil ) Gold London PM Fixing ) Platinum Spot ) Japanese Yen ) Swiss Franc ) DB Long USD ER

14 Historical Correlations ( ) ) Russell Fundamental US Lg Company TR ) Russell Fundamental US Sm Company TR ) Russell Fndmntl Dv ex US Lg Cmpny TR ) Russell Fndmntl Dv ex US Sm Cmpny TR ) Russell Fundamental Emerging Mkts TR ) S&P GSCI Crude Oil ) Gold London PM Fixing ) Platinum Spot ) Japanese Yen ) Swiss Franc ) DB Long USD ER

15 Global Macro & Currency Effect

16 Currency Hedging in Focus Luke Oliver Panelist Director, Portfolio Manager Deutsche Asset & Wealth Management

17 Important Information DBX Advisors LLC (DBX) is the investment advisor to the db X-trackers funds, which are distributed by ALPS Distributors, Inc. (ALPS). DBX is a subsidiary of Deutsche Bank AG, neither of which is affiliated with ALPS. Carefully consider the funds investment objectives, risk factors and charges and expenses before investing. This and other important information can be found in the funds prospectuses, which may be obtained by calling DBX-ETFS ( ) or by viewing or downloading a prospectus. Read the prospectus carefully before investing. Risks Investing involves risk, including possible loss of principal. Funds that invest in specific countries or geographic regions may be more volatile than investing in broadly diversified funds. Securities focusing on a single country may be more volatile. In addition to the normal risks associated with investing, international investments may involve risk of capital loss from unfavorable currency fluctuations, from differences in generally accepted accounting principles or from economic or political instability in other nations. Emerging markets involve heightened risks related to the same factors as well as increased volatility and lower trading volume. There are additional risks because of potential fluctuations in currency and interest rates. Investing in derivatives entails special risks relating to liquidity, leverage and credit that may reduce returns and increase volatility.

18 Important Information cont Indexes are unmanaged and you cannot invest directly in an index. Shares of the funds may be sold throughout the day on the exchange through any brokerage account. However, shares may only be purchased and redeemed directly from the funds by authorized participants in very large creation/redemption units. There is no assurance that an active trading market for shares of a fund will develop or be maintained. MSCI is a servicemark of MSCI Inc. (MSCI) and has been licensed for use by DBX. The funds are not sponsored, endorsed, issued, sold or promoted by MSCI nor does MSCI make any representation regarding the advisability of investing in the funds.

19 Definitions Price-to-earnings ratio (P/E) ratio compares a company s current share price to its per-share earnings. Standard deviation is often used to represent the volatility of an investment and depicts how widely an investment s returns vary from the investment s average return over a certain period. The MSCI EAFE Index captures large- and mid-cap representation across developed markets countries around the world, excluding the United States and Canada. The MSCI EAFE U.S. Dollar Hedged Index is calculated using the same methodology as its corresponding MSCI EAFE Index, but is designed to mitigate exposure to fluctuations between the value of the U.S. dollar and non-u.s. currencies. The MSCI Emerging Markets Index captures large- and mid-cap representation across 21 emerging markets. The MSCI Emerging Markets U.S. Dollar Hedged Index is calculated using the same methodology as its corresponding MSCI Emerging Markets Index, but is designed to mitigate exposure to fluctuations between the value of the U.S. dollar and non-u.s. currencies. The MSCI Brazil Index is designed to track the performance of the large- and mid-cap segments of the Brazilian market. The MSCI Brazil U.S. Dollar Hedged Index is calculated using the same methodology as its corresponding MSCI Brazil Index, but is designed to mitigate exposure to fluctuations between the value of the U.S. dollar and non-u.s. currencies. The MSCI Germany Index is designed to track the performance of the large- and mid-cap segments of the German market. The MSCI Germany U.S. Dollar Hedged Index is calculated using the same methodology as its corresponding MSCI Germany Index, but is designed to mitigate exposure to fluctuations between the value of the U.S. dollar and non-u.s. currencies.

20 Definitions (continued) The MSCI Japan Index is designed to track the performance of the large- and mid-cap segments of the Japanese market. The MSCI Japan U.S. Dollar Hedged Index is calculated using the same methodology as its corresponding MSCI Japan Index, but is designed to mitigate exposure to fluctuations between the value of the U.S. dollar and non-u.s. currencies. The MSCI AC Europe Index captures large- and mid-cap representation across 16 developed-markets countries and five emerging-markets countries in Europe. The MSCI Europe U.S. Dollar Hedged Index is designed to provide exposure to equity securities in 16 developed European stock markets, while at the same time mitigating exposure to fluctuations between the value of the U.S. dollar and selected non-u.s. currencies. The MSCI Asia ex Japan Index captures large- and mid-cap representation across two of three developed-markets countries (excluding Japan) and eight emerging-market countries in Asia. The MSCI Asia Pacific Ex Japan U.S. Dollar Hedged Index is designed to provide exposure to equity securities in developed and emerging stock markets in the Asia-Pacific region (excluding Japan), while at the same time mitigating exposure to fluctuations between the value of the U.S. dollar and selected non-u.s. currencies. The MSCI United Kingdom Index is designed to measure the performance of the large- and mid-cap segments of the UK market. The MSCI United Kingdom U.S. Dollar Hedged Index is designed to provide exposure to the equity market of the United Kingdom, while at the same time mitigating exposure to fluctuations between the value of the U.S. dollar and British pound sterling. The U.S. Dollar Index measures the performance of the U.S. dollar vs. a basket of currencies including the euro, yen, British pound, Canadian dollar and Swiss franc. The S&P 500 Index tracks the performance of 500 leading U.S. stocks and is widely considered representative of the U.S. equity market. It is not possible to invest directly in an index.

21 International Equity Allocation Risks? International equity investing Even when investing in U.S. dollars, an international equity investor is exposed to fluctuations in local currencies of underlying holdings. Currency risk Typically, investors are unaware of this risk and how to control it. Country risk Typically, investors manage this through portfolio diversification. International equity investors are also exposed to the economic and/or political risks of individual countries. Hedged products are designed to mitigate the exposure to fluctuations between the value of the U.S. dollar and non-u.s. currencies while allowing pure exposure to equity markets. Diversification does not guarantee protection against losses..

22 Currency Risk Misconceptions Currency risk is an inherent component of international equity investing and cannot be controlled in an efficient and cost-effective manner. Realities Through the use of currency-hedged equity ETFs, investors are able to strip out or dampen currency fluctuations from their international equity portfolios. Currency risk Typically, investors are unaware of this risk and how to control it. Currency risk can be avoided or mitigated through the use of American Depositary Receipts (ADRs). Currency risk is not significant enough to warrant concern. ADRs are still exposed to currency risk despite being U.S. dollar denominated. Currency fluctuations are often significant and unpredictable driven by central bank activities, policy rhetoric, international trade flows and speculators. International investing is one dimensional. International equity investing subjects investors to two sources of risk: currency risk and country risk. An ADR is a certificate issued by banks representing shares in a foreign stock traded on a U.S. exchange.

23 Trends in the U.S. Dollar Since 1968, the average U.S. dollar cycle has been approximately eight years. The current cycle with the U.S. Dollar Index near all-time lows is in its 11th year. The dollar has been in a secular decline for more than a decade. With the average USD cycle at about eight years and the USD near all-time lows, that tide could shift at any time. U.S. Dollar Index (2/3/67 12/31/13) 10.8 Yrs. 6.3 Yrs. 7.5 Yrs. 9.4 Yrs. 6.1 Yrs. End of Bretton Woods % (+11.11% ann) Black Wednesday, Sept Sept. 11, 2001 Plaza Accord Sept % (+4.56% ann) Lehman collapse Sept % (-4.26% ann) % (-9.25% ann) Asian currency crisis % (-7.91% ann) Source: Deutsche Bank and Bloomberg as of 12/31/13. See slide 2 for index definitions. Past performance is no guarantee of future results. The numbers on the vertical axis represent index levels for the U.S. Dollar Index.

24 MSCI EAFE Unhedged vs. Local Currency 79% 33% Source: Deutsche Asset & Wealth Management as of 12/31/13. Past performance is no guarantee of future results. For comparison purposes, each entry begins with a value of 100.

25 What is Your Currency Risk Exposure? Euro Austria Belgium Finland France Germany Greece Ireland Italy Portugal Spain The Netherlands Swiss franc Switzerland Yen Japan Singapore dollar Singapore Australian dollar Australia British pound United Kingdom Hong Kong dollar Hong Kong Krona Sweden Krone Denmark Krone Norway New Zealand dollar New Zealand Shekel Israel EUROPE 16 countries / 6 currencies ASIA / PACIFIC 5 countries / 5 currencies Middle East 1 country / 1 currency See slide 2 for index definitions.

26 Japanese Indices 64% 27% Source: Deutsche Asset & Wealth Management as of 12/31/13. Past performance is no guarantee of future results. For comparison purposes, each entry begins with a value of 100.

27 MSCI Currency-Hedged Indices International equity investments and FX forward contracts These indices combine international equity investments with FX forward contracts in an attempt to mitigate the impact on performance of the currency exposure of MSCI equity indices against a U.S. dollar-based investor. Month Start[i] start[i] Month Start[i+1] start[i+1] Time Time The index is long equity constituents. The index goes long a series of U.S. dollar one-month forwards. 1 The notional value of the forwards represents the relative marketcap weights of the equities within the index. 2 The index does not adjust the hedge intramonth. Forward positions are rolled over using the new value of the index and any changes in the portfolio. Equity indices + hedge = Hedged indices The MSCI hedged indices provide benchmarks for funds that aim to help investors mitigate the effects of FX movements on their equity exposures and therefore have access solely to the equity returns. 3 (1) A forward currency contract is a negotiated agreement between the contracting parties to exchange a specified amount of currency at a specified future time at a specified rate. (2) An index where 50% of the underlying equity market cap is denominated in euros would buy U.S. dollar one-month forwards against euros in a notional amount equalling 50% of the index s equity market capitalization. (3) MSCI hedged indices do not adjust the hedge intramonth and therefore actual currency exposure may fluctuate. FX is the exchange of one currency for another, or the conversion of one currency into another currency.

28 Thank you. Questions?

29 Juliana Bambaci Panelist Index Applied Research MSCI Ugo Egbunike Moderator Director of Business Development ETF.com Jonathan Citrin Panelist Founder & CEO Citrin Group Luke Oliver Panelist Director, Portfolio Manager Deutsche Asset & Wealth Management