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Investors pile into currency-hedged European equity

Consider the following: you come together with your investment committee, look at macroeconomic fundamentals, GDP growth trends and companies’ earnings forecasts, and you come to the conclusion that European equities are far more attractive than stocks elsewhere. However, you and your colleagues also agree that, with a rate hike in the US this year ever…


PA Europe

This is what many European investors appear to have done in the first half of this year. In the six months to July, European investors poured a net €14.3bn into currency-hedged share classes of European equity funds, only marginally less than the net flows into their non-hedged equivalents.

While part of these inflows into currency-hedged share classes will have come from non-eurozone investors, such as the British who invested a net £2.2bn in European equities in the first half of 2015 (source: the Investment Association), much will have originated from investors swapping the euro for a foreign currency (presumably the dollar) in pursuit of higher returns.

A risky bet?

One of these eurozone investors cheating on their base currency is Rico Bosma, a fund analyst at Wealth Management Partners in the Netherlands. “In February this year, we swapped part of our exposure to US equities for European equity,” he told Expert Investor Europe recently. “But as we didn’t want to reduce our exposure to the dollar, we bought a dollar-hedged share class of a European equity fund.”


Being a trendsetter in the currency-hedging trade, Bosma has made a handsome profit with his bet on the dollar. Since mid-February, it has appreciated a further 4.2% versus the euro. The bulk of investors, who bought their currency-hedged share classes in March and April, might have been less lucky though (see chart above).